-----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, qtgulPm/03izFUlzMktFH4ymGtRW9t4/c5Edxvz6iRgeBCwTOq9shAx4fZiNhcXS HrwIRXMwYLyUik2xcLRLZQ== 0000890566-94-000084.txt : 19940323 0000890566-94-000084.hdr.sgml : 19940323 ACCESSION NUMBER: 0000890566-94-000084 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANTA FE ENERGY RESOURCES INC CENTRAL INDEX KEY: 0000086772 STANDARD INDUSTRIAL CLASSIFICATION: 1311 IRS NUMBER: 362722169 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-07667 FILM NUMBER: 94517268 BUSINESS ADDRESS: STREET 1: 1616 S VOSS RD STE 1000 CITY: HOUSTON STATE: TX ZIP: 77057 BUSINESS PHONE: 7137832401 FORMER COMPANY: FORMER CONFORMED NAME: SANTA FE NATURAL RESOURCES INC DATE OF NAME CHANGE: 19900111 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-7667 SANTA FE ENERGY RESOURCES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) [S] [C] DELAWARE 36-2722169 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1616 SOUTH VOSS, SUITE 1000 HOUSTON, TEXAS 77057 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 783-2401 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH TITLE OF EACH CLASS EXCHANGE ON WHICH REGISTERED Common Stock, $.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 1, 1994 was approximately $827 million. Shares of Common Stock outstanding at March 1, 1994 --89,906,799. DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT DATED MARCH 21, 1994 --------------------. PART III TABLE OF CONTENTS PAGE PART I Items 1 and 2. Business and Properties--------------------------- 1 General-------------------------- 1 Corporate Restructuring Program-------------------------- 2 Reserves------------------------- 4 Domestic Development Activities----------------------- 5 Domestic Exploration Activities----------------------- 7 International Development Activities----------------------- 8 International Exploration Activities----------------------- 10 Drilling Activities-------------- 11 Producing Wells------------------ 11 Domestic Acreage----------------- 12 Foreign Acreage------------------ 12 Current Markets for Oil and Gas------------------------------ 13 Santa Fe Energy Trust------------ 14 Other Business Matters----------- 15 Item 3. Legal Proceedings---------- 19 Item 4. Submission of Matters to a Vote of Security Holders------------- 19 Executive Officers of the Registrant--------------------------- 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters---------------- 20 Item 6. Selected Financial Data---- 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations----------------- 23 Item 8. Financial Statements and Supplementary Data----------------- 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure----------------- 29 Part III Item 10. Directors and Executive Officers of the Registrant--------- 30 Item 11. Executive Compensation----- 30 Item 12. Security Ownership of Certain Beneficial Owners and Management------------------------- 30 Item 13. Certain Relationships and Related Transactions--------------- 30 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K-------- 30 Signatures--------------------------- 64 Schedule V -- Property, Plant and Equipment----- 65 Schedule VI -- Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment-------- 66 Schedule VIII -- Valuation and Qualifying Accounts----------------------------- 67 Schedule IX -- Short Term Borrowings------------- 68 Schedule X -- Supplementary Income Statement Information-------------------------- 69 i PART I CERTAIN DEFINITIONS As used herein, the following terms have the specific meanings set out: 'Bbl' means barrel. 'MBbl' means thousand barrels. 'MMBbl' means million barrels. 'Mcf' means thousand cubic feet. 'MMcf' means million cubic feet. 'Bcf' means billion cubic feet. 'BOE' means barrel of oil equivalent. 'MBOE' means thousand barrels of oil equivalent and 'MMBOE' means million barrels of oil equivalent. Natural gas volumes are converted to barrels of oil equivalent using the ratio of 6.0 Mcf of natural gas to 1.0 barrel of crude oil. Unless otherwise indicated, natural gas volumes are stated at the official temperature and pressure basis of the area in which the reserves are located. 'Finding cost' refers to a fraction, of which the numerator is equal to the costs incurred by the Company for property acquisition, exploration and development and of which the denominator is equal to proved reserve additions from extensions, discoveries, improved recovery, acquisitions and revisions of previous estimates. 'Improved recovery,' 'enhanced oil recovery' and 'EOR' include all methods of supplementing natural reservoir forces and energy, or otherwise increasing ultimate recovery from a reservoir, such as waterfloods, cyclic steam, steam drive and CO2 (carbon dioxide) injection and fireflood projects. 'Heavy oil' is low gravity, high viscosity crude oil. ITEMS 1 AND 2. BUSINESS AND PROPERTIES GENERAL Santa Fe Energy Resources, Inc. ('Santa Fe' or the 'Company') is engaged in the exploration, development and production of oil and natural gas in the continental United States and in certain foreign areas. At December 31, 1993, the Company had worldwide proved reserves totaling 292.0 MMBOE (consisting of approximately 248.2 MMBbls of oil and approximately 263.0 Bcf of natural gas), of which approximately 93% were domestic reserves and approximately 7% were foreign reserves. During 1993, the Company's worldwide production aggregated approximately 94.3 MBOE per day, of which approximately 71% was crude oil and approximately 29% was natural gas. A substantial portion of the Company's domestic oil production is in long-lived fields with well-established production histories. With recent sales of non-core properties pursuant to the Company's corporate restructuring program (see '-- Corporate Restructuring Program'), the Company has focused its activities on its three domestic core areas -- the Permian Basin in Texas and New Mexico, the offshore Gulf of Mexico and the San Joaquin Valley of California -- as well as in Argentina and Indonesia. Santa Fe was incorporated in Delaware in 1971 as Santa Fe Natural Resources, Inc., a wholly owned subsidiary of a predecessor of Santa Fe Pacific Corporation ('SFP'). SFP was formed as a result of a business combination on December 23, 1983, between Santa Fe Industries, Inc., the parent company of Santa Fe at that time and Southern Pacific Company. On January 8, 1990, Santa Fe Energy Company, which previously conducted a substantial portion of Santa Fe's domestic exploration and development operations, merged into Santa Fe. Santa Fe thereafter changed its name to Santa Fe Energy Resources, Inc. On March 8, 1990 Santa Fe sold 11,700,000 previously unissued shares of common stock in initial public offerings. On December 4, 1990, SFP distributed all of the shares of Santa Fe's common stock it held to its shareholders. In May 1992 Adobe Resources Corporation ('Adobe') was merged with and into the Company (the 'Adobe Merger'). The location of the properties acquired in the Adobe Merger (the 'Adobe Properties') enhanced the Company's existing domestic operations and added significant international operations to the Company's international program. See Note 3 to the Consolidated Financial Statements for a further discussion of the Adobe Merger. For the five years ended December 31, 1993, the Company has replaced approximately 172% of its production at an average finding cost of $4.80 per BOE. Over the last four years, the Company has increased its overall production by increasing production from its existing properties and through acquisitions and has reduced its overall cost structure in order to enhance operating results and to mitigate the Company's financial exposure in a low oil and natural gas price environment. For example, over the four-year period ended December 31, 1993, Santa Fe has increased its average daily production from 69.1 MBOE to 94.3 MBOE (including 7.7 MBOE attributable to production from non-care assets sold pursuant to the corporate restructuring program) and has reduced its average production costs (including related production, severance and ad valorem taxes) from $6.22 per BOE in 1990 to $5.39 per BOE in 1993. Most of the Company's domestic crude oil production is located in California and Texas, while its domestic natural gas production comes primarily from the Gulf of Mexico, New Mexico and Texas. During 1993, the Company's domestic daily production averaged approximately 60.2 MBbls of crude oil and 165.0 MMcf of natural gas. Substantially all of the Company's oil and gas production is sold at market responsive prices. Pursuant to the corporate restructuring program, during 1993 the Company sold properties having 1993 combined production of 4.1 MBbls per day and 21.7 MMcf per day and estimated proved reserves of approximately 16.7 MMBOE. The domestic crude oil marketing activities of the Company are conducted through its Santa Fe Energy Products Division ('Energy 1 Products'), which is also engaged in crude oil trading. Substantially all of the Company's domestic natural gas production is currently marketed under the terms of a sales contract with Hadson Corporation ('Hadson'). See '-- Current Markets for Oil and Gas.' A substantial portion of the Company's domestic oil production is in long-lived fields with well-established production histories and where EOR methods are employed. As of December 31, 1993, approximately 69% of the Company's domestic proved crude oil and liquids reserves and 50% of its 1993 average daily domestic production of crude oil and liquids were attributable to the Midway-Sunset field in the San Joaquin Valley of California, where the Company first began production in 1905. Nearly all of the reserves in this field are heavy oil, the production of which depends primarily on steam injection. As of December 31, 1993, an additional 21% of the Company's domestic proved crude oil and liquids reserves and approximately 25% of its 1993 average daily domestic production of crude oil and liquids were attributable to five other oil producing properties: the Wasson and Reeves fields in the Permian Basin of west Texas and the South Belridge, Kern River and Coalinga fields in the San Joaquin Valley. The Company's foreign production is located in the El Tordillo field in Argentina and in the Salawati Basin and Salawati Island area of Indonesia. Production from the El Tordillo field averaged 2,400 barrels of oil per day in 1993 and production from the Indonesian operations averaged 4,100 barrels of oil per day in 1993. The Company maintains an active exploration and development program, a significant portion of which consists of EOR projects on the producing fields discussed above. During 1993, Santa Fe spent a total of $100.2 million on EOR and development programs and $50.5 million on exploration programs (including $38.5 million of exploration costs, of which $31.0 million was charged to expense, and $12.0 million of unproved property acquisition costs), and $32.6 million on proved property acquisitions. The Company has budgeted $240 million of expenditures for 1994. However, as a result of depressed oil prices that have prevailed since November 1993, the Company, consistent with industry practice, is considering deferring some of its capital projects in order to prudently manage its available cash flow in the near term. Based upon current market conditions, the Company estimates that 1994 capital expenditures will total between $100 million and $160 million, with the actual amount to be determined by the Company based upon numerous factors outside its control, including, without limitation, prevailing oil and natural gas prices and the outlook therefor and the availability of funds. In the United States, at December 31, 1993, the Company held oil and gas rights to approximately 0.8 million net undeveloped leasehold and fee acres in 14 states, excluding approximately 1.1 million net undeveloped acres sold to Bridge under terms of a purchase agreement signed in December 1993 (expected to close in April 1994) and 0.1 million net undeveloped fee acres sold to another company in January 1994. See ' -- Corporate Restructuring Program.' Outside the United States, at December 31, 1993, the Company held exploration rights with respect to an aggregate of approximately 3.5 million net undeveloped acres in Argentina, Bolivia, Canada, Gabon, Indonesia, Morocco, Myanmar and Papua New Guinea. CORPORATE RESTRUCTURING PROGRAM In October 1993 the Company's Board of Directors adopted a broad corporate restructuring program designed to improve earnings and cash flow while increasing production and replacing reserves in the long-term. The restructuring program is the result of an intensive review of the Company's operations and cash flows and focuses on capital spending in the Company's core operating areas and the disposition of non-core assets. To provide additional funding for the capital program, the Company also announced the elimination of the payment of its $0.04 per share quarterly dividend on its common stock, which will make available approximately $14 million annually. The dividend on the Company's convertible preferred stock will remain at its current level. 2 As a part of the Company's restructuring program, the Company intends to concentrate its capital spending on its three domestic core areas -- the Permian Basin in Texas and New Mexico, the offshore Gulf Coast and the San Joaquin Valley of California -- as well as its productive areas in Indonesia and Argentina. The domestic program includes development activities in the Delaware formation in southeast New Mexico, a development drilling program for the offshore Gulf of Mexico natural gas properties and infill drilling in the San Joaquin Valley of California. Internationally, the program includes development of the Company's Sierra Chata discovery in Argentina with gas sales expected to commence in early 1995. The restructuring program includes an evaluation of the Company's capital and cost structures to examine ways to increase flexibility and strengthen the Company's financial performance. In this respect, in 1994 the Company intends to refinance a portion of its existing long-term debt and is currently evaluating a combination of debt and equity financing arrangements with which to effect the refinancing. As a result of the dispositions described below (one of which is expected to close in April 1994), the Company has sold properties having combined production during 1993 of 4.1 MBbls per day and 21.7 MMcf per day and estimated proved reserves of approximately 16.7 MMBOE for total proceeds of approximately $91.4 million, has sold its natural gas gathering and processing assets for Hadson securities and has realized approximately $11.3 million from the sale of its remaining Depositary Units in the Trust and $8.3 million from the sale of its interest in certain other oil and gas properties. As a result of these transactions, the Company has disposed of substantially all of its inventory of non-core properties. SALE TO HADSON. In December 1993 the Company completed a transaction with Hadson under the terms of which the Company sold the common stock of Adobe Gas Pipeline Company ('AGPC'), a wholly owned subsidiary, to Hadson in exchange for Hadson 11.25% preferred stock with a face value of $52.0 million and 40% of Hadson's common stock. In addition, the Company signed a seven-year gas sales contract under the terms of which Hadson will market substantially all of the Company's domestic natural gas production from specified existing wells and certain domestic development and exploration wells. Pursuant to such contract, Hadson will be required to pay the Company for all production delivered at a price for such gas equal to stipulated published monthly index prices. See '-- Current Markets for Oil and Gas'. The Company also designated one-half of the members of the Hadson Board of Directors. AGPC's assets include approximately 630 miles of gathering and transportation lines in Oklahoma, Texas and New Mexico with three processing plants in west Texas and New Mexico and an intrastate pipeline system supplying gas to commercial customers in Lubbock, Texas. Hadson's natural gas assets are predominantly located in southeastern New Mexico and include two gas processing facilities, a 12 Bcf natural gas storage facility and the 650-mile Llano intrastate pipeline which has six connections to various interstate pipelines serving strategic markets in the midwest, on the east coast and in southern California. SALE TO VINTAGE. In November 1993, the Company completed the sale of certain southern California and Gulf Coast producing properties for net proceeds totaling $41.3 million in cash. The transaction included most of the Company's California interests outside its core area in the San Joaquin Valley as well as certain onshore Gulf Coast properties in Texas, Louisiana and Mississippi. Production from the properties sold to Vintage averaged approximately 2,800 barrels of oil per day and 6.5 MMcf of natural gas per day during 1993. During 1993 such properties contributed $2.7 million to the Company's income from operations. SALE TO BRIDGE. In December 1993, the Company signed a purchase agreement with Bridge pursuant to which Bridge will purchase certain Mid-Continent and Rocky Mountain producing and nonproducing oil and gas properties. The sales price of $50.1 million, subject to certain adjustments, will be received by the Company either in the form of cash plus 10% of the outstanding shares of 3 Bridge, following the contemplated public offering of that stock in the first quarter of 1994, or entirely in cash. The transaction is expected to close in April 1994. The transaction includes substantially all of the Company's assets in the Anadarko Basin of Oklahoma and Texas as well as its interests in the Rocky Mountain states, excluding its interests in the Canyon Creek natural gas field in Wyoming. The undeveloped acreage includes approximately 1.7 million mineral and leasehold acres and exploratory options on an additional 8.1 million acres. Production from the properties to be sold to Bridge averaged approximately 1,300 barrels of oil per day and 15.2 MMcf of natural gas per day during 1993. During 1993 such properties contributed $5.8 million to the Company's income from operations. RESERVES The following tables set forth information regarding changes in the Company's estimates of proved net reserves from January 1, 1991 to December 31, 1993 and the balance of the Company's estimated proved developed reserves at December 31 of each of the years 1990 through 1993.
INCREASES (DECREASES) BALANCE NET CHANGES AT REVISION EXTENSIONS, PURCHASES IN BEGINNING OF DISCOVERIES (SALES) OF OWNERSHIP- OF PREVIOUS IMPROVED AND MINERALS PARTNER- PERIOD ESTIMATES RECOVERY ADDITIONS IN PLACE PRODUCTION SHIP(A) PROVED RESERVES AT DECEMBER 31, 1991: Oil and Condensate ((MMBbls)----- 222.3 (1.9) 15.9 1.8 10.9 (20.2) 0.4 Gas (Bcf)------------------------ 185.9 0.4 0.5 19.6 (3.0) (34.8) 2.2 Oil Equivalent (MMBOE)----------- 253.3 (1.8) 16.0 5.1 10.4 (26.0) 0.7 PROVED RESERVES AT DECEMBER 31, 1992: Oil and Condensate (MMBbls)------ 229.2 14.1 17.0 2.6 15.0 (23.0) 0.2 Gas (Bcf)------------------------ 170.8 7.3 1.3 5.6 137.1 (46.2) 1.6 Oil Equivalent (MMBOE)----------- 257.7 15.3 17.2 3.6 37.9 (30.6) 0.4 PROVED RESERVES AT DECEMBER 31, 1993: Oil and Condensate (MMBbls)------ 255.1 (10.8) 26.7 6.2 (4.8) (24.3) 0.1 Gas (Bcf)------------------------ 277.5 26.7 -- 55.9 (37.5) (60.4) 0.8 Oil Equivalent (MMBOE)----------- 301.5 (6.3) 26.7 15.4 (11.1) (34.4) 0.2 BALANCE AT END OF PERIOD PROVED RESERVES AT DECEMBER 31, 1991: Oil and Condensate ((MMBbls)----- 229.2 Gas (Bcf)------------------------ 170.8 Oil Equivalent (MMBOE)----------- 257.7 PROVED RESERVES AT DECEMBER 31, 1992: Oil and Condensate (MMBbls)------ 255.1 Gas (Bcf)------------------------ 277.5 Oil Equivalent (MMBOE)----------- 301.5 PROVED RESERVES AT DECEMBER 31, 1993: Oil and Condensate (MMBbls)------ 248.2 Gas (Bcf)------------------------ 263.0 Oil Equivalent (MMBOE)----------- 292.0(b) DECEMBER 31, 1993 1992 1991 1990 PROVED DEVELOPED RESERVES (MMBOE)---- 225.5 248.4 210.3 205.0 (a) The information set forth under the column headed 'Changes in Ownership -- Partnership' reflects reserve additions attributable to the Company's increased ownership interest in Santa Fe Energy Partners, L.P. (the 'Partnership') caused by the reinvestment of distributions received by the Company in respect of its interest in the Partnership. At December 31, 1993, the Company (through its subsidiaries) owned an aggregate 100% interest in the Partnership. (b) At December 31, 1993, 5.2 MMBOE were subject to a 90% net profits interest held by Santa Fe Energy Trust. See '-- Santa Fe Energy Trust.'
Historically, the Company has utilized active development and exploration programs as well as selected acquisitions to replace its reserves depleted by production. The Company has increased its proved reserves (net of production) by approximately 35% over the five years ended December 31, 1993. Most of such increases are attributable to proved reserve additions from the Company's producing oil properties in the San Joaquin Valley of California and the Permian Basin in west Texas, proved reserves acquired in the Adobe Merger and other purchases of oil and gas reserves. At December 31, 4 1993, the Company's reserves were 9.5 MMBOE lower than at December 31, 1992, primarily reflecting the sale during 1993 of properties with reserves totaling 16.7 MMBOE partially offset by additions. The following table sets forth as of December 31, 1993 the Company's estimated proved reserves and the discounted net present value thereof in each of the Company's principal operating areas.
NATURAL OIL PV1O(A) OIL GAS EQUIVALENT (MILLIONS OPERATING REGION (MMBBLS) (MMCF) (MMBOE) OF DOLLARS) Permian Basin------------------------ 41.6 45.8 49.2 128.1 Offshore Gulf of Mexico-------------- 3.8 103.8 21.1 169.8 San Joaquin Valley------------------- 183.6 11.8 185.6 167.1 Other Domestic----------------------- 1.9 74.5 14.3 78.2 International------------------------ 17.3 27.1 21.8 24.6 Total---------------------------- 248.2 263.0 292.0 567.8 (a) Represents the net present value (discounted at 10%) of the pretax future net cash flows estimated to result from production of the Company's estimated proved reserves using estimated sales prices and estimates of production costs, ad valorem and production taxes and future development costs necessary to produce such reserves. The sales prices used in the determination of proved reserves and of estimated future net cash flows are based on the prices in effect at year end, and for 1993 averaged $9.27 per Bbl for oil and $2.17 per Mcf for natural gas. The average sales price (unhedged) realized by the Company for its production during 1993 was $12.93 per Bbl for oil and $2.03 per Mcf for natural gas.
Ryder Scott Company ('Ryder Scott'), a firm of independent petroleum engineers, prepared the above estimates of the Company's total proved reserves as of December 31, 1990 through 1993. During 1993 the Company filed Energy Information Administration Form 23 which reported natural gas and oil reserves for the year 1992. On an equivalent barrel basis, the reserve estimates for the year 1992 contained in such report and those reported herein for the year 1992 do not differ by more than five percent. DOMESTIC DEVELOPMENT ACTIVITIES The Company is engaged in development activities primarily through the application of thermal enhanced recovery techniques to its heavy oil properties in the San Joaquin Valley, the use of secondary waterfloods and tertiary CO2 floods on its properties in other mature fields and the development of producing properties acquired by the Company through its exploration successes and its acquisition program. Thermal EOR operations involve the injection of steam into a reservoir to raise the temperature and reduce the viscosity of the heavy oil, facilitating the flow of the oil into producing wellbores. The Company has operated thermal EOR projects in the San Joaquin Valley since the mid-1960s. Similarly, the Company has extensive experience in the use of waterfloods, which involve the injection of water into a reservoir to drive hydrocarbons into producing wellbores. The Company has an interest in more than 50 waterflood projects, and additional projects are planned for the future. Following the waterflood phase, certain fields may continue to produce in response to tertiary EOR projects, such as the injection of CO2 which mixes miscibly with the oil and improves the displacement efficiency of the water injection. The Company's principal CO2 floods are in the Wasson field and are operated by affiliates of Shell Oil Company, ARCO and Amoco. Set forth below is a discussion of some of the Company's principal development projects. The Company has operated in the Midway-Sunset and Wasson fields since 1905 and 1939, respectively. The Company acquired interests in the South Belridge field from Petro-Lewis in 1987 and in January 1991 expanded its holdings in the field with the purchase of certain properties from Mission Operating Partnership, L.P. The Company's interests in the Kern River and Coalinga fields were acquired in 1905 and 1977, respectively. The Gulf of Mexico fields were discovered on leases held by 5 the Company or acquired in the Adobe Merger, while the Delaware and Cisco Canyon properties were acquired as undeveloped properties. SAN JOAQUIN VALLEY MIDWAY-SUNSET. The Company owns a 100% working interest (92% average net revenue interest) in over 10,000 gross acres and 2,200 active wells in the Midway-Sunset field. Substantially all the oil produced from the Midway-Sunset field is heavy crude oil produced principally by cyclic steam and steamflood operations from Pleistocene and Miocene reservoirs at depths less than 2,000 feet. These steam stimulation operations were initiated in the field in the mid-1960s. During 1993 the Midway-Sunset field accounted for approximately 50% of the Company's domestic crude oil and liquids production. At December 31, 1993 the Midway-Sunset field accounted for approximately 69% of the Company's domestic proved crude oil and liquid reserves. Reservoir engineering studies prepared on behalf of the Company indicate significant additions to its proved reserves in this field can continue to be made through additional EOR and development projects. The Company has identified a substantial number of locations that could be drilled in the field, depending in part on future prices and economic conditions. The Company is pursuing electrical cogeneration opportunities which could lower Midway-Sunset operating costs. SOUTH BELRIDGE. The South Belridge field is located approximately 15 miles north of the Midway-Sunset field. The Company operates three leases in the field which produce heavy oil from the shallow Tulare sands and lighter low viscosity oil from the deeper Diatomite reservoirs. Steamflood operations in the lower Tulare sands are in progress on one of these leases and plans call for flooding the remaining Tulare sands on this lease and all Tulare sands on another lease in the coming years. Waterflood operations in the Diatomite reservoir have been initiated on two leases and the Company expects to expand these operations to include the rest of the developed area. COALINGA. The Coalinga field is located 55 miles southwest of Fresno, California. Successful steamfloods and a pilot steamflood project have been conducted in the Lower Temblor Sands on three of the six leases in which the Company owns interests in the field. During the next several years, the Company plans to expand the pilot steamflood project in the lower sands to cover the remaining producing area and expand steam floods on the Upper Temblor Sands on all leases after depletion of the lower zones. Most of the facilities required for these projects are already in place as a result of the prior steamfloods. KERN RIVER. The Kern River field is located near Bakersfield, California. The Lower Kern River Series sands have been successfully steamflooded on three of the leases in which the Company owns an interest. Over the next several years steamflood operations will be sequentially redeployed in the upper sands of the Kern River Series. Eventually the Company plans to flood all sands on its remaining lease in several stages. The Company has installed and operates a large steam generation plant on these properties. PERMIAN BASIN WASSON. The Company's interests in the field principally consist of royalty and working interests in three units which are presently under CO2 flood. Most of the expenditures for plant, facilities, wells and equipment necessary for such tertiary recovery projects have been made. In addition, while expenditures relating to the purchase of CO2 for the Wasson field are expected to continue, CO2 can be recycled and, therefore, such expenditures should decline in the future. During 1993 the Wasson field accounted for approximately 9% of the Company's domestic crude oil and liquids production and at December 31, 1993 the field accounted for approximately 8% of the Company's domestic proved crude oil and liquids reserves. Since initiation of CO2 flooding operations in 1984, the field's previous production decline has been reversed. Reservoir engineering studies 6 prepared on behalf of the Company indicate significant additions to proved reserves can be made through additional EOR and development projects. REEVES. The Company owns a 72% net interest in the Reeves field, seven miles east of the large Wasson field in west Texas. The field has been under waterflood since 1965. During 1993 six wells were drilled and 16 wells were worked over as part of a program to delineate the extended productive limits of the field, to evaluate the potential for infill drilling and to enhance current waterflood operations. Based on the successes of the prior year's program, the Company plans to initiate an infill drilling and workover program in this field in the near future. NEW MEXICO. During 1993 the Company increased its activity in the light-oil Delaware play in Lea and Eddy Counties of southeast New Mexico. A total of 51 gross (18.1 net) development wells were completed in 1993 with a 100% success rate and in December 1993 such wells produced approximately 1,400 barrels of oil and 3.1 MMcf of natural gas per day. Net production from this area in December 1993 totaled approximately 1,500 barrels of oil and 4.0 MMcf of natural gas per day. The Company plans to drill additional development wells in 1994. Also in southeastern New Mexico, the Company participated in five gross (2.8 net) wells in 1993 in the light oil and gas Cisco-Canyon project. Four wells were completed as producers from the Cisco-Canyon zone by year end and a fifth continued production testing. The Company plans to continue delineation of this play which contains some 75 identified potential development locations. OFFSHORE GULF OF MEXICO At December 31, 1993, offshore Gulf of Mexico properties accounted for 39% of the Company's proved natural gas reserves and during 1993 these properties accounted for approximately 56% of the Company's natural gas production. In the Gulf Division, several new fields or field additions were placed on production during 1993. Net production from these fields at year end averaged approximately 29.0 MMcf of gas per day. Further development in these fields are either planned or under study for 1994 and 1995. The Company's activities in the offshore Gulf of Mexico are conducted in the shallow water (less than 300 feet), where the costs of drilling, completion and production are not as uncertain as are the costs in the Flextrend and Deepwater areas of the Gulf of Mexico. During 1993, the Company participated in the drilling of four gross (1.3 net) exploratory wells and one gross (0.3 net) well was drilling at year end (which well resulted in a discovery and a multiwell development program is expected to commence in 1994). For a description of the Company's leasehold position in the offshore Gulf of Mexico, see '-- Domestic Exploration Activities.' DOMESTIC EXPLORATION ACTIVITIES The Company's domestic exploration focus continues to be in the Permian Basin and the offshore Gulf of Mexico. Overall the Company participated in 22 gross (9.0 net) exploratory wells in 1993. A total of ten gross (3.6 net) were completed as producers for a 40% net well success. At year end there were nine gross (4.3 net) wells in some stage of drilling or completion. As of December 31, 1993, the Company held approximately 0.3 million net undeveloped leasehold acres in 14 states and offshore areas, excluding approximately 0.5 million net undeveloped leasehold acres committed to Bridge under the terms of a Purchase and Sales Agreement signed in December 1993. The primary terms of lease expire with respect to 24% of such acreage in 1994, 25% in 1995, 15% in 1996, 10% in 1997 and the remainder thereafter. In addition, the Company owns approximately 0.5 million net acres of undeveloped fee minerals in Louisiana, Texas and California. The Company also controls the oil and gas rights on approximately 8.1 million net undeveloped acres in the western United States through direct ownership and pursuant to lease option agreements from Santa Fe Pacific Railroad Company and other former affiliates. These lands are located in high risk exploration areas. Due to this risk, the Company has historically negotiated with third parties to explore this acreage with the Company to receive a royalty or carried interest in the exploration 7 phase. An agreement relating to substantially all of these oil and gas rights has been entered into with Bridge. This agreement is intended to provide incentive to Bridge to accelerate exploration activities on lands subject to these rights. The Company will receive a small revenue interest in the event such activities are successful. Set forth below is a brief discussion of some of the Company's principal exploration programs. PERMIAN BASIN. This area continues to be one of the Company's most active and successful exploration areas. During 1993, the Company participated in 18 gross (7.7 net) exploratory wells. Eight gross (3.3 net) of these were completed in 1993 as oil or gas discoveries. Additionally, eight gross (4.0 net) were in some phase of drilling or completing at year end. Drilling objectives for the Company's exploratory program target oil and gas zones at depths of between 2,500 to 15,000 feet. The shallower targets such as the Delaware, and Cisco-Canyon formations are providing successful results. The Delaware program in southeast New Mexico was the subject of seven gross (3.7 net) exploratory and 51 gross (18.1 net) development wells completed in 1993. A success rate of 58% of the net exploratory wells and 100% of the net development wells was achieved in this increasingly active light oil play. Currently the Company has identified in excess of 150 development well locations and has 20 exploratory prospects in inventory to be drilled over the next several years. In the west Texas Permian Basin, the Company completed the shooting of 3-D seismic over its 250 square mile block near Midland last fall. The joint venture block contains over 100,000 net acres of lands owned or controlled by the Company and its partners. Almost all of the Company's 25% interest in the 3-D seismic was paid by a promoted partner. Drilling began in December 1993 on two prospects identified in this program. Additional drilling is planned on a variety of other prospects in 1994 at depths of 10,000 to 12,000 feet. OFFSHORE GULF OF MEXICO. The Company participated in four gross (1.3 net) exploratory wells in the offshore in 1993 and one gross (0.3 net) was drilling at year end. One gross (0.3 net) well resulted in a discovery on which a multiwell development program will commence in the second quarter of 1994. The Company acquired 3-D seismic coverage over 12 blocks during 1993 adding to its extensive Gulf of Mexico seismic database which includes 3-D coverage on 57 blocks. Currently the Company has 35 exploratory prospects in inventory and some 30 development locations identified a portion of which are exploratory planned to be drilled in 1994. At year end the Company owned 179 blocks of acreage in the Gulf of Mexico consisting of approximately 299,800 gross (147,400 net) undeveloped acres and 257,900 gross (79,000 net) developed acres. INTERNATIONAL DEVELOPMENT ACTIVITIES INDONESIA. The Company, through a wholly owned subsidiary, is engaged in the production of crude oil in Indonesia through a joint venture (the 'Salawati Basin Joint Venture') formed in 1970 to explore for and develop hydrocarbon reserves in the Salawati Basin area of Irian Jaya. At December 31, 1993, the Company held a 33 1/3% participation interest in, and acts as operator for, the Salawati Basin Joint Venture. The Salawati Basin Joint Venture operates under a production sharing contract (the 'PSC') with the Indonesia state oil agency ('Pertamina'), which had an initial term of 30 years and expires in the year 2000. The Company is currently negotiating with such state oil agency to extend the contract for an additional 20 years. As of December 31, 1993, the contract covered an area of approximately 235,000 acres. Production occurs from seven oil and three gas condensate fields. The PSC entitles the Salawati Basin Joint Venture to recover all of its expenditures related to the operation (the 'cost recovery amount') before any additional production is shared with the Indonesian state oil agency, which recovery is effected by allocating to the Salawati Basin Joint Venture a portion of the crude oil production sufficient, at the Indonesia government official crude oil price ('ICP'), to offset the cost recovery amount. The balance of production after the cost recovery 8 amount is divided between the parties, with approximately 66% allocated to Pertamina and 34% allocated to the Salawati Basin Joint Venture. However, 25% of the 34% pre-tax portion (8.5% of total production) must be sold into the Indonesian domestic market for $0.20 per barrel. The entire entitlement of the Salawati Basin Joint Venture under the PSC, including the domestic market obligation, averaged approximately 10.1 MBbls per day (approximately 3.4 MBbls per day net to the Company) for the year ended December 31, 1993. The Salawati Basin Joint Venture is required to pay Indonesian income taxes at the rate of 56%. The Company, through another subsidiary, has also entered into a joint venture with Pertamina to explore the Salawati Island Block of Irian Jaya. The effective date of this joint venture is April 23, 1990 with a term of 30 years. At December 31, 1993, the Company held a 16 2/3% participation interest in the block which covers 1.09 million acres. The Company and Pertamina (with its 50% interest) jointly operate the contract area. In 1991, a successful exploratory well tested at a combined rate of 3,568 barrels of oil per day and was followed by two successful delineation wells. Pertamina declared the field commercial in January 1993 and designated it as the Matoa Field. Sales of production began in January of 1993. Development activities through 1993 have the Matoa field producing approximately 5,600 barrels of oil per day from eight wells as of December 31, 1993. Under the terms of the PSC, the joint venture participants are allowed to recover the cost recovery amount, after an initial 20% portion (2.9% to the joint venture participants and 17.1% to Pertamina) has been deducted, by allocating to the joint venture participants a portion of the crude oil production ('cost oil') sufficient to offset the cost recovery amount. All unrecovered costs in any calendar year can be carried forward to future years. The balance of production after allocation of cost oil is allocated approximately 85.5% to Pertamina and 14.5% to the other Salawati Island Joint Venture participants. However, 7.25% of the gross production allocated to the joint venture participants must be sold into the Indonesian domestic market for 10% of ICP. ARGENTINA. In 1991, the Company, through a wholly owned subsidiary, acquired an 18% non-operated working interest (15.84% net interest) in the El Tordillo field in Chubut Province, Argentina. At that time, the field was producing approximately 10,500 barrels of oil per day. The Company has agreed to spend approximately $16.7 million net during the period from July 1, 1992 to July 1, 1996 on development and maintenance of the field which began with an extensive workover and recompletion program. As of December 31, 1993 the El Tordillo owners have completed 163 such workovers and drilled three new wells. During that time production increased to approximately 16,000 barrels of oil per day. The Company expects this program to continue through 1994 and anticipates an expansion of the existing waterflood facilities. Under the terms of the contract with the Argentine national oil company, the joint venture group is allowed to sell crude oil produced from this field into the open market. There is a 12% royalty on gross production and the joint venture is taxed at a 30% rate after deductions for capitalized costs and expenses. In April 1993, the Company's subsidiary completed the Sierra Chata X-1 as a successful exploratory test in Chihuidos Block, Neuquen Province, Argentina. The well produced at a combined rate of 22.2 million cubic feet per day and 109 barrels of condensate per day. Carbon dioxide content of the natural gas was 6%. Five successful delineation wells were drilled in 1993. Producing rates on these wells varied from 3.2 to 27.6 million cubic feet per day. Engineering and geological studies are presently being undertaken to develop the field through additional drilling, with 4.0 gross (1.0 net) additional wells currently planned for 1994. In addition, the Company and its partners intend to build a gas processing facility and a 40-mile gathering pipeline during 1994 that will transport production from the field and interconnect with a main transmission line owned by a third party that transports gas to Buenos Aires and other major markets. Construction of the gas processing facility and the pipeline and the drilling of the development wells are estimated to cost an aggregate of $76.0 million gross ($17.2 million net to the Company's interest). The Company expects that sales of production from the Sierra Chata discovery will commence in 1995. 9 INTERNATIONAL EXPLORATION ACTIVITIES In 1993, the Company had its most active year ever in the international arena. The Company participated in six gross (1.8 net) exploratory wells of which two gross (0.5 net) were completed as natural gas wells. Additionally, four gross (1.2 net) wells were either drilling or completing at year end. The Company made one exploration discovery in 1993. The Sierra Chata natural gas discovery in the Neuquen Basin of Argentina is being developed from sandstone reservoirs at 6,000 feet. The Company has a 22.5% working interest (20% net revenue interest) and is operator of this field. To date a total of six gross (1.3 net) wells have been drilled with no dry holes. Combined gross flow rates from these six wells are in excess of 100 million cubic feet of gas and 500 barrels of condensate per day. Additional development drilling will continue during 1994 to increase production capacity and further define the limits of the field. See '-- International Development Activities.' The Company plans to drill eight gross (2.8 net) wells in 1994 in addition to the four gross (1.2 net) wells which carried over from 1993 in either a drilling or completing status. The 1994 drilling and exploratory activity will be centered principally in Indonesia and South America. Of the total wells to be completed in 1994, four gross (1.2 net) are in Indonesia, four gross (1.3 net) are in Argentina and Bolivia, one gross (0.2 net) is in Papua New Guinea, two gross (1.0 net) are in Canada and one gross (0.3 net) is in Gabon (West Africa). The Company holds exploration contracts totaling 3.5 million net acres in eight foreign countries. The majority of acreage is in Indonesia (1.1 million net acres) and South America (1.2 net million acres) with the balance in Canada, Morocco, Myanmar, Papua New Guinea and Gabon. 10 DRILLING ACTIVITIES The table below sets forth, for the periods indicated, the number of wells drilled in which Santa Fe had an economic interest. As of December 31, 1993, Santa Fe was in the process of drilling or completing 9 gross ( 4.3 net) domestic exploratory wells, 13 gross (5.3 net) development wells, 4 gross (1.2 net) foreign exploratory wells and 3 gross (1.0 net) foreign development wells.
YEAR ENDED DECEMBER 31, 1993 1992 1991 GROSS NET GROSS NET GROSS NET Development Wells Domestic Completed as natural gas wells-------------------------- 21 6.0 6 1.5 25 7.5 Completed as oil wells----------- 237 180.0 62 39.0 220 167.3 Dry holes------------------------ 10 3.6 5 0.4 6 1.6 Foreign: Completed as natural gas wells---------------------------- 4 1.0 -- -- -- -- Completed as oil wells----------- 3 0.9 -- -- -- -- 275 191.5 73 40.9 251 176.4 Exploratory Wells Domestic Completed as natural gas wells-------------------------- 3 0.9 1 0.3 6 2.0 Completed as oil wells----------- 7 2.7 4 1.2 6 1.9 Dry holes------------------------ 12 5.4 2 0.6 19 7.2 Foreign Completed as natural gas wells---------------------------- 2 0.4 -- -- -- -- Completed as oil wells----------- -- -- 1 0.3 -- -- Dry holes------------------------ 4 1.3 4 1.3 3 0.4 28 10.7 12 3.7 34 11.5 303 202.2 85 44.6 285 187.9
PRODUCING WELLS The following table sets forth Santa Fe's ownership in producing wells at December 31, 1993:
U.S. ARGENTINA(1) INDONESIA(2) TOTAL GROSS(3) NET GROSS NET GROSS(4) NET GROSS NET Oil---------------------------------- 10,081 4,780 381 69 401 131 10,863 4,980 Gas---------------------------------- 690 179 6 1 5 2 701 182 10,771 4,959 387 70 406 133 11,564 5,162 (1) At December 31, 1993 the 6 gross (1 net) gas wells were shut-in. (2) Includes 98 gross (32 net) wells which were shut-in at December 31, 1993. (3) Includes 33 wells with multiple completions. (4) Includes 3 wells with multiple completions.
11 DOMESTIC ACREAGE The following table summarizes Santa Fe's developed and undeveloped fee and leasehold acreage in the United States at December 31, 1993. Excluded from such information is acreage in which Santa Fe's interest is limited to royalty, overriding royalty and other similar interests.
UNDEVELOPED DEVELOPED STATE GROSS NET GROSS NET Alabama -- Offshore------------------ -- -- 23,040 12,480 Alabama -- Onshore------------------- 3,089 108 6,063 382 Arkansas----------------------------- 633 493 4,177 3,173 California -- Offshore--------------- -- -- 17,280 2,074 California -- Onshore---------------- 249,207 248,990 7,391 7,011 Colorado----------------------------- -- -- 6,368 5,657 Illinois----------------------------- 202 50 43 13 Kansas------------------------------- 19,433 19,373 4,591 1,002 Louisiana -- Offshore---------------- 222,376 116,843 190,675 57,721 Louisiana -- Onshore----------------- 17,575 16,620 14,635 2,941 Michigan----------------------------- -- -- 71 11 Mississippi-------------------------- 114 30 3,724 810 Montana------------------------------ -- -- 3,196 142 Nevada------------------------------- 3,491 764 9,455 9,455 New Mexico--------------------------- 195,750 155,594 41,427 18,852 New York----------------------------- -- -- 189 47 North Dakota------------------------- 1,509 544 4,337 1,377 Oklahoma----------------------------- 1,917 1,917 29,589 9,940 Texas -- Offshore-------------------- 77,397 30,545 67,194 21,243 Texas -- Onshore--------------------- 180,828 174,912 246,287 168,421 Utah--------------------------------- 1,348 575 8,389 3,494 Wyoming------------------------------ 13,785 10,804 25,888 11,312 988,654 778,162 714,009 337,558
The foregoing table excludes approximately 2,033,400 gross (1,682,000 net) undeveloped leasehold and fee acres and 80,200 gross (45,900 net) developed acres committed to Bridge under terms of a Purchase and Sales Agreement signed in December 1993 and 123,000 gross (123,000 net) undeveloped acres sold in January 1994. FOREIGN ACREAGE The following table summarizes Santa Fe's foreign acreage at December 31, 1993:
UNDEVELOPED DEVELOPED GROSS NET GROSS NET Argentina---------------------------- 2,103,010 550,457 53,988 10,858 Bolivia------------------------------ 1,442,446 649,100 -- -- Canada (Alberta)--------------------- 150,703 68,071 -- -- Gabon-------------------------------- 701,000 175,250 -- -- Indonesia---------------------------- 4,439,569 1,059,193 9,360 2,870 Morocco------------------------------ 1,300,000 422,500 -- -- Myanmar------------------------------ 394,000 315,200 -- -- Papua New Guinea--------------------- 1,970,000 295,500 -- -- 12,500,728 3,535,271 63,348 13,728
12 CURRENT MARKETS FOR OIL AND GAS The revenues generated by the Company's operations are highly dependent upon the prices of, and demand for, oil and gas. For the last several years, prices of these products have reflected a worldwide surplus of supply over demand. The price received by the Company for its crude oil and natural gas depends upon numerous factors beyond the Company's control, including economic conditions in the United States and elsewhere and the world political situation as it affects OPEC, the Middle East (including the current embargo of Iraqi crude oil from worldwide markets) and other producing countries, the actions of OPEC and governmental regulation. The fluctuation in world oil prices continues to reflect market uncertainty regarding OPEC's ability to control member country production and underlying concern about the balance of world demand for and supply of oil and gas. Decreases in the prices of oil and gas have had, and could have in the future, an adverse effect on the Company's development and exploration programs, proved reserves, revenues, profitability, cash flow and dividend levels. See Item 7. 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- General.' The Company believes the market for heavy crude oil produced in California differs substantially from the remainder of the domestic crude oil market. It is necessary to heat or dilute heavy oil to make it flow, which increases transportation and handling costs, and it is also more costly to refine. As a result, the price paid for heavy crude oil is generally lower than the price paid for light crudes. In addition, there is currently an oversupply of crude oil in the California market that has had an adverse effect on the prices for crude oil in that market. Although no assurance can be given, the Company believes that such oversupply will not continue for the long term due to the availability of crude oil pipelines to transport excess crude oils, including blended oils, to markets in the midwest and west Texas, and due to the decline of crude oil produced from the North Slope of Alaska. From time to time the Company has hedged a portion of its oil and natural gas production to manage its exposure to volatility in prices of oil and natural gas. The Company used several instruments whereby monthly settlements were based on the difference between the price, or a range of prices, specified in the instruments and the monthly average of the daily settlement prices of certain West Texas Intermediate ('WTI') crude oil futures contracts or of certain natural gas futures contracts quoted on the New York Mercantile Exchange. In instances where the actual average of the daily settlement price was less than the price specified in the contract, the Company received a settlement based on the difference; in instances where the actual average of the daily settlement price was higher than the specified price, the Company paid an amount based on the difference. The instruments utilized by the Company differed from futures contracts in that there was no contractual obligation which required or allowed for the future delivery of the product. Settlements were included in revenues in the period in which the oil and natural gas were sold. In 1990, oil hedges resulted in a $10.7 million reduction in oil revenues and in 1991 and 1992 oil hedges resulted in an increase in oil revenues of $41.7 million and $9.7 million, respectively. The Company has had no oil hedging contracts subsequent to 1992. In 1992 and 1993, natural gas hedges resulted in a reduction in natural gas revenues of $0.5 million and $8.2 million, respectively. The Company currently has six open natural gas hedging contracts for approximately 24.6 MMcf per day during the seven month period beginning March 1994. The 'approximate break-even price' (the average of the monthly settlement prices of the applicable futures contracts which would result in no settlement being due to or from the Company) with respect to such contracts is approximately $1.88 per Mcf. In addition, a certain party holds an option on a contract covering approximately 4.7 MMcf per day during the five month period beginning May 1994 at an approximate break even price of $1.92 per Mcf. The Company has no other outstanding natural gas hedging instruments. During 1993, affiliates of Shell Oil Company and Celeron Corporation accounted for approximately 23% and 15% respectively, of the Company's domestic crude oil and liquids and natural gas revenues. No other individual customer accounted for more than 10% of such revenues during 1993. Substantially all of the Company's oil and natural gas production is currently sold at market- 13 responsive prices that approximate spot prices. Availability of a ready market for the Company's oil and gas production depends on numerous factors, including the level of consumer demand, the extent of worldwide oil production, the cost and availability of alternative fuels, the cost of and proximity of pipelines and other transportation facilities, regulation by state and federal authorities and the cost of complying with applicable environmental regulations. In December 1993, the Company signed a seven-year gas sales contract with Hadson pursuant to the terms of which Hadson will market substantially all of the Company's domestic natural gas production. Pursuant to such gas contract, Santa Fe dedicated to Hadson all of its domestic natural gas production from specified existing wells, which consist of essentially all of the Company's domestic natural gas production, except to the extent such production was dedicated under pre-existing contracts. Upon the expiration of any such pre-existing contracts, that production shall also be dedicated to the Company. In addition to production from existing wells, such gas contract provides for the dedication by the Company of gas production from certain domestic development wells and exploration wells to the extent that the Company accepts proposals from Hadson to gather and market production from such exploration wells. Production from gas wells acquired by the Company pursuant to an acquisition of producing oil and gas properties will not be dedicated under the gas contract but may be dedicated by the mutual agreement of the Company and Hadson. Pursuant to the gas contract, Hadson will be required to pay the Company for all production delivered at a price for such gas equal to stipulated published monthly index prices. Hadson is obligated to use its best efforts to receive gas from the Company at delivery points so as to maximize the net price received by the Company for such production. Payment for purchases by Hadson are to be made in immediately available funds no later than the last working day of the month following the month of production. SANTA FE ENERGY TRUST In November 1992, 5,725,000 Depositary Units ('Depositary Units'), each consisting of beneficial ownership of one unit of undivided interest in Santa Fe Energy Trust (the 'Trust') and a $20 face amount beneficial ownership interest in a $1,000 face amount zero coupon United States Treasury obligation maturing on February 15, 2008, were sold in a public offering. The assets of the Trust consist of certain oil and gas properties conveyed by the Company. A total of $114.5 million was received from public investors, of which $38.7 million was used to purchase the Treasury obligations and $5.7 million was used to pay underwriting commissions and discounts. The Company received the remaining $70.1 million and retained 575,000 Depositary Units. A portion of the proceeds received by the Company was used to retire $30.0 million of the debt incurred in connection with the Merger and the remainder was used for general corporate purposes. In the first quarter of 1994, the Company sold the remaining 575,000 Depositary Units it held for $11.3 million. The properties conveyed to the Trust consisted of two term royalty interests in two production units in the Wasson field in west Texas and a net profits royalty interest in certain royalty and working interests in a diversified portfolio of properties located in twelve states. At December 31, 1993, 5.2 MMBOE of the Company's estimated proved reserves were subject to such net profits interest. The reserve estimates included herein reflect the conveyance of the Wasson term royalties to the Trust. For any calendar quarter ending on or prior to December 31, 2002, the Trust will receive additional royalty payments to the extent that such payments are required to provide distributions of $0.40 per Depositary Unit per quarter. Such additional royalty payments, if needed, will come from the Company's remaining royalty interest in one of the production units in the Wasson field described above, and are non-recourse to the Company. If such additional payments are made, certain proceeds otherwise payable to the Trust in subsequent quarters may be reduced to recoup the amount of such additional payments. The aggregate amount of the additional royalty payments (net 14 of any amounts recouped) will be limited to $20.0 million on a revolving basis. The Company was required to make an additional royalty payment of $362,000 with respect to the distribution made by the Trust for operations during the quarter ended December 31, 1993. Based upon current prices, the Company believes that a support payment will be required for the quarter ending March 31, 1994, the amount of which has not been determined. OTHER BUSINESS MATTERS COMPETITION The Company faces competition in all aspects of its business, including, but not limited to, acquiring reserves, leases, licenses and concessions; obtaining goods, services and labor needed to conduct its operations and manage the Company; and marketing its oil and gas. The Company's competitors include multinational energy companies, government-owned oil and gas companies, other independent producers and individual producers and operators. The Company believes that its competitive position is affected by price, its geological and geophysical capabilities and ready access to markets for production. Many competitors have greater financial and other resources than the Company, more favorable exploration prospects and ready access to move favorable markets for their production. The Company believes that the well-defined nature of the reservoirs in its long-lived oil fields, its expertise in EOR methods in these fields, its active development and exploration position and its experienced management may give it a competitive advantage over some other producers. REGULATION OF CRUDE OIL AND NATURAL GAS The petroleum industry is subject to various types of regulation throughout the world, including regulation in the United States by state and federal agencies. Domestic legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the oil and gas industry and its individual members, compliance with which is often difficult and costly and which may carry substantial penalties for non-compliance. Although the regulatory burden on the oil and gas industry increases the cost of doing business and, consequently, affects profitability, generally these burdens do not appear to affect the Company any differently or to any greater or lesser extent than other companies in the industry with similar types and quantities of production. While the Company is a party to several regulatory proceedings before governmental agencies arising in the ordinary course of business, management does not believe that the outcome of such proceedings will have a material adverse affect on the operations or financial condition of the Company. Set forth below is a general description of certain state and federal regulations which have an effect on the Company's operations. STATE REGULATION. State statutes and regulations require permits for drilling operations, drilling bonds and reports concerning operations. Most states in which the Company operates also have statutes and regulations governing the conservation of oil and gas and the prevention of waste, including the unitization or pooling of oil and gas properties and rates of production from oil and gas wells. Rates of production may be regulated through the establishment of maximum daily production allowables on a market demand or conservation basis or both. FEDERAL REGULATION. A portion of the Company's oil and gas leases are granted by the federal government and administered by the Bureau of Land Management ('BLM') and the Minerals Management Service ('MMS'), both of which are federal agencies. Such leases are issued through competitive bidding, contain relatively standardized terms and require compliance with detailed BLM and MMS regulations and orders (which are subject to change by the BLM and the MMS). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies (such as the Coast Guard, Army Corps of Engineers and Environmental 15 Protection Agency), lessees must obtain a permit from the BLM or the MMS prior to the commencement of drilling. The interstate transportation of natural gas is regulated by the Federal Energy Regulatory Commission ('FERC') under the Natural Gas Act of 1938 and, to a lesser extent, the Natural Gas Policy Act of 1978 (collectively, the 'Acts'). Numerous questions have been raised concerning the interpretation and implementation of several significant provisions of the Acts, as well as the regulations and policies promulgated by FERC thereunder. A number of lawsuits and administrative proceedings have been instituted which challenge the validity of regulations implementing the Acts. In addition, as described below, FERC currently has under consideration various policies and proposals which will affect the marketing of gas under new and existing contracts. Since 1991, FERC's regulatory efforts have centered largely around its generic rulemaking proceedings, Order No. 636. Through Order No. 636 and successor orders, FERC has undertaken to restructure the interstate pipeline industry with the goal of providing enhanced access to, and competition among, alternative gas suppliers. By requiring interstate pipelines to 'unbundle' their sales services and to provide its customers with direct access to any upstream pipeline capacity held by pipelines, Order No. 636 has enabled pipeline customers to choose the levels of transportation and storage service they require, as well as to purchase gas directly from third-party merchants other than the pipelines. Although the implementation of Order No. 636 on individual interstate pipelines is nearing completion, this process is not yet final. Moreover, nearly all of these individual restructuring proceedings, as well as Order No. 636 itself and the regulations promulgated thereunder, are subject to pending appellate review and could possibly be substantially modified by the courts. Thus, while Order No. 636, if ultimately implemented without substantial change, should generally facilitate the transportation of gas and the direct access to end-user markets, the precise impact of these regulations on marketing production cannot be predicted at this time. Beyond Order No. 636, FERC is now considering a number of other important policies, all of which could significantly affect the marketing of gas. Some of the more notable of these regulatory initiatives include FERC's rulemakings on gathering and production-area rate design, regulation of pipeline marketing affiliates under Order No. 497, and standards for pipeline electronic bulletin boards and electronic data exchange. The U.S. Congress has historically been active in the area of oil and natural gas regulation. Although no prediction can be made concerning future regulation or legislation which may affect the competitive status of the Company, or affect the prices at which it may sell its oil and gas, any regulation or legislation that, directly or indirectly, lowers price levels for oil and gas sold or increases the costs of production could have an adverse effect on the Company's operations. ENVIRONMENTAL REGULATION Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the Company's operations and costs. In particular, the Company's oil and gas exploration, development, production and EOR operations, its activities in connection with storage and transportation of liquid hydrocarbons and its use of facilities for treating, processing, recovering or otherwise handling hydrocarbons and wastes therefrom are subject to stringent environmental regulation by governmental authorities. Such regulation has increased the cost of planning, designing, drilling, installing, operating and abandoning the Company's oil and gas wells and other facilities. The Company has expended significant resources, both financial and managerial, to comply with environmental regulations and permitting requirements and anticipates that it will continue to do so in the future in order to comply with stricter industry and regulatory safety standards such as those described below. Although the Company believes that its operations and facilities are in general compliance with applicable environmental regulations, risks of substantial costs and liabilities are inherent in oil and gas 16 operations and there can be no assurance that significant costs and liabilities will not be incurred in the future. Moreover, it is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies thereunder, and claims for damages to property, employees, other persons and the environment resulting from the Company's operations, could result in substantial costs and liabilities in the future. Although the resulting costs cannot be accurately estimated at this time, these requirements and risks typically apply to companies with types and quantities of production similar to those of the Company and to the oil and gas industry in general. OFFSHORE PRODUCTION. Offshore oil and gas operations are subject to regulations of the United States Department of the Interior, the Department of Transportation, the United States Environmental Protection Agency ('EPA') and certain state agencies. In particular, the Federal Water Pollution Act of 1972, as amended ('FWPCA'), imposes strict controls on the discharge of oil and its derivatives into navigable waters. The FWPCA provides for civil and criminal penalties for any discharges of petroleum in reportable quantities and, along with the Oil Pollution Act of 1990 and similar state laws, imposes substantial liability for the costs of oil removal, remediation and damages. SOLID AND HAZARDOUS WASTE. The Company currently owns or leases, and has in the past owned or leased, numerous properties that have been used for production of oil and gas for many years. Although the Company has utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other solid wastes may have been disposed or released on or under the properties owned or leased by the Company. State and federal laws applicable to oil and gas wastes and properties have gradually become more strict. Under these new laws, the Company has been, and in the future could be, required to remove or remediate previously disposed wastes or property contamination (including groundwater contamination) or to perform remedial plugging operations to prevent future contamination. The Company generates hazardous and nonhazardous wastes that are subject to the federal Resource Conservation and Recovery Act and comparable state statutes. The EPA has limited the disposal options for certain hazardous wastes and is considering the adoption of stricter disposal standards for nonhazardous wastes. Furthermore, it is anticipated that additional wastes (which could include certain wastes generated by the Company's oil and gas operations) will in the future be designated as 'hazardous wastes,' which are subject to more rigorous and costly disposal requirements. In response to the changing regulatory environment, the Company has made certain changes in its operations and disposal practices. For example, the Company has commenced remediation of sites or replacement of facilities where its wastes have previously been disposed. SUPERFUND. The Comprehensive Environmental Response, Compensation and Liability Act ('CERCLA'), also known as the 'superfund' law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that contributed to the release of a 'hazardous substance' into the environment. These persons include the owner or operator of a site and companies that disposed or arranged for the disposal of the hazardous substance found at a site. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in responses to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. In the course of its operations, the Company has generated and will generate wastes that may fall within CERCLA's definition of 'hazardous substances.' The Company may be responsible under CERCLA for all or part of the costs to clean up sites at which such wastes have been disposed. The Company has been identified as one of over 250 potentially responsible parties ('PRPs') at a superfund site in Los Angeles County, California. The site was operated by a third party as a waste disposal facility from 1948 until 1983. The EPA is requiring the PRPs to undertake remediation of the site in several phases, which include site monitoring and leachate control, gas control and final remediation. In 1989 the EPA and a group of the PRPs entered into a consent decree covering the site monitoring and leachate control phase of remediation. The Company is a member of the group that is 17 responsible for carrying out this first phase of work, which is expected to be completed in five to eight years. The maximum liability of the group, which is joint and several for each member of the group, for the first phase is $37.0 million, of which the Company's share is expected to be approximately $2.4 million ($1.3 million after recoveries from working interest participants in the unit at which the wastes were generated) payable over the period that the phase one work is performed. The EPA and a group of PRPs of which the Company is a member have also entered into a subsequent consent decree (which has not yet been finally entered by the court) with respect to the second phase of work (gas control). The liability of this group has not been capped, but is estimated to be $130 million. The Company's share of costs for this phase, however, is expected to be approximately of the same magnitude as that of the first phase because more parties are involved in the settlement. The Company has provided for costs with respect to the first two phases, but it cannot currently estimate the cost of any subsequent phases of work which may be required by the EPA. In 1989, Adobe received requests from the EPA for information pursuant to Section 104(e) of CERCLA with respect to the D. L. Mud and Gulf Coast Vacuum Services superfund sites located in Abbeville, Louisiana. The EPA has issued its record of decision at the Gulf Coast Site and on February 9, 1993 the EPA issued to all PRPs at the site a settlement order pursuant to Section 122 of CERCLA. Earlier, an emergency order pursuant to Section 106 of CERCLA was issued on December 11, 1992, for purposes of containment due to the Louisiana rainy season. On December 15, 1993 the Company entered into a cost-sharing agreement with other PRPs to participate in the final remediation of the Gulf Coast site which is presently estimated to cost $15.0 million. The Company's share of the remediation is approximately $600,000 and reflects its proportionate share of the orphans' shares of this site. With respect to the D.L. Mud site, a former site owner has already conducted remedial activities at the site under a state agency agreement. To date the Company has not been requested to share in the remediation costs. The extent, if any, of any further necessary remedial activity at and the prospective PRPs and the Company's financial obligations for, the D. L. Mud Site has not been finally determined. The Company has received a request for information from the EPA regarding the Lee Acres Landfill CERCLA site in New Mexico. The Company advised the EPA that it was not able to locate any information indicating that it had used that facility. The Company is investigating its potential connection, if any, to this facility and is not able to estimate its share of costs, if any, for the site at this time. AIR EMISSIONS. The operations of the Company, including most of its operations in the San Joaquin Valley, are subject to local, state and federal regulations for the control of emissions from sources of air pollution. Legal and regulatory requirements in this area are increasing, and there can be no assurance that significant costs and liabilities will not be incurred in the future as a result of new regulatory developments. In particular, the 1990 Clean Air Act amendments will impose additional requirements that may affect the Company's operations, including permitting of existing sources and control of hazardous air pollutants. However, it is impossible to predict accurately the effects, if any, of the Clean Air Act Amendments on the Company at this time. The Company has been and may in the future be subject to administrative enforcement actions for failure to comply strictly with air regulations or permits. These administrative actions are generally resolved by payment of a monetary penalty and correction of any identified deficiencies. Alternatively, regulatory agencies may require the Company to forego construction or operation of certain air emission sources. OTHER. The Company is subject to the requirements of the federal Occupational Safety and Health Act ('OSHA') and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes (such as California Proposition 65) require the Company to organize information about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities 18 and local citizens. The Company's facilities in California are also subject to California Proposition 65, which was adopted in 1986 to address discharges and releases of, or exposures to, toxic chemicals in the environment. Proposition 65 makes it illegal to knowingly discharge a listed chemical if the chemical will pass (or probably will pass) into any source of drinking water. It also prohibits companies from knowingly and intentionally exposing any individual to such chemicals through ingestion, inhalation or other exposure pathways without first giving a clear and reasonable warning. Although generally less stringent, the Company's foreign operations are subject to similar foreign laws respecting environmental and worker safety matters. INSURANCE COVERAGE MAINTAINED WITH RESPECT TO OPERATIONS The Company maintains insurance policies covering its operations in amounts and areas of coverage normal for a company of its size in the oil and gas exploration and production industry. These coverages include, but are not limited to, workers' compensation, employers' liability, automotive liability and general liability. In addition, an umbrella liability and operator's extra expense policies are maintained. All such insurance is subject to normal deductible levels. The Company does not insure against all risks associated with its business either because insurance is not available or because it has elected not to insure due to prohibitive premium costs. EMPLOYEES As of December 31, 1993, the Company had approximately 777 employees, 210 of whom were covered by a collective bargaining agreement which expires on January 31, 1996. The Company believes that its relations with its employees are satisfactory. ITEM 3. LEGAL PROCEEDINGS The Company, its subsidiaries and other related companies are named defendants in several lawsuits and named parties in certain governmental proceedings arising in the ordinary course of business. For a description of certain proceedings in which the Company is involved, see Items 1 and 2 ' Business and Properties -- Other Business Matters -- Environmental Regulation' and Notes 12 and 13 to the Consolidated Financial Statements. While the outcome of lawsuits or other proceedings against the Company cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF SANTA FE Listed below are the names, ages (as of January 1, 1994) and positions of all executive officers of Santa Fe (excluding executive officers who are also directors of Santa Fe) and their business experience during the past five years. Unless otherwise stated, all offices were held with Santa Fe Energy Company prior to its merger with Santa Fe. Each executive officer holds office until his successor is elected or appointed or until his earlier death, resignation or removal. HUGH L BOYT, 48 Senior Vice President -- Production since March 1, 1990. From 1989 until March 1990, Mr. Boyt served as Corporate Production Manager. From 1983, when Mr. Boyt joined Santa Fe, until 1989 he served as District Production Manager -- Permian Basin. JERRY L BRIDWELL, 50 Senior Vice President -- Exploration and Land since 1986. Mr. Bridwell served in various other capacities, including Vice President -- Exploration, Central Division, since joining Santa Fe in 1974. KEITH P. HENSLER, 62 Senior Vice President -- Marketing since January, 1990. From 1980 when Mr. Hensler joined Santa Fe, until January 1990, he served as Vice President -- Marketing. Mr. Hensler is also Senior Vice President of Energy Products. 19 RICHARD B. BONNEVILLE, 51 Vice President -- Planning and Administration since 1988. Prior to such time Mr. Bonneville served as Secretary of SFP. E. EVERETT DESCHNER, 53 Vice President -- Reservoir Engineering and Evaluation since April 1990. From 1982, when Mr. Deschner joined Santa Fe, until 1990, he served as Manager -- Engineering and Evaluation. C. ED HALL, 51 Vice President -- Public Affairs since March 1991. Prior to such time Mr. Hall served as Director -- Public Affairs since joining Santa Fe in 1984. CHARLES G. HAIN, JR., 47 Vice President -- Employee Relations since 1988. From 1981, when Mr. Hain joined Santa Fe, until 1988, Mr. Hain served as Director -- Employee Relations. DAVID L HICKS, 44 Vice President -- Law and General Counsel since March 1991. From 1988 until March 1991 Mr. Hicks was General Counsel and prior to that time was General Attorney for SFP. MICHAEL J. ROSINSKI, 48 Vice President and Chief Financial Officer since September 1992. Prior to joining Santa Fe, Mr. Rosinski was with Tenneco Inc. and its subsidiaries for 24 years. From 1988 until 1990 he served as Deputy Project Executive for the Colombian Crude Oil Pipeline Project and from 1990 until August 1992 he was Executive Director of Investor Relations. Mr. Rosinski is also a director of Hadson Corporation. JOHN R. WOMACK, 55 Vice President -- Business Development since 1987. From 1982, when Mr. Womack joined Santa Fe, until 1987, Mr. Womack served as Vice President -- Land. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Santa Fe's common stock is listed on the New York Stock Exchange and trades under the symbol SFR. The following table sets forth information as to the last sales price per share of Santa Fe's common stock as quoted on the Consolidated Tape System and cash dividends paid per share for each calendar quarter in 1992 and 1993. [CAPTION] CASH LOW HIGH DIVIDENDS [S] [C] [C] [C] 1992 1st Quarter---------------------- 7 9 3/8 0.04 2nd Quarter---------------------- 7 7/8 9 1/4 0.04 3rd Quarter---------------------- 7 7/8 9 7/8 0.04 4th Quarter---------------------- 7 3/4 9 7/8 0.04 1993 1st Quarter---------------------- 7 3/4 11 0.04 2nd Quarter---------------------- 9 5/8 11 7/8 0.04 3rd Quarter---------------------- 9 1/8 10 5/8 0.04 4th Quarter---------------------- 8 3/8 10 7/8 -- As discussed in Items 1 and 2, Business and Properties -- Corporate Restructuring Program, the Company has eliminated the payment of its $0.04 per share quarterly dividend on its common stock. The determination of the amount of future cash dividends, if any, to be declared and paid is in the sole discretion of Santa Fe's board of directors and will depend on dividend requirements with respect to the Company's convertible preferred stock, the Company's financial condition, earnings and funds from operations, the level of its capital and exploration expenditures, dividend restrictions in its financing agreements, its future business prospects and other matters as the Company's board of directors deems relevant. For a discussion of certain restrictions on Santa Fe's ability to pay dividends, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financing Activities. At December 31, 1993 the Company had approximately 59,100 shareholders of record. 20 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, 1993 1992(B) 1991 1990 1989 (IN MILLIONS OF DOLLARS, EXCEPT AS NOTED) SELECTED FINANCIAL DATA INCOME STATEMENT DATA: Revenues------------------------- 436.9 427.5 379.8 382.9 322.9 Operating expenses Production and operating----- 163.8 153.4 134.6 135.5 107.1 Oil and gas systems and pipelines------------------ 4.2 3.2 -- -- -- Exploration, including dry hole costs----------------- 31.0 25.5 18.7 21.0 19.4 Depletion, depreciation and amortization--------------- 152.7 146.3 106.6 105.2 99.4 Impairment of oil and gas properties----------------- 99.3 -- -- 1.4 1.1 General and administrative------------- 32.3 30.9 27.8 25.6 28.6 Taxes (other than income)---- 27.3 24.3 27.2 22.0 22.3 Restructuring charges(a)----- 38.6 -- -- -- -- Loss (gain) on disposition of oil and gas properties----- 0.7 (13.6) 0.5 2.8 (0.5) Total operating expenses--------------- 549.9 370.0 315.4 313.5 277.4 Income (loss) from Operations---- (113.0) 57.5 64.4 69.4 45.5 Other income (expense)------- (4.8) (10.0) 5.6 (0.3) 18.2 Interest income-------------- 9.1 2.3 2.3 5.2 4.3 Interest expense------------- (45.8) (55.6) (47.3) (57.1) (30.5) Interest capitalized--------- 4.3 4.9 7.7 10.6 13.8 Income (loss) before income taxes and cumulative effect of accounting charge-------------- (150.2) (0.9) 32.7 27.8 51.3 Income taxes benefit (expense)------------------ 73.1 (0.5) (14.2) (10.8) (26.0) Income (loss) before cumulative effect of accounting change---- (77.1) (1.4) 18.5 17.0 25.3 Cumulative effect of accounting change------------------------- -- -- -- -- 24.5 Net income (loss)---------------- (77.1) (1.4) 18.5 17.0 49.8 Preferred dividend requirement-------------------- (7.0) (4.3) -- -- -- Earnings (loss) attributable to common stock------------------- (84.1) (5.7) 18.5 17.0 49.8 Per share data (in dollars): Income (loss) before cumulative effect of accounting change---------- 0.48 Cumulative effect of change in accounting for income taxes---------------------- 0.47 Earnings (loss) to common stock---------------------- (0.94) (0.07) 0.29 0.28 0.95 Weighted average number of shares outstanding (in millions)------------------ 89.7 79.0 63.8 61.7 52.1 STATEMENT OF CASH FLOWS DATA: Net cash provided by operating activities--------------------- 160.2 141.5 128.4 144.1 173.1 Net cash used in investing activities--------------------- 121.4 15.9 117.2 108.2 86.8 BALANCE SHEET DATA (AT PERIOD END): Properties and equipment, net---- 832.7 1,101.8 797.4 745.0 747.6 Total assets--------------------- 1,076.9 1,337.2 911.9 911.1 881.8 Long-term debt------------------- 405.4 492.8 440.8 417.2 124.7 Convertible preferred stock------ 80.0 80.0 -- -- -- Shareholders' equity------------- 323.6 416.6 225.1 215.8 228.1 21 SELECTED OPERATING DATA: DAILY AVERAGE PRODUCTION(C): Crude oil and liquids (MBbls/day) Domestic--------------------- 60.2 58.3 54.9 52.0 50.7 Argentina-------------------- 2.4 2.4 0.6 -- -- Indonesia-------------------- 4.1 1.8 -- -- -- 66.7 62.5 55.5 52.0 50.7 Natural gas (MMcf/day)----------- 165.4 126.3 95.2 102.5 81.6 Total production (MMBOE)--------- 94.3 83.6 71.4 69.1 64.3 AVERAGE SALES PRICES: Crude oil and liquids ($/Bbl) Unhedged Domestic----------------- 12.70 14.38 14.07 17.90 14.11 Argentina---------------- 14.07 15.99 16.24 -- -- Indonesia---------------- 15.50 17.51 -- -- -- Total-------------------- 12.93 14.54 14.09 17.90 14.11 Hedged----------------------- 12.93 14.96 16.16 17.34 14.11 Natural Gas ($/Mcf) Unhedged--------------------- 2.03 1.71 1.49 1.57 1.72 Hedged----------------------- 1.89 1.70 1.49 1.57 1.72 PROVED RESERVES AT YEAR END(D): Crude oil, condensate and natural gas liquids (MMBbls)--------------- 248.2 255.1 229.2 222.3 219.8 Natural gas (Bcf)---------------- 263.0 277.5 170.8 185.9 188.0 Proved reserves (MMBOE)---------- 292.0 301.5 257.7 253.3 251.1 Proved developed reserves (MMBOE)------------------------ 225.5 248.4 210.3 205.0 204.0 Present value of proved reserves at year-end Before income taxes-------------- 567.8 915.2 602.6 1,231.4 1,090.1 After income taxes--------------- 502.4 733.5 463.6 839.4 772.8 Production costs (including related production, severance and ad valorem taxes) per BOE (in dollars)--------------------------- 5.39 5.66 6.06 6.22 5.69 (a) Includes losses on property dispositions of $27.8 million, long-term debt repayment penalties of $8.6 million and accruals of certain personnel benefits and related costs of $2.2 million. (b) On May 19, 1992 Adobe Resources Corporation was merged with and into the Company. (c) Includes production attributable to the properties sold to Vintage (closed in November 1993) and Bridge (expected to close in April 1994). Production attributable to such properties during 1993 totaled approximately 4.1 MBbls of oil and 21.7 MMcf of natural gas per day (7.7 MBOE per day). (d) The estimates set forth in this table for 1993 give effect to the sale by the Company of approximately 8.0 MMBOE of proved reserves to Bridge, which sale is expected to close in April 1994.
22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the year ended December 31, 1993 the Company reported a loss to common shares of $84.1 million, or $0.94 per share. The loss for the year includes a $99.3 million charge for the impairment of oil and gas properties (see ' -- Results of Operations') and a $38.6 million restructuring charge (see Items 1 and 2. 'Business and Properties -- Corporate Restructuring Program'). The restructuring charge is comprised of losses on property dispositions of $27.8 million, long-term debt repayment penalties of $8.6 million and accruals for certain personnel benefits and related costs of $2.2 million. At December 31, 1993 the Company's long-term debt totalled $449.7 million, a portion of which the Company intends to refinance to reduce required debt amortization in the near-term and provide additional financial flexibility in the current low oil price environment. GENERAL As an independent oil and gas producer, the Company's results of operations are dependent upon the difference between the prices received for oil and gas and the costs of finding and producing such resources. A substantial portion of the Company's crude oil production is from long-lived fields where EOR methods are being utilized. The market price of the heavy (i.e., low gravity, high viscosity) and sour (i.e., high sulfur content) crude oils produced in these fields is lower than sweeter, light (i.e., low sulfur and low viscosity) crude oils, reflecting higher transportation and refining costs. The lower price received for the Company's domestic heavy and sour crude oil is reflected in the average sales price of the Company's domestic crude oil and liquids (excluding the effect of hedging transactions) for 1993 of $12.70 per barrel, compared to $16.94 per barrel for West Texas Intermediate crude oil (an industry posted price generally indicative of spot prices for sweeter light crude oil). In addition, the lifting costs of heavy crude oils are generally higher than the lifting costs of light crude oils. As a result of these narrower margins, even relatively modest changes in crude oil prices may significantly affect the Company's revenues, results of operations, cash flows and proved reserves. In addition, prolonged periods of high or low oil prices may have a material effect on the Company's financial position. Crude oil prices are subject to significant changes in response to fluctuations in the domestic and world supply and demand and other market conditions as well as the world political situation as it affects OPEC, the Middle East and other producing countries. (See Items 1 and 2, "Business and Properties -- Current Markets for Oil and Gas"). The period since mid-1990 has included some of the largest fluctuations in oil prices in recent times, primarily due to the political unrest in the Middle East. The actual average sales price (unhedged) received by the Company ranged from a high of $23.92 per barrel in the fourth quarter of 1990 to a low of $9.83 per barrel for the two months ended February 28, 1994. The Company's average sales price for its 1993 oil production was $12.93 per barrel. Based on operating results of 1993, the Company estimates that a $1.00 per barrel increase or decrease in average sales prices would have resulted in a corresponding $21.6 million change in 1993 income from operations and a $16.2 million change in 1993 cash flow from operating activities. The Company also estimates that a $0.10 per Mcf increase or decrease in average sales prices would have resulted in a corresponding $5.8 million change in 1993 income from operations and a $4.4 million change in 1993 cash flow from operating activities. The foregoing estimates do not give effect to changes in any other factors, such as the effect of the Company's hedging program or depreciation and depletion, that would result from a change in oil and natural gas prices. In the third quarter of 1990 the Company initiated a hedging program with respect to its sales of crude oil and in the third quarter of 1992 a similar program was initiated with respect to the Company's sales of natural gas. See Items 1 and 2. 'Business and Properties -- Current Markets for Oil and Gas.' During 1992 and 1993, certain significant events occurred which affect the comparability of prior periods, including the merger of Adobe with and into the Company in May 1992, the formation of the Santa Fe Energy Trust in November 1992 and implementation of the corporate restructuring 23 program adopted in October 1993. The corporate restructuring program includes (i) the concentration of capital spending in the Company's core operating areas, (ii) the disposition of non-core assets, (iii) the elimination of the $0.04 per share quarterly Common Stock dividend and (iv) the recognition of $38.6 million of restructuring charges. See Note 2 to the Consolidated Financial Statements and Items 1 and 2, 'Business and Properties -- Corporate Restructuring Program.' In addition, the Company's results of operations for 1993 include a charge of $99.3 million for the impairment of oil and gas properties. The Company's capital program will be concentrated in three domestic core areas -- the Permian Basin in Texas and New Mexico, the offshore Gulf of Mexico and the San Joaquin Valley of California -- as well as its productive areas in Argentina and Indonesia. The domestic program includes development activities in the Delaware and Cisco-Canyon formations in west Texas and southeast New Mexico, a development drilling program for the offshore Gulf of Mexico natural gas properties and relatively low risk infill drilling in the San Joaquin Valley of California. Internationally, the program includes development of the Company's Sierra Chata discovery in Argentina with gas sales expected to commence in early 1995 and the Salawati Basin Joint Venture in Indonesia. See Items 1 and 2. 'Business and Properties -- Domestic Development Activities' and '--International Development Activities.' The Company's non-core asset disposition program includes the sale of its natural gas gathering and processing assets to Hadson (completed in December 1993), the sale to Vintage of certain southern California and Gulf Coast oil and gas producing properties (completed in November 1993) and the sale to Bridge of certain Mid-Continent and Rocky Mountain oil and gas producing properties and undeveloped acreage (expected to be completed during April 1994). See Items 1 and 2. 'Business and Properties -- Corporate Restructuring Program' for a description of the transactions with Hadson, Vintage and Bridge. In the first quarter of 1994, the Company sold the remaining 575,000 Depositary Units which it held in Santa Fe Energy Trust (the 'Trust') for $11.3 million and its interest in certain other oil and gas properties for $8.3 million. As a result of the Vintage and Bridge dispositions, the Company has sold properties having combined production during 1993 of 4.1 MBbls per day of oil and 21.7 MMcf per day of natural gas and estimated proved reserves of approximately 16.7 MMBOE. The restructuring program also includes an evaluation of the Company's capital and cost structures to examine ways to increase flexibility and strengthen the Company's financial performance. In this respect, in 1994 the Company intends to refinance a portion of its existing long-term debt and is currently evaluating a combination of debt and equity financing arrangements with which to effect the refinancing. In May, 1992, Adobe, an oil and gas exploration and production company, was merged with and into the Company. The acquisition was accounted for as a purchase and the results of operations of the properties acquired are included in the Company's results of operations effective June 1, 1992. Pursuant to the Adobe Merger, the Company issued 5,000,000 shares of its convertible preferred stock and assumed approximately $175.0 million of long-term debt and other liabilities. Pursuant to the Adobe Merger, the Company also acquired Adobe's proved reserves and inventory of undeveloped acreage. As of December 31, 1991, Adobe's estimated proved reserves totaled approximately 53.2 MMBOE (net of 6.9 MMBOE attributable to Adobe's ownership in certain gas plants), of which approximately 58% was natural gas (approximately 66% of Adobe's estimated domestic proved reserves were natural gas). Approximately 72% of the discounted future net cash flow of Adobe's estimated domestic proved reserves was concentrated in three areas of operation -- offshore Gulf of Mexico, onshore Louisiana and in the Spraberry Trend in west Texas. In addition, Adobe's international operations consisted of certain production sharing arrangements in Indonesia, in respect of which approximately 6.0 MMBOE of estimated proved reserves had been attributed to Adobe's interest as of December 31, 1991. The location of the Adobe Properties enhanced the Company's 24 existing domestic operations and added significant operations to the Company's international program. In November 1992, 5,725,000 Depositary Units consisting of interests in the Trust were sold in a public offering. After payment of certain costs and expenses, the Company received $70.1 million and 575,000 Depositary Units. For any calendar quarter ending on or prior to December 21, 2002, the Trust will receive additional royalty payments to the extent necessary to distribute $0.40 per Depositary Unit per quarter. The source of such payments, if needed, will be limited to the Company's remaining royalty interest in certain of the properties conveyed to the Trust. The aggregate amount of such payments will be limited to $20.0 million on a revolving basis. The Company was required to make an additional royalty payment of $362,000 with respect to the distribution made by the Trust for operations during the quarter ended December 31, 1993. Based upon current prices, the Company believes that a support payment will be required for the quarter ending March 31, 1994, the amount of which has not been determined. See Items 1 and 2. 'Business and Properties -- Santa Fe Energy Trust.' RESULTS OF OPERATIONS The following table sets forth, on the basis of the BOE produced by the Company during the applicable annual period, certain of the Companys costs and expenses for each of the three years ended December 31, 1993. 1993 1992 1991 Production and operating costs per BOE (a)------------------------------ $ 4.76 $ 5.02 $ 5.17 Exploration, including dry hole costs per BOE---------------------------- 0.90 0.84 0.72 Depletion, depreciation and amortization per BOE--------------- 4.44 4.79 4.09 General and administrative costs per BOE-------------------------------- 0.94 1.01 1.07 Taxes other than income per BOE (b)-------------------------------- 0.79 0.80 1.05 Interest, net, per BOE (c)----------- 0.94 1.58 1.43 (a) Excluding related production, severance and ad valorem taxes. (b) Includes production, severance and ad valorem taxes. (c) Reflects interest expense less amounts capitalized and interest income. 1993 COMPARED WITH 1992 Total revenues increased approximately 2% from $427.5 million in 1992 to $436.9 million in 1993 principally due to an increase in oil and natural gas production offset by a decline in average oil prices. Average daily oil production increased 7% from 62.5 MBbls in 1992 to 66.7 MBbls in 1993, principally due to increased domestic and Indonesian production. The average price realized per Bbl of oil during 1993 was $12.93, a decrease of 14% versus the average price of $14.96 in 1992. Natural gas production increased 31% from 126.3 MMcf per day in 1992 to 165.4 MMcf per day in 1993, primarily reflecting the effect of a full year's production from the Adobe Properties. Average natural gas prices realized increased approximately 11% from $1.70 per Mcf in 1992 to $1.89 per Mcf in 1993. Production and operating costs increased $10.4 million in 1993, primarily reflecting the effect of a full year's costs for the Adobe Properties; however, on a BOE basis such costs declined from $5.02 per barrel in 1992 to $4.76 per barrel in 1993. Exploration costs were $5.5 million higher than in 1992 primarily reflecting higher geological and geophysical costs and higher dry hole costs. Depletion, depreciation and amortization ('DD&A') increased $6.4 million in 1993 primarily reflecting a full year's expense on Adobe Properties partially offset by reduced amortization rates with respect to certain unproved properties. DD&A for 1993 includes $12.1 million with respect to the properties sold to Vintage and Bridge. On a BOE basis, DD&A decreased by $0.35 per Bbl, from $4.79 to $4.44 per Bbl. General and administrative costs increased $1.4 million principally due to a $1.8 million charge related to the adoption of Statement of Financial Standards No. 112 -- 'Employer's Accounting for Postemployment Benefits'. Taxes (other than income) increased by $3.0 million in 1993 primarily reflecting the effect of the Adobe Properties. 25 Costs and expenses for 1993 also include $99.3 million in impairments of oil and gas properties and $38.6 million in restructuring charges. The Company estimates the impairments taken in 1993 will result in a reduction of DD&A in 1994 of approximately $20.0 million. The restructuring charges include losses on property dispositions of $27.8 million, long-term debt repayment penalties of $8.6 million and accruals of certain personnel benefits and related costs of $2.2 million. In connection with the property dispositions effected during 1993 (See '-- Liquidity and Capital Resources'), the Company sold properties having combined production during 1993 of 4.1 MBbls per day of oil and 21.7 MMcf per day of natural gas and combined estimated proved reserves of approximately 16.7 MMBOE. The Company's income from operations for 1993 includes $8.5 million with respect to such operations. Interest income in 1993 includes $6.8 million related to a $10 million refund received as a result of the completion of the audit of the Company's federal income tax returns for 1971 through 1980. The decrease in interest expenses during 1993 reflects a decrease in the Company's debt outstanding and a $5.7 million credit related to a revision to a tax sharing agreement with the Company's former parent. Other income and expenses of 1993 includes a $4.0 million charge related to the accrual of a contingent loss with respect to the operations of a former affiliate of Adobe. 1992 COMPARED WITH 1991 Total revenues increased approximately 13% from $379.8 million in 1991 to $427.5 million in 1992 principally due to an increase of approximately $53.2 million attributable to production from properties acquired in the Adobe Merger and an increase of approximately $10.7 million and $10.2 million in revenues from the Company's domestic and Argentine properties, respectively, offset in part by a decline of $32.0 million in crude oil hedging revenues. Oil production increased 13% from 55.5 MBbls per day in 1991 to 62.5 MBbls per day in 1992, reflecting a 3.4 MBbl per day increase in domestic oil production and a 3.6 MBbl per day increase in production in Argentina and Indonesia. The average price realized per barrel of oil during 1992 decreased to $14.96, a decrease of 7% versus the average price of $16.16 in 1991, primarily reflecting a $32.0 million decrease in hedging revenues. Natural gas production increased 33% from 95.2 MMcf per day in 1991 to 126.3 MMcf per day in 1992 as a result of properties acquired in the Adobe Merger. Average natural gas prices realized increased approximately 14% from $1.49 per Mcf in 1991 to $1.70 per Mcf in 1992. Total operating expenses of the Company increased $54.6 million from $315.4 million in 1991 to $370.0 million in 1992 primarily reflecting costs associated with the Adobe Merger. Production and operating costs in 1992 were $18.8 million higher than in 1991, primarily reflecting costs related to the Adobe Properties and increased fuel costs associated with the Company's EOR projects. On a BOE basis, production and operating costs declined from $5.17 per barrel in 1991 to $5.02 per barrel in 1992, primarily reflecting the lower cost structure of the Adobe Properties. Exploration costs were $6.8 million higher than in 1991 primarily reflecting higher geological and geophysical costs with respect to foreign projects. Depletion, depreciation and amortization costs were $39.7 million higher in 1992 due to the acquisition of the Adobe Properties and, to a lesser extent, adjustments to oil and gas reserves with respect to certain producing properties. General and administrative costs increased $3.1 million principally due to a $1.2 million charge related to certain stock awards which fully vested upon consummation of the Adobe Merger and certain other merger-related costs. Taxes (other than income) decreased by $2.9 million in 1992, as a result of lower accruals with respect to property taxes. The $13.6 million gain on the disposition of properties in 1992 primarily relates to the sale of certain royalty interest properties, in which the Company had no remaining financial basis. The increase in interest expense during 1992 reflects the increase in debt as a result of the Adobe Merger. Other income and expenses for 1992 includes a $10.9 million charge for costs incurred by Adobe in connection with the Adobe Merger and paid by Santa Fe. 26 LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has generally funded capital and exploration expenditures and working capital requirements from cash provided by operating activities. Depending upon the future levels of operating cash flows, which are significantly affected by oil and gas prices, the restrictions on additional borrowings included in certain of the Company's debt agreements, together with debt service requirements and dividends, may limit the cash available for future exploration, development and acquisition activities. Net cash provided by operating activities totaled $160.2 million in 1993, $141.5 million in 1992 and $128.4 million in 1991; net cash used in investing activities in such periods totaled $121.4 million, $15.9 million and $117.2 million, respectively. The Company's cash flow from operating activities is a function of the volumes of oil and gas produced from the Company's properties and the sales prices realized therefor. Crude oil and natural gas are depleting assets. Unless the Company replaces over the long term the oil and natural gas produced from the Company's properties, the Company's assets will be depleted over time and its ability to service and incur debt at constant or declining prices will be reduced. The Company's cash flow from operations for 1993 reflects an average sales price (unhedged) for the Company's 1993 oil production of $12.93 per barrel. For the two months ended February 28, 1994, the average sales price (unhedged) for the Company's 1994 oil production was $9.83 per barrel. If such lower oil prices prevail throughout 1994, the Company's cash flow from operating activities for 1994 will be significantly lower than that for 1993. In October 1993, the Company's Board of Directors adopted a broad corporate restructuring program that focuses on the concentration of capital spending in core areas and the disposition of non-core assets. The Company's asset disposition program adopted in connection with the 1993 restructuring program has been substantially completed by the asset sales to Hadson, Vintage and Bridge (expected to close in April 1994), the sale of the 575,000 Depositary Units in the Trust and the sale of its interest in certain other oil and gas properties. As a result of such sales, the Company sold a total of 16.7 MMBOE of proved reserves and undeveloped acreage for a total of approximately $111.0 million, and sold certain gas gathering and processing facilities for Hadson securities. As a part of the 1993 restructuring program, the Company eliminated its $0.04 per share quarterly dividend on its Common Stock and announced that it might spend up to $240 million in 1994 on an accelerated capital program. However, as a result of the depressed crude oil prices that have prevailed since November 1993, the Company, consistent with industry practice, is considering deferring some of its capital projects in order to prudently manage its cash flow available in the near term. Based on current market conditions, the Company estimates that 1994 capital expenditures may total between $100 million and $160 million, with the actual amount to be determined by the Company based upon numerous factors outside its control, including, without limitation, prevailing oil and natural gas prices and the outlook therefor. The Company is a party to several long-term and short-term credit agreements which restrict the Company's ability to take certain actions, including covenants that restrict the Company's ability to incur additional indebtedness and to pay dividends on its capital stock. For a description of such existing credit agreements, see Note 7 to the Consolidated Financial Statements. Effective March 16, 1994, the Company entered into an Amended and Restated Revolving Credit Agreement (the "Bank Facility") which consists of a five year secured revolving credit agreement maturing December 31, 1998 ("Facility A") and and a three year unsecured revolving credit facility maturing December 31, 1996 ("Facility B"). The aggregate borrowing limits under the terms of the Bank Facility are $125.0 million (up to $90.0 million under Facility A and up to $35.0 million under Facility B). Under certain circumstances, the aggregate borrowing limits under the terms of the Bank Facility may be increased to $175.0 million (up to $90.0 million under Facility A and up to $85.0 million under Facility B). Interest rates under the Bank Facility are tied to LIBOR or the bank's prime rate with the actual interest rate reflecting certain ratios based upon the Company's ability to repay its outstanding debt and the value and projected timing of production of the Company's oil and gas reserves. These and other similar ratios will also affect the Company's ability to borrow under the Bank Facility and the timing and amount of any required repayments and corresponding commitment reductions. The Bank Facility replaces the Revolving and Term Credit Agreement discussed in Note 7 to the Consolidated Financial Statements. EFFECTS OF INFLATION Inflation during the three years ended December 31, 1993 has had little effect on the Company's capital costs and results of operations. ENVIRONMENTAL MATTERS Almost all phases of the Company's oil and gas operations are subject to stringent environmental regulation by governmental authorities. Such regulation has increased the costs of planning, designing, drilling, installing, operating and abandoning oil and gas wells and other facilities. The Company has expended significant financial and managerial resources to comply with such regulations. Although the Company believes its operations and facilities are in general compliance with applicable environmental regulations, risks of substantial costs and liabilities are inherent in oil and gas operations. It is possible that other developments, such as increasingly strict environmental laws, regulations and enforcement policies or claims for damages to property, employees, other persons and the environment resulting from the Company's operations, could result in significant costs and liabilities in the future. As it has done in the past, the Company intends to fund its cost of environmental compliance from operating cash flows. See also, Items 1 and 2. 'Business and Properties -- Other Business Matters -- Environmental Regulation' and Note 12 to the Consolidated Financial Statements. 27 DIVIDENDS Dividends on the Company's convertible preferred stock are cumulative at an annual rate of $1.40 per share. No dividends may be declared or paid with respect to the Company's common stock if any dividends with respect to the convertible preferred stock are in arrears. As described elsewhere herein, the Company has eliminated the payment of its $0.04 per share quarterly dividend on its common stock. The determination of the amount of future cash dividends, if any, to be declared and paid on the Company's common stock is in the sole discretion of the Company's Board of Directors and will depend on dividend requirements with respect to the convertible preferred stock, the Company's financial condition, earnings and funds from operations, the level of capital and exploration expenditures, dividend restrictions in financing agreements, future business prospects and other matters the Board of Directors deems relevant. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE Audited Financial Statements Report of Independent Accountants------------------- 31 Consolidated Statement of Operations for the years ended December 31, 1993, 1992 and 1991--------------------- 32 Consolidated Balance Sheet -- December 31, 1993 and 1992---- 33 Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and 1991--------------------- 34 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991---------- 35 Notes to Consolidated Financial Statements---------- 36 Unaudited Financial Information Supplemental Information to the Consolidated Financial Statements-------------------- 55 Financial Statement Schedules: Schedule V --Property, Plant and Equipment------ 65 Schedule VI --Accumulated Depreciation, Depletion and Amortization of Property Plant and Equipment---------------------- 66 Schedule --Valuation and Qualifying VIII Accounts--------------------------- 67 Schedule IX --Short Term Borrowings-------------- 68 --Supplementary Income Statement Schedule X Information------------------------ 69 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except for the portion of Item 10 relating to Executive Officers of the Registrant which is included in Part I of this Report, the information called for by Items 10 through 13 is incorporated by reference from the Company's Notice of Annual Meeting and Proxy Statement dated March 21, 1994, which meeting involves the election of directors, in accordance with General Instruction G to the Annual Report on Form 10-K. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: PAGE 1. Financial Statements: Report of Independent Accountants--------------------------------------- 31 Consolidated Statement of Operations for the years ended December 31, 1993, 1992 and 1991------------ 32 Consolidated Balance Sheet -- December 31, 1993 and 1992------------------------------------------ 33 Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and 1991---------------- 34 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991------ 35 Notes to Consolidated Financial Statements------------ 36 2. Financial Statement Schedules: Schedule V -- Property, Plant and Equipment--------- 65 Schedule VI -- Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment---------------- 66 Schedule VIII -- Valuation and Qualifying Accounts---- 67 Schedule IX -- Short Term Borrowings------------------ 68 Schedule X -- Supplementary Income Statement Information------------------------ 69 All other schedules have been omitted because they are not applicable or the required information is presented in the financial statements or the notes to financial statements. 3. Exhibits: See Index to Exhibits on page 70 for a description of the exhibits filed as a part of this report. (b) Reports on Form 8-K [CAPTION] DATE ITEM February 8, 1994 5 30 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Santa Fe Energy Resources, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 30 present fairly, in all material respects, the financial position of Santa Fe Energy Resources, Inc. and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE Houston, Texas February 18, 1994 31 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF OPERATIONS (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, 1993 1992 1991 Revenues Crude oil and liquids------------ $ 307.3 $ 333.6 $ 320.3 Natural gas---------------------- 107.8 74.8 47.9 Natural gas systems-------------- 8.2 7.3 -- Crude oil marketing and trading------------------------ 9.9 5.9 7.2 Other---------------------------- 3.7 5.9 4.4 436.9 427.5 379.8 Costs and Expenses Production and operating--------- 163.8 153.4 134.6 Oil and gas systems and pipelines---------------------- 4.2 3.2 -- Exploration, including dry hole costs-------------------------- 31.0 25.5 18.7 Depletion, depreciation and amortization------------------- 152.7 146.3 106.6 Impairment of oil and gas properties--------------------- 99.3 -- -- General and administrative------- 32.3 30.9 27.8 Taxes (other than income)-------- 27.3 24.3 27.2 Restructuring charges------------ 38.6 -- -- Loss (gain) on disposition of oil and gas properties------------- 0.7 (13.6) 0.5 549.9 370.0 315.4 Income (Loss) from Operations-------- (113.0) 57.5 64.4 Interest income------------------ 9.1 2.3 2.3 Interest expense----------------- (45.8) (55.6) (47.3) Interest capitalized------------- 4.3 4.9 7.7 Other income (expense)----------- (4.8) (10.0) 5.6 Income (Loss) Before Income Taxes---- (150.2) (0.9) 32.7 Income taxes--------------------- 73.1 (0.5) (14.2) Net Income (Loss)-------------------- (77.1) (1.4) 18.5 Preferred dividend requirement------- (7.0) (4.3) -- Earnings (Loss) Attributable to Common Shares---------------------- $ (84.1) $ (5.7) $ 18.5 Earnings (Loss) Attributable to Common Shares Per Share------------ $ (0.94) $ (0.07) $ 0.29 Weighted Average Number of Shares Outstanding (in millions)---------- 89.7 79.0 63.8 The accompanying notes are an integral part of these financial statements. 32 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED BALANCE SHEET (IN MILLIONS OF DOLLARS) DECEMBER 31, 1993 1992 ASSETS Current Assets Cash and cash equivalents-------- $ 4.8 $ 83.8 Accounts receivable-------------- 87.4 90.0 Income tax refund receivable----- -- 16.2 Inventories---------------------- 8.7 4.8 Assets held for sale------------- 59.5 -- Other current assets------------- 12.2 10.6 172.6 205.4 Investment in Hadson Corporation----- 56.2 -- Properties and Equipment, at cost Oil and gas (on the basis of successful efforts accounting)-------------------- 2,064.3 2,330.9 Other---------------------------- 27.3 26.8 2,091.6 2,357.7 Accumulated depletion, depreciation, amortization and impairment--------------------- (1,258.9) (1,255.9) 832.7 1,101.8 Other Assets Receivable under gas balancing arrangements------------------- 3.9 7.7 Other---------------------------- 11.5 22.3 15.4 30.0 $ 1,076.9 $ 1,337.2 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable----------------- $ 93.5 $ 90.9 Interest payable----------------- 10.2 11.0 Current portion of long-term debt--------------------------- 44.3 53.4 Other current liabilities-------- 18.1 17.1 166.1 172.4 Long-Term Debt----------------------- 405.4 492.8 Deferred Revenues-------------------- 8.6 13.0 Other Long-Term Obligations---------- 48.8 43.4 Deferred Income Taxes---------------- 44.4 119.0 Commitments and Contingencies (Note 12)-------------------------------- -- -- Convertible Preferred Stock, $0.01 par value, 5.0 million shares authorized, issued and outstanding------------------------ 80.0 80.0 Shareholders' Equity Preferred stock, $0.01 par value, 45.0 million shares authorized, none issued-------------------- -- -- Common stock, $0.01 par value, 200.0 million shares authorized--------------------- 0.9 0.9 Paid-in capital------------------ 496.9 494.3 Unamortized restricted stock awards------------------------- (0.1) (0.4) Accumulated deficit-------------- (173.8) (78.0) Foreign currency translation adjustment--------------------- (0.3) (0.2) 323.6 416.6 $ 1,076.9 $ 1,337.2 The accompanying notes are an integral part of these financial statements. 33 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (IN MILLIONS OF DOLLARS) YEAR ENDED DECEMBER 31, 1993 1992 1991 Operating Activities: Net income (loss)---------------- $ (77.1) $ (1.4) $ 18.5 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depletion, depreciation and amortization--------------- 152.7 146.3 106.6 Impairment of oil and gas properties----------------- 99.3 -- -- Restructuring charges-------- 27.8 -- -- Deferred income taxes-------- (71.9) (6.3) 1.5 Net loss (gain) on disposition of properties----------------- 0.7 (13.6) (5.5) Exploratory dry hole costs---------------------- 8.9 4.7 3.8 Expenses related to acquisition of Adobe Resources Corporation------ -- 10.9 -- Other------------------------ 4.2 2.0 0.3 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable-------- 12.4 (8.3) 23.6 Decrease (increase) in inventories---------------- (3.8) 0.3 5.6 Increase (decrease) in accounts payable----------- (2.6) 5.9 (24.9) Increase (decrease) in interest payable----------- (0.8) 0.4 0.2 Decrease in income taxes payable-------------------- (0.6) (0.4) (3.6) Net change in other assets and liabilities------------ 11.0 1.0 2.3 Net Cash Provided by Operating Activities------------------------- 160.2 141.5 128.4 Investing Activities: Capital expenditures, including exploratory dry hole costs----- (127.0) (76.8) (108.1) Acquisitions of producing properties, net of related debt--------------------------- (4.4) (14.2) (28.5) Acquisition of Adobe Resources Corporation-------------------- -- (11.9) -- Acquisition of Santa Fe Energy Partners, L.P.----------------- (28.3) -- -- Net proceeds from sales of properties--------------------- 39.9 89.1 22.1 Increase in partnership interest due to reinvestment------------ (1.6) (2.1) (2.7) Net Cash Used in Investing Activities------------------------- (121.4) (15.9) (117.2) Financing Activities: Net change in short-term debt---- -- (4.6) (4.2) Proceeds from long-term borrowings--------------------- -- 5.0 -- Principal payments on long-term borrowings--------------------- (41.5) (55.5) (16.3) Net change in revolving credit agreement---------------------- (55.0) -- -- Cash dividends paid to others---- (21.3) (14.9) (10.2) Net Cash Used in Financing Activities------------------------- (117.8) (70.0) (30.7) Net Increase (Decrease) in Cash and Cash Equivalents------------------- (79.0) 55.6 (19.5) Cash and Cash Equivalents at Beginning of Year------------------ 83.8 28.2 47.7 Cash and Cash Equivalents at End of Year------------------------------- $ 4.8 $ 83.8 $ 28.2 The accompanying notes are an integral part of these financial statements. 34 SANTA FE ENERGY RESOURCES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (SHARES AND DOLLARS IN MILLIONS)
FOREIGN UNAMORTIZED CURRENCY RESTRICTED TRANSLA- TOTAL COMMON STOCK PAID-IN STOCK ACCUMULATED TION SHAREHOLDERS' SHARES AMOUNT CAPITAL AWARDS DEFICIT ADJUSTMENT EQUITY Balance at December 31, 1990--------- 63.8 $0.6 $ 282.4 $-- $ (67.2) $-- $ 215.8 Net income------------------------- -- -- -- -- 18.5 -- 18.5 Issuance of common stock----------- 0.3 -- 2.5 (1.4) -- -- 1.1 Dividends declared----------------- -- -- -- -- (10.3) -- (10.3) Balance at December 31, 1991--------- 64.1 0.6 284.9 (1.4) (59.0) -- 225.1 Issuance of common stock Acquisition of Adobe Resources Corporation----------- 24.9 0.3 205.3 -- -- -- 205.6 Employee stock compensation and savings plans------------------- 0.5 -- 4.1 (0.5) -- -- 3.6 Amortization of restricted stock awards---------------------------- -- -- -- 1.5 -- -- 1.5 Foreign currency translation adjustments----------------------- -- -- -- -- -- (0.2) (0.2) Net loss--------------------------- -- -- -- -- (1.4) -- (1.4) Dividends declared----------------- -- -- -- -- (17.6) -- (17.6) Balance at December 31, 1992--------- 89.5 0.9 494.3 (0.4) (78.0) (0.2) 416.6 Issuance of common stock Employee stock compensation and savings plans------------------- 0.3 -- 2.6 (0.1)] -- -- 2.5 Amortization of restricted stock awards---------------------- -- -- -- 0.4 -- -- 0.4 Pension liability adjustment------- -- -- -- -- (0.9) -- (0.9) Foreign currency transaction adjustments----------------------- -- -- -- -- -- (0.1) (0.1) Net loss--------------------------- -- -- -- -- (77.1) -- (77.1) Dividends declared----------------- -- -- -- -- (17.8) -- (17.8) Balance December 31, 1993------------ 89.8 $0.9 $ 496.9 $ (0.1) $ (173.8) $ (0.3) $ 323.6
The accompanying notes are an integral part of these financial statements. 35 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of Santa Fe Energy Resources, Inc. ('Santa Fe' or the 'Company') and its subsidiaries include the accounts of all wholly owned subsidiaries. The accounts of Santa Fe Energy Partners, L.P., (the 'Partnership') are included on a proportional basis until September 1993 when Santa Fe purchased all the Partnership's outstanding Depositary Units and undeposited LP Units other than those units held by Santa Fe and its affiliates. On September 27, 1993 the Company exercised its right under the Agreement of Limited Partnership to purchase all of the Partnership's outstanding Depositary Units and undeposited LP Units, other than those units held by the Company and its affiliates, at a redemption price of $4.9225 per unit. Consideration for the 5,749,500 outstanding units totalled $28.3 million. The acquisition of the units has been accounted for as a purchase and the results of operations of the Partnership attributable to the units acquired is included in the Company's results of operations with effect from October 1, 1993. The purchase price has been allocated primarily to oil and gas properties. References herein to the 'Company' or 'Santa Fe' relate to Santa Fe Energy Resources, Inc., individually or together with its consolidated subsidiaries; references to the 'Partnership' relate to Santa Fe Energy Partners, L.P. All significant intercompany accounts and transactions have been eliminated. Prior years' financial statements include certain reclassifications to conform to current year's presentation. OIL AND GAS OPERATIONS The Company follows the successful efforts method of accounting for its oil and gas exploration and production activities. Costs (both tangible and intangible) of productive wells and development dry holes, as well as the cost of prospective acreage, are capitalized. The costs of drilling and equipping exploratory wells which do not find proved reserves are expensed upon determination that the well does not justify commercial development. Other exploratory costs, including geological and geophysical costs and delay rentals, are charged to expense as incurred. Depletion and depreciation of proved properties are computed on an individual field basis using the unit-of-production method based upon proved oil and gas reserves attributable to the field. Certain other oil and gas properties are depreciated on a straight-line basis. Individual proved properties are reviewed periodically to determine if the carrying value of the field exceeds the estimated undiscounted future net revenues from proved oil and gas reserves attributable to the field. Based on this review and the continuing evaluation of development plans, economics and other factors, if appropriate, the Company records impairments (additional depletion and depreciation) to the extent that the carrying value exceeds the estimated undiscounted future net revenues. Such impairments totaled $99.3 million in 1993 and there were none in 1992 and 1991. The Company provides for future abandonment and site restoration costs with respect to certain of its oil and gas properties. The Company estimates that with respect to these properties such future costs total approximately $24.7 million and such amount is being accrued over the expected life of the properties. At December 31, 1993 Accumulated Depletion, Depreciation, Amortization and Impairment includes $14.6 million with respect to such costs. The value of undeveloped acreage is aggregated and the portion of such costs estimated to be nonproductive, based on historical experience, is amortized to expense over the average holding period. Additional amortization may be recognized based upon periodic assessment of prospect evaluation results. The cost of properties determined to be productive is transferred to proved 36 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) properties; the cost of properties determined to be nonproductive is charged to accumulated amortization. Maintenance and repairs are expensed as incurred; major renewals and improvements are capitalized. Gains and losses arising from sales of properties are included in income currently. REVENUE RECOGNITION Revenues from the sale of petroleum produced are generally recognized upon the passage of title, net of royalties and net profits interests. Crude oil revenues include the effect of hedging transactions; see Note 12 -- Commitments and Contingencies -- Crude Oil Hedging Program. Crude oil revenues also include the value of crude oil consumed in operations with an equal amount charged to operating expenses. Such amounts totalled $15.4 million in 1991, $4.8 million in 1992 and $1.2 million in 1993. Revenues from natural gas production are generally recorded using the entitlement method, net of royalties and net profits interests. Sales proceeds in excess of the Company's entitlement are included in Deferred Revenues and the Company's share of sales taken by others is included in Other Assets. At December 31, 1993 the Company's deferred revenues for sales proceeds received in excess of the Company's entitlement was $6.8 million with respect to 5.2 MMcf and the asset related to the Company's share of sales taken by others was $3.9 million with respect to 2.7 MMcf. Natural gas revenues are net of the effect of hedging transactions; see Note 12 -- Commitments and Contingencies -- Natural Gas Hedging Program. Revenues from crude oil marketing and trading represent the gross margin resulting from such activities. Revenues from such activities are net of costs of sales of $210.5 million in 1991, $247.3 million in 1992 and $225.9 million in 1993. Revenues from natural gas systems are net of the cost of natural gas purchased and resold. Such costs totalled $43.8 million in 1992 and $49.9 million in 1993. EARNINGS PER SHARE Earnings per share are based on the weighted average number of common shares outstanding during the year. ACCOUNTS RECEIVABLE Accounts Receivable relates primarily to sales of oil and gas and amounts due from joint interest partners for expenditures made by the Company on behalf of such partners. The Company reviews the financial condition of potential purchasers and partners prior to signing sales or joint interest agreements. At December 31, 1993 and 1992 the Company's allowance for doubtful accounts receivable, which is reflected in the consolidated balance sheet as a reduction in accounts receivable, totaled $6.3 million and $5.0 million, respectively. Accounts receivable totalling $0.2 million, $1.1 million and $0.1 million were written off as uncollectible in 1991, 1992 and 1993, respectively. INVENTORIES Inventories are valued at the lower of cost (average price or first-in, first-out) or market. Crude oil inventories at December 31, 1993 and 1992 were $1.1 million and $1.5 million, respectively, and materials and supplies inventories at such dates were $7.6 million and $3.3 million, respectively. ENVIRONMENTAL EXPENDITURES Environmental expenditures relating to current operations are expensed or capitalized, as appropriate, depending on whether such expenditures provide future economic benefits. Liabilities are 37 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recognized when the expenditures are considered probable and can be reasonably estimated. Measurement of liabilities is based on currently enacted laws and regulations, existing technology and undiscounted site-specific costs. Generally, such recognition coincides with the Company's commitment to a formal plan of action. INCOME TAXES The Company follows the asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are determined using the tax rate for the period in which those amounts are expected to be received or paid, based on a scheduling of temporary differences between the tax bases of assets and liabilities and their reported amounts. Under this method of accounting for income taxes, any future changes in income tax rates will affect deferred income tax balances and financial results. (2) CORPORATE RESTRUCTURING PROGRAM In October 1993 the Company's Board of Directors endorsed a broad corporate restructuring program that focuses on the disposition of non-core assets, the concentration of capital spending in core areas, the refinancing of certain long-term debt and the elimination of the payment of its $0.04 per share quarterly dividend on common stock. In implementing the restructuring program the Company recorded a nonrecurring charge of $38.6 million in 1993 comprised of (1) losses on property dispositions of $27.8 million: (2) long-term debt repayment penalties of $8.6 million; and (3) accruals for certain personnel benefits and related costs of $2.2 million. The Company's non-core asset disposition program includes the sale of its natural gas gathering and processing assets to Hadson Corporation ('Hadson'), the sale to Vintage Petroleum, Inc. of certain southern California and Gulf Coast oil and gas producing properties and the sale to Bridge Oil (U.S.A.) Inc. ('Bridge') of certain Mid-Continent and Rocky Mountain oil and gas producing properties and undeveloped acreage. The Company also plans to dispose of other non-core oil and gas properties during 1994. In 1994 the Company intends to refinance a portion of its existing long-term debt and is currently evaluating a combination of debt and equity financing arrangements with which to effect the refinancing. SALE TO HADSON. In December 1993 the Company completed a transaction with Hadson under the terms of which the Company sold the common stock of Adobe Gas Pipeline Company ('AGPC'), a wholly-owned subsidiary which held the Company's natural gas gathering and processing assets, to Hadson in exchange for Hadson 11.25% preferred stock with a face value of $52.0 million and 40% of Hadson's common stock. In addition, the Company signed a seven-year gas sales contract under the terms of which Hadson will market substantially all of the Company's domestic natural gas production at market prices as defined by published monthly indices for relevant production locations. The Company accounted for the sale as a non-monetary transaction and the investment in Hadson has been valued at $56.2 million, the carrying value of the Company's investment in AGPC. The Company's investment in Hadson is being accounted for on the equity basis. At December 31, 1993 the Company's investment in Hadson's common stock exceeded the net book value attributable to such common shares by approximately $11.3 million. The Company's income from operations for 1993 includes $1.6 million attributable to the assets sold to Hadson. SALE TO VINTAGE. In November 1993 the Company completed the sale of certain southern California and Gulf Coast producing properties for net proceeds totalling $41.3 million in cash, $31.5 38 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) million of which was collected in 1993. The Company's income from operations for 1993 includes $2.7 million attributable to the assets sold to Vintage. SALE TO BRIDGE. In December 1993 the Company signed a Purchase and Sales Agreement with Bridge under the terms of which Bridge will purchase certain Mid-Continent and Rocky Mountain producing and nonproducing oil and gas properties. The sale price of $51.0 million, subject to certain adjustments, will be received by the Company either in the form of cash plus 10% of the outstanding shares of Bridge, following the contemplated public offering of that stock in the first quarter of 1994, or entirely in cash. The transaction is expected to close in the second quarter of 1994. The net book value of these assets is included in Assets Held for Sale at December 31, 1993. The Company's income from operations for 1993 includes $5.8 million attributable to the assets to be sold to Bridge. OTHER DISPOSITIONS. The Company has identified certain other oil and gas properties which it plans to dispose of in 1994. The estimated realizable value of these properties, $1.0 million, is included in Assets Held for Sale at December 31, 1993. In the first quarter of 1994 the Company sold its interest in certain other oil and gas properties for $8.3 million. (3) MERGER WITH ADOBE RESOURCES CORPORATION On May 19, 1992 Adobe Resources Corporation ('Adobe'), an oil and gas exploration and production company, was merged with and into Santa Fe (the 'Merger'). The acquisition has been accounted for as a purchase and the results of operations of the properties acquired (the 'Adobe Properties') are included in Santa Fe's results of operations effective June 1, 1992. To consummate the Merger, the Company issued 24.9 million shares of common stock valued at $205.5 million, 5.0 million shares of convertible preferred stock valued at $80.0 million, assumed long-term bank debt and other liabilities of $140.0 million and $35.0 million, respectively, and incurred $13.8 million in related costs. The Company also recorded a $19.7 million deferred tax liability with respect to the difference between the book and tax basis in the assets acquired. Certain merger-related costs incurred by Adobe and paid by Santa Fe totaling $10.9 million were charged to income in the second quarter of 1992. The Merger constituted a 'change of control' as defined in certain of the Company's employee benefit plans and employment agreements (see Notes 10 and 12). In a separate transaction in January 1992, the Company purchased three producing properties from Adobe for $14.2 million. (4) SANTA FE ENERGY TRUST In November 1992 5,725,000 Depository Units ('Trust Units'), each consisting of beneficial ownership of one unit of undivided beneficial interest in the Santa Fe Energy Trust (the 'Trust') and a $20 face amount beneficial ownership interest in a $1,000 face amount zero coupon United States Treasury obligation maturing on or about February 15, 2008, were sold in a public offering. The Trust consists of certain oil and gas properties conveyed by Santa Fe. A total of $114.5 million was received from public investors, of which $38.7 million was used to purchase the Treasury obligations and $5.7 million was used to pay underwriting commissions and discounts. Santa Fe received the remaining $70.1 million and 575,000 Trust Units. A portion of the proceeds received by the Company was used to retire $30.0 million of the debt incurred in connection with the Merger and the remainder will be used for general corporate purposes including possible acquisitions. For any calendar quarter ending on or prior to December 31, 2002, the Trust will receive additional royalty payments to the extent that it needs such payments to distribute $0.40 per 39 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depository Unit per quarter. The source of such additional royalty payments, if needed, will be limited to the Company's remaining royalty interest in certain of the properties conveyed to the Trust. If such additional payments are made, certain proceeds otherwise payable to the Trust in subsequent quarters may be reduced to recoup the amount of such additional payments. The aggregate amount of the additional royalty payments (net of any amounts recouped) will be limited to $20.0 million on a revolving basis. At December 31, 1993 the Company held 575,000 Trust Units. At December 31, 1993 Accounts Receivable includes $0.2 million due from the Trust and Accounts Payable includes $1.9 million due to the Trust. In the first quarter of 1994 the Company sold the Trust Units for $11.3 million, the Company's investment in the Trust Units, $10.4 million, is included in Assets Held for Sale at December 31, 1993. (5) ACQUISITIONS OF OIL AND GAS PROPERTIES In January 1991 the Company completed the purchase of Mission Operating Partnership, L.P.'s ('Mission') interest in certain oil and gas properties, effective from November 1, 1990, for approximately $55.0 million. The Company formed a partnership, with an institutional investor as a limited partner, to acquire and operate the properties. The investor contributed $27.5 million for a 50% interest in the partnership, which will be reduced to 15% upon the occurence of payout. Payout will occur when the investor has received distributions from the partnership totalling an amount equal to its original contribution plus a 12% rate of return on such contribution. Prior to payout, the Company will bear 100% of the capital expenditures of the partnership. Under the terms of the partnership agreement a total of $36.8 million must be expended on development of the property by the year 2000, $12.4 million of which had been expended through the end of 1993. The Company funded $16.8 million of its share of the purchase of the properties with the assumption of a term loan and paid the remainder from working capital. The Company has given the lender the equivalent of an overriding royalty interest in certain production from the properties. The royalty is payable only if such production occurs and is limited to a maximum of $3.0 million. In June 1991 the Company acquired a 10% interest in a producing field in Argentina for approximately $18.3 million and in October 1991 purchased an additional 8% interest in the field for approximately $15.7 million. The Company financed $17.8 million of the total purchase price with loans from an Argentine bank. The Company has agreed to spend approximately $16.7 million over a five-year period on development and maintenance of the field. (6) CASH FLOWS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Merger included certain non-cash investing and financing activities not reflected in the Statement of Cash Flows as follows (in millions of dollars): Common stock issued------------------ 205.5 Convertible preferred stock issued------------------------------- 80.0 Deferred tax liability--------------- 19.7 Long-term debt----------------------- 140.0 Assets acquired, other than cash, net of liabilities assumed------------- (457.1) Cash paid---------------------------- (11.9) In 1991, the Company sold a producing property for $0.9 million in cash and a note receivable for $1.2 million. In 1991, the Partnership purchased certain surface properties for $6.2 million, 40 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $5.5 million of which was funded by the issuance of promissory notes and the Company also purchased producing properties for $63.1 million, $34.6 million of which was funded with debt (see Notes 5 and 7). The Company made interest payments of $45.5 million, $49.0 million and $48.0 million in 1991, 1992 and 1993, respectively. In 1991, 1992 and 1993, the Company made tax payments of $18.4 million, $4.4 million and $5.0 million, respectively, and in 1993 received refunds of $4.1 million, primarily related to the audit of prior years' returns. (7) FINANCING AND DEBT Long-term debt at December 31, 1993 and 1992 consisted of (in millions of dollars):
DECEMBER 31, 1993 1992 CURRENT LONG-TERM CURRENT LONG-TERM SFER Senior Notes--------------------- 30.0 310.0 25.0 340.0 Revolving and Term Credit Agreement---------------------- 1.3 48.7 12.8 92.2 Notes Payable to Bank------------ 3.8 11.3 2.5 15.1 Term-Loan------------------------ 1.2 11.4 1.2 12.6 Partnership Credit Agreement----------------- 8.0 24.0 11.1 29.5 Promissory Notes----------------- -- -- 0.8 3.4 44.3 405.4 53.4 492.8 Aggregate total maturities of long-term debt during the next five years are as follows: 1994 -- $44.3 million; 1995 -- $78.9 million; 1996 -- $73.5 million; 1997 -- $43.0 million; and 1998 -- $35.0 million. These maturities will be affected by the refinancing discussed in Note 2 -- Corporate Restructuring Program. On April 11, 1990 SFER issued $365.0 million of serial unsecured Senior Notes with interest rates averaging 10.35%. The Note Agreement pursuant to which the Senior Notes were issued includes certain covenants which, among other things, restrict the Company's ability to incur additional indebtedness and to pay dividends. Under the terms of the Note Agreement, at December 31, 1993 the Company had the ability to incur at least $64.0 million in additional long-term debt and pay $26.0 million in dividends and other restricted payments. At December 31, 1993 $340.0 million in Senior Notes were outstanding and are to be repaid, $30.0 million in 1994 and 1995, $35.0 million in 1996 through 1998 and $25.0 million per year in 1999 through 2005. In January 1991 the Company executed a $16.8 million term-loan agreement, with interest at 9.0%, in connection with the purchase of certain producing properties from Mission. At December 31, 1993 $12.6 million was outstanding under the terms of the agreement and is to be repaid $1.2 million in 1994 and $11.4 million in 1995. The Company made principal payments on the loan totalling $1.8 million in 1991, $1.2 million in 1992 and $1.2 million in 1993. In June 1991 the Company borrowed $10.4 million from an Argentine bank in connection with the purchase of an interest in a producing oil field in Argentina. The loan bore interest at the higher of 12% or the interbank offering rate plus 2%. In October 1991 the Company borrowed an additional $7.8 million in connection with the purchase of an additional interest in the field. The second loan bore interest at the higher of rates ranging from 13.4% to 14.0% or the London Interbank Offering Rate ('LIBOR') plus 2%. During 1993 the two loans were combined in a new loan which bears interest at the higher of 13.06% or LIBOR plus 2%. 41 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the Merger the Company entered into a $195.0 million Revolving and Term Credit Agreement (the 'Credit Agreement') with a group of banks. Upon consummation of the Merger the Company drew down the $145.0 million available under the term loan feature of the Credit Agreement and repaid the $140.0 million of long-term debt assumed in the Merger. The borrowings under the term loan feature of the Credit Agreement are secured by properties acquired in the Merger. Interest rates on borrowings are determined from time to time and at December 31, 1993 amounts outstanding under the term loan feature bore interest at an average of 5.5% per annum. In April 1993 the term loan feature was amended to allow the Company to make voluntary prepayments and reborrowings. At December 31, 1993 the balance outstanding under the term loan feature was $50.0 million and the total amount available under the term loan feature, including amounts then outstanding, was $87.7 million. The amount available will be reduced, in semi-annual increments, to $48.6 million in December 31, 1994 and $24.3 million at December 31, 1995. The Credit Agreement expires December 31, 1996. In certain circumstances, primarily related to the sale of properties securing the loans, the amount available may be reduced or the Company may be required to make mandatory repayments. The Company is currently negotiating an amendment to the Credit Agreement which would extend the maturities and under certain circumstances increase the amount available for borrowings. Under the revolving credit feature of the Credit Agreement the Company may borrow and issue letters of credit totalling up to $50.0 million. Borrowings under the revolving credit feature are unsecured but are subject to compliance with covenants identical to existing covenants under the Company's other long-term debt agreeements including covenants related to debt incurrence, dividends and other restricted payments, investments and limitations on liens, mergers and sales of assets. In addition, the Company must comply annually with certain borrowing base coverage ratios relating to projected cash flows from oil and gas revenues. The amount available under the revolving credit feature will be reduced to $10.0 million on February 28, 1994 and this feature expires on February 28, 1995. At December 31, 1993, the Company had $8.7 million in letters of credit outstanding under the revolving credit feature of the Credit Agreement. The Company has two uncommitted lines of credit totalling $35.0 million which is used to meet short-term cash needs. Interest rates on borrowings under this line of credit is typically lower than rates paid under the Credit Agreement. At December 31, 1993 no amounts were outstanding under these lines of credit. In December 1991 the Partnership issued two promissory notes for a total of $5.5 million in connection with the purchase of certain surface lands. The notes, which bore interest at 10.0%, were retired in 1993. The Company's proportionate share of such debt at December 31, 1992 was $4.2 million. At December 31, 1993 and 1992 the Partnership had $32.0 million and $44.0 million, respectively, outstanding under the terms of long-term credit agreement which expires in 1997. The Company's proportionate share of such debt totaled $40.6 million at December 31, 1992. Interest on 65% of principal amount outstanding is fixed at 10.13% with interest on the remaining amount outstanding at floating rates which averaged 4.3% in 1993 and 5.46% in 1992. The credit agreement imposes certain restrictions on future indebtedness and the transfer or sale of principal properties and requires the maintenance of certain financial ratios to avoid collateralization or default. 42 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) SEGMENT INFORMATION The principal business of the Company is oil and gas, which consists of the acquisition, exploration and development of oil and gas properties and the production and sale of crude oil and liquids and natural gas. Pertinent information with respect to the Company's oil and gas business is presented in the following table (in millions of dollars):
OIL AND GAS OTHER GENERAL U.S. ARGENTINA INDONESIA FOREIGN CORPORATE TOTAL 1993 Revenues--------------------------- 401.2 12.5 23.2 -- -- 436.9 Income (Loss) from Operations------ (33.6) 3.0 (13.4) (18.4) (50.6) (113.0) Depletion, Depreciation, Amortiza- tion and Impairment-------------- 218.8 3.6 21.2 6.7 1.7 252.0 Additions to Property and Equipment------------------------ 116.1 7.3 16.8 6.1 4.4 150.7 Identifiable Assets at December 31---------------------- 862.0 48.2 65.3 2.8 98.6 1,076.9 1992 Revenues--------------------------- 400.0 13.9 13.6 -- -- 427.5 Income (Loss) from Operations------ 100.6 2.5 2.3 (10.7) (37.2) 57.5 Depletion, Depreciation and Amortization--------------------- 136.7 3.7 2.7 1.6 1.6 146.3 Additions to Property and Equipment------------------------ 452.6 4.0 71.6 5.7 2.4 536.3 Identifiable Assets at December 31------------------------------- 1,076.5 39.2 73.9 5.8 141.8 1,337.2 1991 Revenues--------------------------- 376.1 3.7 -- -- -- 379.8 Income (Loss) from Operations------ 103.7 (2.2) .2 (2.5) (34.8) 64.4 Depletion. Depreciation and Amortization--------------------- 101.3 1.8 -- .7 2.8 106.6 Additions to Property and Equipment------------------------ 125.8 35.4 -- 3.7 8.8 173.7 Identifiable Assets at December 31------------------------------- 816.5 37.5 .2 3.9 53.8 911.9
Crude oil and liquids and natural gas accounted for more than 95% of revenues in 1991, 1992 and 1993. The following table reflects sales revenues from crude oil purchasers who accounted for more than 10% of the Company's crude oil and liquids revenues (in millions of dollars): YEAR ENDED DECEMBER 31, 1993 1992 1991 Texaco Trading and Transportation, Inc-------------------------------- -- 46.8 55.9 Celeron Corporation------------------ 56.8 56.3 45.6 Shell Oil Company-------------------- 86.3 -- -- None of the Company's purchasers of natural gas accounted for more than 10% of revenues in 1991, 1992 or 1993. The Company does not believe the loss of any purchaser would have a material adverse effect on its financial position since the Company believes alternative sales arrangements could be made on relatively comparable terms. 43 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) CONVERTIBLE PREFERRED STOCK The convertible preferred stock issued in connection with the Merger is non-voting and entitled to receive cumulative cash dividends at an annual rate equivalent to $1.40 per share. The holders of the convertible preferred shares may, at their option, convert any or all such shares into 1.3913 shares of the Company's common stock. The Company may, at any time after the fifth anniversary of the effective date of the Merger and upon the occurrence of a 'Special Conversion Event', convert all outstanding shares of convertible preferred stock into common stock at the initial conversion rate of 1.3913 shares of common stock, subject to certain adjustments, plus additional shares in respect to accrued and unpaid dividends. A Special Conversion Event is deemed to have occurred when the average daily closing price for a share of the Company's common stock for 20 of 30 consecutive trading days equals or exceeds 125% of the quotient of $20.00 divided by the then applicable conversion rate (approximately $18.00 per share at a conversion rate of 1.3913). Upon the occurrence of the 'First Ownership Change' of Santa Fe, each holder of shares of convertible preferred stock shall have the right, at the holder's option, to elect to have all of such holder's shares redeemed for $20.00 per share plus accrued and unpaid interest and dividends. The First Ownership Change shall be deemed to have occurred when any person or group, together with any affiliates or associates, becomes the beneficial owner of 50% or more of the outstanding common stock of Santa Fe. (10) SHAREHOLDERS' EQUITY COMMON STOCK In 1991, 1992 and 1993 the Company issued 1.1 million previously unissued shares of common stock in connection with certain employee benefit and compensation plans. Also in 1992, the Company issued 24.9 million previously unissued shares of common stock in connection with the Merger. The Company declared dividends to common shares of $0.16 per share in 1991 and 1992 and $0.12 per share in 1993. PREFERRED STOCK The Board of Directors of the Company is empowered, without approval of the shareholders, to cause shares of preferred stock to be issued in one or more series, and to determine the number of shares in each series and the rights, preferences and limitations of each series. Among the specific matters which may be determined by the Board of Directors are: the annual rate of dividends; the redemption price, if any; the terms of a sinking or purchase fund, if any; the amount payable in the event of any voluntary liquidation, dissolution or winding up of the affairs of the Company; conversion rights, if any; and voting powers, if any. ACCUMULATED DEFICIT At December 31, 1993 Accumulated Deficit included dividends in excess of retained earnings of $89.8 million. 1990 INCENTIVE STOCK COMPENSATION PLAN The Company has adopted the Santa Fe Energy Resources 1990 Incentive Stock Compensation Plan (the 'Plan') under the terms of which the Company may grant options and awards with respect to no more than 5,000,000 shares of common stock to officers and key employees. Options granted in 1991 and prior are fully vested and expire in 2000. Options granted in 1992 have a ten year term and vest as to 33.33 percent one year after grant, as to a cumulative 66.67 44 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) percent two years after grant and as to the entire amount three years after grant. The options granted in 1993 have a ten year term and vest as to 50 percent 5 years after grant, as to a cumulative 75 percent 6 years after grant and as to the entire amount 7 years after grant. The options are exercisable on an accelerated basis beginning one year and ending three years after grant in certain circumstances. If the market value per share of the Company's common stock (sustained in all events for at least 60 days) exceeds $15, 25 percent of the options shall become exercisable; in the event the market value per share exceeds $20, 50 percent of the options shall become exercisable; and in the event the market value exceeds $25, 100 percent shall become exercisable. Unexercised options would be forfeited in the event of voluntary or involuntary termination. Vested options are exercisable for a period of one year following termination due to death, disability or retirement. In the event of termination by the Company for any reason there is no prorata vesting of unvested options. The following table reflects activity with respect to Non-Qualified Stock Options during 1991 through 1993: OPTION OPTIONS PRICE OUTSTANDING PER SHARE Outstanding at December 31, 1990----- 1,803,923 $14.4375 to $24.24 Grants------------------------------- 4,500 $14.625 Cancellations------------------------ (45,332) $14.4375 to $24.24 Outstanding at December 31, 1991----- 1,763,091 $14.4375 to $24.24 Grants------------------------------- 1,099,000 $ 9.5625 Cancellations------------------------ (50,163) $14.4375 to $24.24 Outstanding at December 31, 1992----- 2,811,928 $ 9.5625 to $24.24 Grants------------------------------- 800,000 $ 9.5625 Cancellations------------------------ (95,398) $ 9.5625 to $24.24 Exercises---------------------------- (6,945) $ 9.5625 Outstanding at December 31, 1993----- 3,509,585 $ 9.5625 to $24.24 At December 31, 1993 options on 780,790 shares were available for future grants. A 'Phantom Unit' is the right to receive a cash payment in an amount equal to the average trading price of the shares of common stock at the time the award becomes payable. Awards are made for a specified period and are dependent upon continued employment and the achievement of performance objectives established by the Company. In December 1990 the Company awarded 211,362 Phantom Units and in December 1991 313,262 shares of restricted stock were issued in exchange for such units. Compensation expense is recognized over the period the awards are earned based on the market price of the restricted stock on the date it was issued ($8.00 per share). During 1990 and 1991 $0.2 million and $0.8 million, respectively, were charged to expense with respect to such awards. The unamortized portion of the award at December 31, 1991 ($1.4 million) was reflected in Shareholders' Equity. The consummation of the Merger resulted in a 'change of control' as defined in the Plan and resulted in the vesting of the awards and $1.4 million in compensation expense was recognized in 1992. In 1993 the Company issued 6,432 shares of restricted stock to certain employees and 118,039 common shares in accordance with the terms of certain other employee compensation plans. 45 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) PENSION AND OTHER EMPLOYEE BENEFIT PLANS PENSION PLANS Prior to the Spin-Off the Company was included in certain non-contributory pension plans of SFP. The Santa Fe Pacific Corporation Retirement Plan (the 'SFP Plan') covered substantially all of the Company's officers and salaried employees who were not covered by collective bargaining agreements. The Santa Fe Pacific Corporation Supplemental Retirement Plan was an unfunded plan which provided supplementary benefits, primarily to senior management personnel. The Company adopted, effective as of the date of the Spin-Off, a defined benefit retirement plan (the 'SFER Plan') covering substantially all salaried employees not covered by collective bargaining agreements and a nonqualified supplemental retirement plan (the 'Supplemental Plan'). The Supplemental Plan will pay benefits to participants in the SFER Plan in those instances where the SFER Plan formula produces a benefit in excess of limits established by ERISA and the Tax Reform Act of 1986. Benefits payable under the SFER Plan are based on years of service and compensation during the five highest paid years of service during the ten years immediately preceding retirement. Benefits accruing to the Company's employees under the SFP Plan have been assumed by the SFER Plan. The Company's funding policy is to contribute annually not less than the minimum required by ERISA and not more than the maximum amount deductible for income tax purposes. In the fourth quarter of 1993 the Company established a new pension plan with respect to certain persons employed in foreign locations. The following table sets forth the funded status of the SFER Plan and the Supplemental Plan at December 31, 1993 and 1992 (in millions of dollars): SFER PLAN SUPPLEMENTAL PLAN 1993 1992 1993 1992 Plan assets at fair value, primarily invested in common stocks and U.S. and corporate bonds---------------- 30.2 28.9 -- -- Actuarial present value of projected benefit obligations: Accumulated benefit obligations Vested----------------------- (30.9) (24.5) (0.6) (0.5) Nonvested-------------------- (1.5) (1.4) -- -- Effect of projected future salary increases----------- (8.3) (6.4) (0.3) (0.2) Excess of projected benefit obligation over plan assets-------- (10.5) (3.4) (0.9) (0.7) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions------------------------ 6.4 0.7 0.3 0.2 Unrecognized net (asset) obligation being recognized over plan's average remaining service life----- (1.0) (1.1) 0.2 0.3 Additional minimum liability--------- -- -- (0.3) (0.3) Accrued pension liability------------ (5.1) (3.8) (0.7) (0.5) Major assumptions at year-end Discount rate-------------------- 7.0% 8.25% 7.0% 8.25% Long-term asset yield------------ 9.5% 9.5% 9.5% 9.5% Rate of increase in future compensation------------------- 5.25% 5.25% 5.25% 5.25% 46 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the components of pension expense for the SFER Plan and Supplemental Plan for 1993, 1992 and 1991 (in millions of dollars):
SFER PLAN SUPPLEMENTAL PLAN 1993 1992 1991 1993 1992 1991 Service cost------------------------- 1.4 1.2 1.1 -- -- -- Interest cost------------------------ 2.6 2.4 2.3 0.1 0.1 0.1 Return on plan assets---------------- (2.7) (2.5) (2.4) -- -- -- Net amortization and deferral-------- -- -- (0.1) -- -- -- 1.3 1.1 0.9 0.1 0.1 0.1
The Company also sponsors a pension plan covering certain hourly-rated employees in California (the 'Hourly Plan'). The Hourly Plan provides benefits that are based on a stated amount for each year of service. The Company annually contributes amounts which are actuarially determined to provide the Hourly Plan with sufficient assets to meet future benefit payment requirements. The following table sets forth the components of pension expense for the Hourly Plan for the years 1993, 1992 and 1991 (in millions of dollars): YEAR ENDED DECEMBER 31, 1993 1992 1991 Service cost--------------------- 0.2 0.2 0.2 Interest cost-------------------- 0.7 0.7 0.7 Return on plan assets------------ (0.8) (0.1) (0.5) Net amortization and deferral---- 0.4 (0.4) 0.1 0.5 0.4 0.5 The following table sets forth the funded status of the Hourly Plan at December 31, 1993 and 1992 (in millions of dollars): 1993 1992 Plan assets at fair value, primarily invested in fixed-rate securities---- 7.7 7.2 Actual present value of projected benefit obligations Accumulated benefit obligations Vested----------------------- (11.2) (9.1) Nonvested-------------------- (0.4) (0.3) Excess of projected benefit obligation over plan assets-------- (3.9) (2.2) Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions------------------------ 1.5 (0.3) Unrecognized prior service cost------ 0.5 0.6 Unrecognized net obligation---------- 1.5 1.6 Additional minimum liability--------- (3.5) (2.1) Accrued pension liability-------- (3.9) (2.4) Major assumptions at year-end Discount rate-------------------- 7.0% 8.25% Expected long-term rate of return on plan assets----------------- 8.5% 8.5% At December 31, 1993 the Company's additional minimum liability exceeded the total of its unrecognized prior service cost and unrecognized net obligation by $1.5 million. Accordingly, at December 31, 1993 the Company's retained earnings have been reduced by such amount, net of related taxes of $0.6 million. 47 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides health care and life insurance benefits for substantially all employees who retire under the provisions of a Company-sponsored retirement plan and their dependents. Participation in the plans is voluntary and requires a monthly contribution by the employee. Effective January 1, 1993 the Company adopted the provisions of SFAS No. 106 -- 'Employers' Accounting for Postretirement Benefits Other Than Pensions'. The Statement requires the accrual, during the years the employee renders service, of the expected cost of providing postretirement benefits to the employee and the employee's beneficiaries and covered dependents. The following table sets forth the plan's funded status at December 31, 1993 and January 1, 1993 (in millions of dollars): DECEMBER 31, JANUARY 1, 1993 1993 Plan assets, at fair value----------- -- -- Accumulated postretirement benefit obligation Retirees--------------------------- (3.6) (3.1) Eligible active participants------- (1.2) (0.9) Other active participants---------- (1.4) (1.2) Accumulated postretirement benefit obligation in excess of plan assets----------------------------- (6.2) (5.2) Unrecognized transition obligation------------------------- 5.0 5.2 Unrecognized net loss from past experience different from that assumed and from changes in assumptions------------------------ 0.5 -- Accrued postretirement benefit cost------------------------------- (0.7) -- Assumed discount rate---------------- 7.5% 8.25% Assumed rate of compensation increase--------------------------- 5.25% 5.25% The Company's net periodic postretirement benefit cost for 1993 includes the following components (in millions of dollars): Service costs---------------------------------------- 0.3 Interest costs--------------------------------------- 0.4 Amortization of unrecognized transition obligation----------------------------------------- 0.3 1.0 In periods prior to 1993 the cost to the Company of providing health care and life insurance benefits for qualified retired employees was recognized as expenses when claims were paid. Such amounts totalled $0.4 million in 1991 and $0.3 million in 1992. Estimated costs and liabilities have been developed assuming trend rates for growth in future health care costs beginning with 10% for 1993 graded to 6% (5.5% for post age 65) by the year 2000 and remaining constant thereafter. Increasing the assumed health care cost trend rate by one percent each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by $0.9 million and the aggregate of the service cost and interest cost components of the net periodic postretirement benefit cost for 1994 by $0.2 million. SAVINGS PLAN The Company has a savings plan, which became effective November 1, 1990, available to substantially all salaried employees and intended to qualify as a deferred compensation plan under Section 401(k) of the Internal Revenue Code (the '401(k) Plan'). The Company will match employee contributions for an amount up to 4% of each employee's base salary. In addition, if at the end of each 48 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fiscal year the Company's performance for such year has exceeded certain predetermined criteria, each participant will receive an additional matching contribution equal to 50% of the regular matching contribution. The Company's contributions to the 401(k) Plan, which are charged to expense, totaled $1.2 million in 1991, $1.3 million in 1992 and $1.5 million in 1993. In the fourth quarter of 1993 the Company established a new savings plan with respect to certain personnel employed in foreign locations. OTHER POSTEMPLOYMENT BENEFITS In the fourth quarter of 1993 the Company adopted SFAS No. 112 -- 'Employers' Accounting for Postemployment Benefits'. The Statement requires the accrual of the estimated costs of benefits provided by an employer to former or inactive employees after employment but before retirement. Such benefits include salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, job training and counseling and continuation of benefits such as health care and life insurance coverage. The adoption of SFAS No. 112 resulted in a charge to earnings of $1.8 million in 1993. (12) COMMITMENTS AND CONTINGENCIES CRUDE OIL HEDGING PROGRAM In the third quarter of 1990, the Company initiated a hedging program designed to provide a certain minimum level of cash flow from its sales of crude oil. Settlements were included in oil revenues in the period the oil is sold. In the year ended December 31, 1990 hedges resulted in a reduction in oil revenues of $10.7 million; in 1991 hedges resulted in an increase in oil revenues of $41.7 million and in 1992 hedges resulted in an increase in oil revenues of $9.7 million. The Company had no open crude oil hedging contracts during 1993. NATURAL GAS HEDGING PROGRAM In the third quarter of 1992 the Company initiated a hedging program with respect to its sales of natural gas. The Company has used various instruments whereby monthly settlements are based on the differences between the price or range of prices specified in the instruments and the settlement price of certain natural gas futures contracts quoted on the New York Mercantile Exchange. In instances where the applicable settlement price is less than the price specified in the contract, the Company receives a settlement based on the difference; in instances where the applicable settlement price is higher than the specified prices the Company pays an amount based on the difference. The instruments utilized by the Company differ from futures contracts in that there is no contractual obligation which requires or allows for the future delivery of the product. In 1992 and 1993 hedges resulted in a reduction in natural gas revenues of $0.5 million and $8.2 million, respectively. At December 31, 1993 the Company had two open natural gas hedging contracts covering approximately 1.2 Bcf during the six month period beginning March 1994. The 'approximate break-even price' (the average of the monthly settlement prices of the applicable futures contracts which would result in no settlement being due to or from the Company) with respect to such contracts is approximately $1.82 per Mcf. In addition, certain parties hold options on contracts covering approximately 4.8 Bcf during the seven month period beginning March 1994 at an approximate break even price of $1.90 per Mcf. The Company has no other outstanding natural gas hedging instruments. INDEMNITY AGREEMENT WITH SFP At the time of the Spin-Off, the Company and SFP entered into an agreement to protect SFP from federal and state income taxes, penalties and interest that would be incurred by SFP if the Spin-off were determined to be a taxable event resulting primarily from actions taken by the Company during a one-year period that ended December 4, 1991. If the Company were required to make 49 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) payments pursuant to the agreement, such payments could have a material adverse effect on its financial condition; however, the Company does not believe that it took any actions during such one-year period that would have such an effect on the Spin-Off. ENVIRONMENTAL REGULATION Federal, state and local laws and regulations relating to environmental quality control affect the Company in all of its oil and gas operations. The Company has been identified as one of over 250 potentially responsible parties ('PRPs') at a superfund site in Los Angeles County, California. The site was operated by a third party as a waste disposal facility from 1948 until 1983. The Environmental Protection Agency ('EPA') is requiring the PRPs to undertake remediation of the site in several phases, which include site monitoring and leachate control, gas control and final remediation. In 1989, the EPA and a group of the PRPs entered into a consent decree covering the site monitoring and leachate control phases of remediation. The Company is a member of the group that is responsible for carrying out this first phase of work, which is expected to be completed in five to eight years. The maximum liability of the group, which is joint and several for each member of the group, for the first phase is $37.0 million, of which the Company's share is expected to be approximately $2.4 million ($1.3 million after recoveries from working interest participants in the unit at which the wastes were generated) payable over the period that the phase one work is performed. The EPA and a group of PRPs of which the Company is a member have also entered into a subsequent consent decree (which has not been finally entered by the court) with respect to the second phase of work (gas control). The liability of this group has not been capped, but is estimated to be $130.0 million. The Company's share of costs of this phase, however, is expected to be approximately of the same magnitude as that of the first phase because more parties are involved in the settlement. The Company has provided for costs with respect to the first two phases, but it cannot currently estimate the cost of any subsequent phases of work or final remediation which may be required by the EPA. In 1989, Adobe received requests from the EPA for information pursuant to Section 104(e) of CERCLA with respect to the D. L. Mud and Gulf Coast Vacuum Services superfund sites located in Abbeville, Louisiana. The EPA has issued its record of decision at the Gulf Coast Site and on February 9, 1993 the EPA issued to all PRP's at the site a settlement order pursuant to Section 122 of CERCLA. Earlier, an emergency order pursuant to Section 106 of CERLA was issued on December 11, 1992, for purposes of containment due to the Louisiana rainy season. On December 15, 1993 the Company entered into a sharing agreement with other PRP'S to participate in the final remediation of the Gulf Coast site. The Company's share of the remediation is approximately $600,000 and includes its proportionate share of those PRPs who do not have the financial resources to provide their share of the work at the site. A former site owner has already conducted remedial activities at the D. L. Mud Site under a state agency agreement. The extent, if any, of any further necessary remedial activity at the D. L. Mud Site has not been finally determined. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with certain key employees. The initial term of each agreement expired on December 31, 1990 and, on January 1, 1991 and beginning on each January 1 thereafter, is automatically extended for one-year periods, unless by September 30 of any year the Company gives notice that the agreement will not be extended. The term of the agreements is automatically extended for 24 months following a change of control. The consummation of the Merger constituted a change of control as defined in the agreements. In the event that following a change of control employment is terminated for reasons specified in the agreements, the employee would receive: (i) a lump sum payment equal to two years' base salary; (ii) the maximum possible bonus under the terms of the Company's incentive compensation plan; 50 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (iii) a lapse of restrictions on any outstanding restricted stock grants and full payout of any outstanding Phantom Units; (iv) cash payment for each outstanding stock option equal to the amount by which the fair market value of the common stock exceeds the exercise price of the option; and, (v) life, disability and health benefits for a period of up to two years. In addition, payments and benefits under certain employment agreements are subject to further limitations based on certain provisions of the Internal Revenue Code. INTEREST RATE SWAPS Prior to the Merger, Adobe had entered into two interest rate swaps with a bank with notional principal amounts of $15.0 mllion and $20.0 million. Under the terms of the $20.0 million swap, which expires in April 1994, during any quarterly period at the beginning of which a floating rate specified in the agreement is less than 7.84%, the Company must pay the bank interest for such period on the principal amount at the difference between the rates. Should the floating rate be in excess of 7.84%, the bank must pay the Company interest for such period on the principal amount at the difference between the rates. For the period from the effective date of the Merger to December 31, 1992 the amount due the bank in accordance with the terms of the $20.0 million swap totalled $0.6 million and the amount due the bank in 1993 totalled $0.9 million. For the quarterly period which ends in April 1994, the amount due the bank is based on a floating rate of 3.375%. The $15.0 million swap, which expired December 31, 1992, had terms similar to the $20.0 million swap and the amount due the bank for the period subsequent to the Merger totaled $0.5 million. OPERATING LEASES The Company has noncancellable agreements with terms ranging from one to ten years to lease office space and equipment. Minimum rental payments due under the terms of these agreements are: 1994 -- $6.1 million, 1995 -- $6.0 million, 1996 -- $5.5 million, 1997 -- $5.2 million, 1998 -- $4.4 million and $4.7 million thereafter. Rental payments made under the terms of noncancellable agreements totaled $4.0 million in 1991,$4.5 million in 1992 and $5.5 million in 1993. OTHER MATTERS The Company has several long-term contracts ranging up to fifteen years for the supply and transportation of approximately 30 million cubic feet per day of natural gas. In the aggregate, these contracts involve a minimum commitment on the part of the Company of approximately $10 million per year. There are other claims and actions, including certain other environmental matters, pending against the Company. In the opinion of management, the amounts, if any, which may be awarded in connection with any of these claims and actions could be significant to the results of operations of any period but would not be material to the Company's consolidated financial position. (13) INCOME TAXES Effective January 1, 1993 the Company adopted the provisions of Statement of Financial Accounting Standards No. 109 -- 'Accounting for Income Taxes'. The adoption of SFAS No. 109 had no significant impact on the Company's provision for income taxes. Through the date of the Spin-Off the taxable income or loss of the Company was included in the consolidated federal income tax return filed by SFP. The Company has filed separate consolidated federal income tax returns for periods subsequent to the Spin-Off. The consolidated federal income tax returns of SFP have been examined through 1988 and all years prior to 1981 are closed. Issues relating to the years 1981 through 1985 are being contested through various stages of administrative appeal. The Company is evaluating its position with respect to issues raised in a 1986 through 1988 51 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) audit. The Company believes adequate provision has been made for any adjustments which might be assessed for all open years. During 1989, the Company received a notice of deficiency for certain state franchise tax returns filed for the years 1978 through 1983 as part of the consolidated tax returns of SFP. The years subsequent to 1983 are still subject to audit. At December 31, 1993 Other Long-Term Obligations includes $20.6 million with respect to this matter. The Company intends to contest this matter. With the Merger of Adobe the Company succeeded to a net operating loss carryforward that is subject to Internal Revenue Code Section 382 limitations which annually limit taxable income that can be offset by such losses. Certain changes in the Company's shareholders may impose additional limitations as well. Losses carrying forward of $133.3 million expire beginning in 1998. At date of the Merger, Adobe had ongoing tax litigation related to a refund claim for carryback of certain net operating losses denied by the Internal Revenue Service. During 1991 Adobe successfully defended its claim in Federal District Court and prevailed again in 1992 in the United States Court of Appeals for the Fifth Circuit. The Internal Revenue Service had no further recourse to litigation and a $16.2 million refund was reflected as Income Tax Refund Receivable at December 31, 1992 and collected in 1993. Pretax income from continuing operations for the years ended December 31, 1993, 1992 and 1991 was taxed under the following jurisdictions: 1993 1992 1991 Domestic----------------------------- (120.9) 2.7 34.8 Foreign------------------------------ (29.3) (3.6) (2.1) (150.2) (0.9) 32.7 The Company's income tax expense (benefit) for the years ended December 31, 1993, 1992 and 1991 consisted of (in millions of dollars): 1993 1992 1991 Current U.S. federal--------------------- (1.3) 3.5 11.0 State---------------------------- (1.2) 1.4 1.7 Foreign-------------------------- 1.3 1.9 -- (1.2) 6.8 12.7 Deferred U.S. federal--------------------- (65.6) (3.5) 0.2 U.S. federal tax rate change----- 2.6 -- -- State---------------------------- (8.0) (2.5) 1.3 Foreign-------------------------- (0.9) (0.3) -- (71.9) (6.3) 1.5 (73.1) 0.5 14.2 52 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's deferred income tax liabilities (assets) at December 31, 1993 and 1992 are composed of the following differences between financial and tax reporting (in millions of dollars): 1993 1992 Capitalized costs and write-offs----- 83.0 150.8 Differences in Partnership basis----- 15.1 29.3 State deferred liability------------- 5.8 13.4 Foreign deferred liability----------- 13.7 15.5 Gross deferred liabilities----------- 117.6 209.0 Accruals not currently deductible for tax purposes----------------------- (17.7) (28.3) Alternative minimum tax carryforwards---------------------- (8.3) (5.3) Net operating loss carryforwards----- (46.7) (56.4) Other-------------------------------- (0.5) -- Gross deferred assets---------------- (73.2) (90.0) Deferred tax liability--------------- 44.4 119.0 The Company had no deferred tax asset valuation allowance at December 31, 1993 or 1992. A reconciliation of the Company's U.S. income tax expense (benefit) computed by applying the statutory U.S. federal income tax rate to the Company's income (loss) before income taxes for the years ended December 31, 1993, 1992 and 1991 is presented in the following table (in millions of dollars): 1993 1992 1991 U.S. federal income taxes (benefit) at statutory rate------------------ (52.6) (0.3) 11.1 Increase (reduction) resulting from: State income taxes, net of federal effect--------------------------- (1.0) 1.4 2.2 Foreign income taxes in excess of U.S. rate------------------------ (0.8) 0.3 -- Nondeductible amounts-------------- (0.2) (2.4) -- Effect of increase in statutory rate on deferred taxes----------- 2.6 -- -- Federal audit refund--------------- (3.2) -- -- Amendment to tax sharing agreement with SFP------------------------- (1.2) -- -- Benefit of tax losses-------------- (11.2) -- -- Prior period adjustments----------- (5.5) -- -- Other------------------------------ -- 1.5 0.9 (73.1) 0.5 14.2 The Company increased its deferred tax liability in 1993 as a result of legislation enacted during 1993 increasing the corporate tax rate from 34% to 35% commencing in 1993. (14) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107 'Disclosure About Fair Value of Financial Instruments' requires the disclosure, to the extent practicable, of the fair value of financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences, if any, of realization or settlement. The following table reflects the financial 53 SANTA FE ENERGY RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) instruments for which the fair value differs from the carrying amount of such financial instrument in the Company's December 31, 1993 and 1992 balance sheets (in millions of dollars):
1993 1992 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Assets Trust Units---------------------- 10.4 11.3 10.4 10.5 Liabilities Long-Term Debt (including current portion)----------------------- 449.7 482.2 546.2 572.2 Convertible Preferred Stock------ 80.0 103.8 80.0 93.8 Interest rate swap--------------- -- 0.4 -- 1.1
The fair value of the Trust Units and convertible preferred stock is based on market prices. The fair value of the Company's fixed-rate long-term debt is based on current borrowing rates available for financings with similar terms and maturities. With respect to the Company's floating-rate debt, the carrying amount approximates fair value. The fair value of the interest rate swap represents the estimated cost to the Company over the remaining life of the contract. At December 31, 1993 the Company had two open natural gas hedging contracts and options outstanding on five additional contracts (see Note 12 -- Commitments and Contingencies -- Natural Gas Hedging Contracts). Based on the settlement prices of certain natural gas futures contracts as quoted on the New York Mercantile Exchange on December 30, 1993, assuming all options are exercised, the cost to the Company with respect to such contracts during 1994 would be approximately $0.6 million. 54 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) OIL AND GAS RESERVES AND RELATED FINANCIAL DATA Information with respect to the Company's oil and gas producing activities is presented in the following tables. Reserve quantities as well as certain information regarding future production and discounted cash flows were determined by independent petroleum consultants, Ryder Scott Company. OIL AND GAS RESERVES The following table sets forth the Company's net proved oil and gas reserves at December 31, 1990, 1991, 1992 and 1993 and the changes in net proved oil and gas reserves for the years ended December 31, 1991, 1992 and 1993.
CRUDE OIL AND LIQUIDS (MMBBLS) NATURAL GAS (BCF) U.S. ARGENTINA INDONESIA TOTAL U.S. ARGENTINA INDONESIA TOTAL Proved reserves at December 31, 1990------------------- 222.3 -- -- 222.3 185.9 -- -- 185.9 Revisions of previous estimates---- (1.9) -- -- (1.9) 0.4 -- -- 0.4 Improved recovery techniques------- 15.9 -- -- 15.9 0.5 -- -- 0.5 Extensions, discoveries and other additions------------------------- 1.8 -- -- 1.8 19.6 -- -- 19.6 Purchases of minerals-in-place----- 4.6 8.7 -- 13.3 2.5 -- -- 2.5 Sales of minerals-in-place--------- (2.4) -- -- (2.4) (5.5) -- -- (5.5) Increase in ownership in Partnership----------------------- 0.4 -- -- 0.4 2.2 -- -- 2.2 Production------------------------- (20.0) (0.2) -- (20.2) (34.8) -- -- (34.8) Proved reserves at December 31, 1991------------------- 220.7 8.5 -- 229.2 170.8 -- -- 170.8 Revisions of previous estimates---- 14.4 (0.3) -- 14.1 7.3 -- -- 7.3 Improved recovery techniques------- 17.0 -- -- 17.0 1.3 -- -- 1.3 Extensions, discoveries and other additions------------------------- 1.3 1.3 -- 2.6 5.6 -- -- 5.6 Purchases of minerals-in-place----- 13.5 -- 7.2 20.7 141.5 -- 0.6 142.1 Sales of minerals-in-place--------- (5.7) -- -- (5.7) (5.0) -- -- (5.0) Increase in ownership in Partnership----------------------- 0.2 -- -- 0.2 1.6 -- -- 1.6 Production------------------------- (21.4) (0.8) (0.8) (23.0) (46.2) -- -- (46.2) Proved reserves at December 31, 1992------------------- 240.0 8.7 6.4 255.1 276.9 -- 0.6 277.5 Revisions to previous estimates---- (11.9) 0.5 0.6 (10.8) 26.6 -- 0.1 26.7 Improved recovery techniques------- 26.7 -- -- 26.7 -- -- -- -- Extensions, discoveries and other additions------------------------- 3.4 0.5 2.3 6.2 29.5 26.4 -- 55.9 Purchases of minerals-in-place----- 3.2 -- 0.7 3.9 9.8 -- 0.1 9.9 Sales of minerals in place--------- (8.7) -- -- (8.7) (47.4) -- -- (47.4) Increase in ownership in Partnership----------------------- 0.1 -- -- 0.1 0.8 -- -- 0.8 Production------------------------- (21.9) (0.9) (1.5) (24.3) (60.3) -- (0.1) (60.4) Proved reserves at December 31, 1993------------------ 230.9 8.8 8.5 248.2 235.9 26.4 0.7 263.0 (TABLE CONTINUED ON FOLLOWING PAGE) 55 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CRUDE OIL AND LIQUIDS (MMBBLS) NATURAL GAS (BCF) U.S. ARGENTINA INDONESIA TOTAL U.S. ARGENTINA INDONESIA TOTAL Proved developed reserves at December 31 1990----------------------------- 176.8 -- -- 176.8 169.4 -- -- 169.4 1991----------------------------- 179.2 5.4 -- 184.6 154.2 -- -- 154.2 1992----------------------------- 194.6 5.6 6.4 206.6 250.2 -- 0.6 250.8 1993----------------------------- 178.8 5.5 6.7 191.0 206.0 -- 0.7 206.7
Proved reserves are estimated quantities of crude oil and natural gas which geological and engineering data indicate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Indonesian reserves represent an entitlement to gross reserves in accordance with a production sharing contract. These reserves include estimated quantities allocable to the Company for recovery of operating costs as well as quantities related to the Company's net equity share after recovery of costs. Accordingly, these quantities are subject to fluctuations with an inverse relationship to the price of oil. If oil prices increase, the reserve quantities attributable to the recovery of operating costs decline. Although this reduction would be offset partially by an increase in the net equity share, the overall effect would be a reduction of reserves attributable to the Company. At December 31, 1993, the quantities include 0.6 million barrels which the Company is contractually obligated to sell for $.20 per barrel. At December 31, 1993 the Company's reserves were 6.9 million barrels of crude oil and liquids and 14.5 Bcf of natural gas lower than at December 31, 1992, reflecting the sale in 1993 of properties with reserves totalling 8.7 million barrels of crude oil and liquids and 47.4 Bcf of natural gas. At December 31, 1993, 1.9 million barrels of crude oil reserves and 19.7 billion cubic feet of natural gas reserves were subject to a 90% net profits interest held by Santa Fe Energy Trust. 56 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) ESTIMATED PRESENT VALUE OF FUTURE NET CASH FLOWS Estimated future net cash flows from the Company's proved oil and gas reserves at December 31, 1991, 1992 and 1993 are presented in the following table (in millions of dollars, except as noted):
U.S. ARGENTINA INDONESIA TOTAL 1993 Future cash inflows-------------- 2,654.9 117.9 115.6 2,888.4 Future production costs---------- (1,547.2) (65.9) (78.7) (1,691.8) Future development costs--------- (216.7) (32.4) (8.9) (258.0) Future income tax expenses------- (100.5) -- (6.9) (107.4) Net future cash flows-------- 790.5 19.6 21.1 831.2 Discount at 10% for timing of cash flows--------------------- (308.5) (12.1) (8.2) (328.8) Present value of future net cash flows from proved reserves---------------- 482.0 7.5 12.9 502.4 Average sales prices Oil ($/Barrel)--------------- 9.10 9.74 13.50 Natural gas ($/Mcf)---------- 2.28 1.23 0.97 1992 Future cash inflows-------------- 3,709.8 132.9 105.8 3,948.5 Future production costs---------- (1,982.6) (82.1) (79.5) (2,144.2) Future development costs--------- (292.2) (13.5) -- (305.7) Future income tax expenses------- (286.9) (1.0) (9.5) (297.4) Net future cash flows-------- 1,148.1 36.3 16.8 1,201.2 Discount at 10% for timing of cash flows--------------------- (450.5) (14.0) (3.2) (467.7) Present value of future net cash flows from proved reserves---------------- 697.6 22.3 13.6 733.5 Average sales prices Oil ($/Barrel)--------------- 13.30 15.28 16.46 Natural gas ($/Mcf)---------- 2.01 -- 0.97 1991 Future cash inflows-------------- 2,899.9 117.2 -- 3,017.1 Future production costs---------- (1,655.3) (76.1) -- (1,731.4) Future development costs--------- (242.2) (13.7) -- (255.9) Future income tax expenses------- (236.6) -- -- (236.6) Net future cash flows-------- 765.8 27.4 -- 793.2 Discount at 10% for timing of cash flows--------------------- (320.0) (9.6) -- (329.6) Present value of future net cash flows from proved reserves---------------- 445.8 17.8 -- 463.6 Average sales prices Oil ($/Barrel)--------------- 11.80 13.72 -- Natural gas ($/Mcf)---------- 1.78 -- --
57 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) The following tables sets forth the changes in the present value of estimated future net cash flows from proved reserves during 1991, 1992 and 1993 (in millions of dollars):
U.S. ARGENTINA INDONESIA TOTAL 1993 Balance at beginning of year------- 697.6 22.3 13.6 733.5 Increase (decrease) due to: Sales of oil and gas, net of production costs of $189.5 million------------------------ (230.1) (7.3) (10.0) (247.4) Net changes in prices and production costs--------------- (325.1) (7.7) 1.7 (331.1) Extensions, discoveries and improved recovery-------------- 94.8 14.8 7.0 116.6 Purchases of minerals-in-place-------------- 20.4 -- 2.1 22.5 Sales of minerals-in-place------- (84.7) -- -- (84.7) Development costs incurred------- 50.0 5.1 -- 55.1 Changes in estimated volumes----- 28.3 1.5 1.8 31.6 Changes in estimated development costs-------------------------- 25.6 (24.1) (8.9) (7.4) Interest factor -- accretion of discount----------------------- 87.1 2.3 2.1 91.5 Income taxes--------------------- 112.0 0.6 3.5 116.1 Increase in ownership in Partnership-------------------- 1.2 -- -- 1.2 Other---------------------------- 4.9 -- -- 4.9 (215.6) (14.8) (0.7) (231.1) 482.0 7.5 12.9 502.4 U.S. ARGENTINA INDONESIA TOTAL 1992 Balance at beginning of year------- 445.8 17.8 -- 463.6 Increase (decrease) due to: Sales of oil and gas, net of production costs of $176.2 million------------------------ (236.6) (8.4) (6.3) (251.3) Net changes in prices and production costs--------------- 191.7 7.8 3.5 203.0 Extensions, discoveries and improved recovery-------------- 70.9 4.6 -- 75.5 Purchases of minerals-in-place-------------- 230.6 -- 24.1 254.7 Sales of minerals-in-place------- (77.7) -- -- (77.7) Development costs incurred------- 26.5 3.1 -- 29.6 Changes in estimated volumes----- 63.4 (1.0) -- 62.4 Changes in estimated development costs-------------------------- (76.9) (2.8) -- (79.7) Interest factor -- accretion of discount----------------------- 58.7 1.8 -- 60.5 Income taxes--------------------- (14.8) (0.6) (7.7) (23.1) Increase in ownership in Partnership-------------------- 1.9 -- -- 1.9 Other---------------------------- 14.1 -- -- 14.1 251.8 4.5 13.6 269.9 697.6 22.3 13.6 733.5 58 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) U.S. ARGENTINA INDONESIA TOTAL 1991 Balance at beginning of year------- 839.4 -- -- 839.4 Increase (decrease) due to: Sales of oil and gas, net of production costs of $157.6 million------------------------ (221.0) (1.2) -- (222.2) Net changes in prices and production costs--------------- (617.6) 7.9 -- (609.7) Extensions, discoveries and improved recovery-------------- 71.6 -- -- 71.6 Purchases of minerals-in-place-------------- 10.4 24.8 -- 35.2 Sales of minerals-in-place------- (30.7) -- -- (30.7) Development costs incurred------- 54.0 0.7 -- 54.7 Changes in estimated volumes----- 2.3 -- -- 2.3 Changes in estimated development costs-------------------------- (117.5) (14.4) -- (131.9) Interest factor -- accretion of discount----------------------- 123.5 -- -- 123.5 Income taxes--------------------- 233.5 -- -- 233.5 Increase in ownership in Partnership-------------------- 4.6 -- -- 4.6 Other---------------------------- 93.3 -- -- 93.3 (393.6) 17.8 -- (375.8) 445.8 17.8 -- 463.6
Estimated future cash flows represent an estimate of future net cash flows from the production of proved reserves using estimated sales prices and estimates of the production costs, ad valorem and production taxes, and future development costs necessary to produce such reserves. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense. The sales prices used in the calculation of estimated future net cash flows are based on the prices in effect at year end. Such prices have been held constant except for known and determinable escalations. Operating costs and ad valorem and production taxes are estimated based on current costs with respect to producing oil and gas properties. Future development costs are based on the best estimate of such costs assuming current economic and operating conditions. Income tax expense is computed based on applying the appropriate statutory tax rate to the excess of future cash inflows less future production and development costs over the current tax basis of the properties involved. While applicable investment tax credits and other permanent differences are considered in computing taxes, no recognition is given to tax benefits applicable to future exploration costs or the activities of the Company that are unrelated to oil and gas producing activities. The information presented with respect to estimated future net revenues and cash flows and the present value thereof is not intended to represent the fair value of oil and gas reserves. Actual future sales prices and production and development costs may vary significantly from those in effect at year-end and actual future production may not occur in the periods or amounts projected. This information is presented to allow a reasonable comparison of reserve values prepared using standardized measurement criteria and should be used only for that purpose. 59 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES The following table includes all costs incurred, whether capitalized or charged to expense at the time incurred (in millions of dollars):
OTHER U.S. ARGENTINA INDONESIA FOREIGN TOTAL 1993 Property acquisition costs Unproved------------------------- 6.4 -- 1.8 3.8 12.0 Proved--------------------------- 29.7 -- 2.9 -- 32.6 Other---------------------------- 0.8 -- -- -- 0.8 Exploration costs------------------ 20.9 0.7 5.2 11.7 38.5 Development costs------------------ 85.3 7.3 7.6 -- 100.2 143.1 8.0 17.5 15.5 184.1 1992 Property acquisition costs Unproved------------------------- 29.3 0.2 8.8 3.5 41.8 Proved--------------------------- 294.1 -- 59.4 -- 353.5 Other---------------------------- 65.6 -- -- -- 65.6 Exploration costs------------------ 18.4 2.1 2.9 8.9 32.3 Development costs------------------ 56.8 3.0 1.8 -- 61.6 464.2 5.3 72.9 12.4 554.8 1991 Property acquisition costs Unproved------------------------- 4.4 -- -- 3.2 7.6 Proved--------------------------- 29.0 -- -- 34.1 63.1 Other---------------------------- -- -- -- -- -- Exploration costs------------------ 20.7 -- -- 4.1 24.8 Development costs------------------ 85.8 -- -- 0.7 86.5 139.9 -- -- 42.1 182.0
60 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES The following table sets forth information concerning capitalized costs at December 31, 1993 and 1992 related to the Company's oil and gas operations (in millions of dollars):
1993 OTHER 1992 U.S. ARGENTINA INDONESIA FOREIGN TOTAL U.S. ARGENTINA Oil and gas properties Unproved------------------------- 40.3 1.3 12.0 10.7 64.3 80.1 1.3 Proved--------------------------- 1,869.9 48.9 68.0 -- 1,986.8 2,049.8 37.5 Other---------------------------- 13.2 -- -- -- 13.2 82.0 -- Accumulated amortization of unproved properties------------------------- (14.6) (1.2) (2.8) (9.9) (28.5) (23.6) (1.0) Accumulated depletion, depreciation and impairment of proved properties------------------------- (1,181.9) (7.9) (22.4) -- (1,212.2) (1,200.0) (4.6) Accumulated depreciation of other oil and gas properties (4.3) -- -- -- (4.3) (7.5) -- 722.6 41.1 54.8 0.8 819.3 980.8 33.2 1992 OTHER INDONESIA FOREIGN TOTAL Oil and gas properties Unproved------------------------- 10.2 7.3 98.9 Proved--------------------------- 62.7 -- 2,150.0 Other---------------------------- -- 82.0 Accumulated amortization of unproved properties------------------------- (1.7) (2.6) (28.9) Accumulated depletion, depreciation and impairment of proved properties------------------------- (2.3) -- (1,206.9) Accumulated depreciation of other oil and gas properties -- -- (7.5) 68.9 4.7 1,087.6
61 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) RESULTS OF OPERATIONS FROM OIL AND GAS PRODUCING ACTIVITIES The following table sets forth the Company's results of operations from oil and gas producing activities for the years ended December 31, 1993, 1992 and 1991 (in millions of dollars):
OTHER U.S. ARGENTINA INDONESIA FOREIGN TOTAL 1993 Revenues--------------------------- 401.2 12.5 23.2 -- 436.9 Production costs------------------- (166.9) (5.2) (13.2) -- (185.3) Oil and gas systems and pipelines------------------------ (4.2) -- -- -- (4.2) Exploration, including dry hole costs---------------------------- (16.4) (0.7) (2.2) (11.7) (31.0) Depletion, depreciation, amortization and impairments----- (218.8) (3.6) (21.2) (6.7) (250.3) Restructuring charges-------------- (27.8) -- -- -- (27.8) Gain (loss) on disposition of properties----------------------- (0.7) -- -- -- (0.7) (33.6) 3.0 (13.4) (18.4) (62.4) Income taxes----------------------- 24.1 (0.9) 1.9 -- 25.1 (9.5) 2.1 (11.5) (18.4) (37.3) 1992 Revenues--------------------------- 400.0 13.9 13.6 -- 427.5 Production costs------------------- (160.2) (5.5) (7.3) -- (173.0) Oil and gas systems and pipelines------------------------ (3.2) -- -- -- (3.2) Exploration, including dry hole costs---------------------------- (12.9) (2.2) (1.3) (9.1) (25.5) Depletion, depreciation, amortization and impairments----- (136.7) (3.7) (2.7) (1.6) (144.7) Gain (loss) on disposition of properties----------------------- 13.6 -- -- -- 13.6 100.6 2.5 2.3 (10.7) 94.7 Income taxes----------------------- (37.9) -- (1.6) -- (39.5) 62.7 2.5 0.7 (10.7) 55.2 1991 Revenues--------------------------- 376.1 3.7 -- -- 379.8 Production costs------------------- (155.1) (2.5) -- -- (157.6) Exploration, including dry hole costs---------------------------- (15.5) (1.5) -- (1.7) (18.7) Depletion, depreciation, amortization and impairments----- (101.3) (1.8) -- (0.7) (103.8) Gain (loss) on disposition of properties----------------------- (0.5) -- -- -- (0.5) 103.7 (2.1) -- (2.4) 99.2 Income Taxes----------------------- (42.3) -- -- -- (42.3) 61.4 (2.1) -- (2.4) 56.9
Income taxes are computed by applying the appropriate statutory rate to the results of operations before income taxes. Applicable tax credits and allowances related to oil and gas producing activities have been taken into account in computing income tax expenses. No deduction has been made for indirect cost such as corporate overhead or interest expense. 62 SANTA FE ENERGY RESOURCES, INC. SUPPLEMENTAL INFORMATION TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) SUMMARIZED QUARTERLY FINANCIAL DATA
1 QTR 2 QTR 3 QTR 4 QTR YEAR (IN MILLIONS OF DOLLARS EXCEPT PER SHARE DATE) 1993 Revenues------------------------- 115.3 116.3 102.7 102.6 436.9 Gross profit (a)----------------- 19.0 22.5 8.5 (130.7) (80.7) Income (loss) from operations---- 12.0 15.4 1.2 (141.6)(b) (113.0) Net income (loss)---------------- (0.4) 4.0 2.4 (83.1) (77.1) Earnings (loss) attributable to common shares------------------ (2.2) 2.3 0.6 (84.8) (84.1) Earnings (loss) attributable to common shares per share-------- (0.02) 0.02 0.01 (0.95) (0.94) Average shares outstanding (millions)--------------------- 89.6 89.7 89.8 89.8 89.7 1992 Revenues------------------------- 78.5 97.7 127.9 123.4 427.5 Gross profit (a)----------------- 2.9 34.1 32.0 19.4 88.4 Income (loss) from operations---- (3.5) 25.1 24.4 11.5 57.5 Net income (loss)---------------- (8.8) 1.8 7.3 (1.7) (1.4) Earnings (loss) attributable to common shares------------------ (8.8) 1.0 5.5 (3.4) (5.7) Earnings (loss) attributable to common shares per share-------- (.14) .01 .06 (.04) (.07) Average shares outstanding (millions)--------------------- 64.3 72.7 89.4 89.5 79.0 (a) Revenues less operating expenses other than general and administrative. (b) Includes charges of $99.3 million for impairment of oil and gas properties and $38.6 million for restructuring charges.
63 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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. SANTA FE ENERGY RESOURCES, INC. By /s/ MICHAEL J. ROSINSKI MICHAEL J. ROSINSKI VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) Dated: March 22, 1994 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED. SIGNATURE AND TITLE JAMES L. PAYNE, Chairman of the Board, President and Chief Executive Officer and Director (PRINCIPAL EXECUTIVE OFFICER) MICHAEL J. ROSINSKI, Vice President and Chief Financial Officer (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) DIRECTORS Rod F. Dammeyer William E. Greehey Melvyn N. Klein Robert D. Krebs Allan V. Martini Michael A. Morphy Reuben F. Richards By: /s/ MICHAEL J. ROSINSKI David M. Schulte MICHAEL J. ROSINSKI Marc J. Shapiro VICE PRESIDENT AND Robert F. Vagt CHIEF FINANCIAL OFFICER Kathryn D. Wriston ATTORNEY IN FACT Dated: March 22, 1994 64 SANTA FE ENERGY RESOURCES, INC. SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT THREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS OF DOLLARS)
OTHER PROPERTIES OIL AND GAS AND PROPERTIES EQUIPMENT TOTAL December 31, 1990-------------------- 1,811.5 13.4 1,824.9 Additions at cost---------------- 164.9 8.8 173.7 Retirements---------------------- (82.3) (.2) (82.5) Other(a)------------------------- 12.1 2.4 14.5 December 31, 1991-------------------- 1,906.2 24.4 1,930.6 Additions at cost---------------- 533.9 2.4 536.3 Retirements---------------------- (117.1) (.1) (117.2) Other(a)------------------------- 7.9 .1 8.0 December 31, 1992-------------------- 2,330.9 26.8 2,357.7 Additions, at cost--------------- 146.4 4.3 150.7 Retirements---------------------- (494.9) (1.3) (496.2) Other(a)------------------------- 81.9 (2.5) 79.4 December 31, 1993-------------------- 2,064.3 27.3 2,091.6 (a) Principally represents an increase in proportionate ownership of property of the Partnership due to reinvestment of the Partnership distributions and in 1993 the purchase of the publicly held Depository Units and undeposited LP Units of the Partnership (see Note 1 to the Consolidated Financial Statements).
65 SANTA FE ENERGY RESOURCES, INC. SCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT THREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS OF DOLLARS)
OTHER PROPERTIES OIL AND GAS AND PROPERTIES EQUIPMENT TOTAL December 31, 1990-------------------- 1,071.4 8.5 1,079.9 Additions------------------------ 103.8 2.8 106.6 Retirements---------------------- (61.6) (.1) (61.7) Other(a)------------------------- 8.4 -- 8.4 December 31, 1991-------------------- 1,122.0 11.2 1,133.2 Additions------------------------ 144.8 1.5 146.3 Retirements---------------------- (29.5) (.1) (29.6) Other(a)------------------------- 6.0 -- 6.0 December 31, 1992-------------------- 1,243.3 12.6 1,255.9 Additions(b)--------------------- 249.7 1.7 251.4 Retirements---------------------- (309.6) (0.4) (310.0) Other(a)------------------------- 61.6 -- 61.6 December 31, 1993-------------------- 1,245.0 13.9 1,258.9 (a) Principally represents an increase in proportionate ownership of property of the Partnership due to reinvestment of the Partnership distributions and in 1993 the purchase of the publicly held Depository Units and undeposited LP Units of the Partnership (see Note 1 to the Consolidated Financial Statements). (b) Depletion, depreciation, amortization and impairment expense per the Statement of Operations totals $252.0 million. Such amount includes amortization expense of $0.6 million with respect to certain assets included in Other Assets.
66 SANTA FE ENERGY RESOURCES, INC. SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS OF DOLLARS) 1993 1992 1991 Accounts receivable Balance at the beginning of period------------------------- 5.0 2.6 2.8 Charge (credit) to income---- -- -- -- Net amounts written off------ (0.1 ) (1.1 ) (.2 ) Other(a)--------------------- 1.4 3.5 -- Balance at the end of period----- 6.3 5.0 2.6 (a) Represents valuation accounts related to accounts receivable acquired in merger with Adobe Resources Corporation. 67 SANTA FE ENERGY RESOURCES, INC. SCHEDULE IX -- SHORT-TERM BORROWINGS THREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS OF DOLLARS, EXCEPT AS NOTED)
WEIGHTED AVERAGE WEIGHTED INTEREST RATE MAXIMUM AVERAGE AVERAGE OF AMOUNTS AMOUNT AMOUNT INTEREST BALANCE OUTSTANDING OUTSTANDING OUTSTANDING RATE AT END AT END AT ANY DURING THE DURING THE OF PERIOD OF PERIOD MONTH END PERIOD(A) PERIOD(B) 1992 Short-term bank loan------------- -- --% 3.7 0.6 5.89% 1991 Short-term bank loan------------- 4.6 6.04% 11.4 7.2 7.06% (a) Total of daily outstanding principal divided by the actual number of days in the period. (b) Actual interest expense on short-term borrowings divided by the average borrowings outstanding during the period, based upon a 365-day year.
68 SANTA FE ENERGY RESOURCES, INC. SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION THREE YEARS ENDED DECEMBER 31, 1993 (IN MILLIONS OF DOLLARS) YEAR ENDED DECEMBER 31, 1993 1992 1991 Maintenance and repairs-------------- 27.1 25.0 22.6 Taxes (other than income) Ad valorem----------------------- 12.0 11.4 17.0 Production and severance--------- 9.5 8.2 6.8 Payroll and other---------------- 5.8 4.7 3.4 27.3 24.3 27.2 69 INDEX OF EXHIBITS A. EXHIBITS
EXHIBIT NUMBER DESCRIPTION 3(a) -- Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Form S-2 Registration Statement of Santa Fe Energy Resources, Inc. ('SFER, Inc.') Commission File No. 33-32831). 3(b) -- Bylaws, as amended (incorporated by reference to Exhibit 3(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). 4(a) -- Form of Certificate of Designation, Rights and Preferences of the 7% Convertible Preferred Stock of Santa Fe Energy Resources, Inc. (incorporated by reference to Exhibit 3(b) of the Form S-4 Registration Statement of SFER, Inc., Commission File No. 33-45043). 4(b) -- Note Agreement dated as of March 31, 1990, by and among Santa Fe Energy Resources, Inc. and various institutional investors relating to the issuance of $365,000,000 of Senior Notes maturing 1993-2005, as amended (incorporated by reference to Exhibit 4(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 4(c) -- Amendment dated as of November 1, 1992, to Note Agreement dated as of March 30, 1990, by and among Santa Fe Energy Resources, Inc. and various institutional investors, relating to the issuance of $365,000,000 of Senior Notes maturing 1993 to 2005, as amended (incorporated by reference to Exhibit 4(c) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). *4(d) -- Amendment dated as of December 31, 1993, to Note Agreement dated as of March 30, 1990, by and among Santa Fe Energy Resources, Inc. and various institutional investors, relating to the issuance of $365,000,000 of Senior Notes maturing 1993 to 2005, as amended. 10(a) -- Revolving and Term Credit Agreement, dated as of May 20, 1992, among Santa Fe Energy Resources, Inc., the banks signatory thereto and Texas Commerce Bank National Association as Co-Agent and Administrative Agent and NationsBank of Texas, N.A. as Co-Agent (incorporated by reference to Exhibit 10(a) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). 10(b) -- Amendment dated as of December 1, 1992, to Revolving Term and Credit Agreement dated as of May 20, 1992, among Santa Fe Energy Resources, Inc., the banks signatory thereto and Texas Commerce Bank National Association as Co-Agent and Administrative Agent and NationsBank of Texas, N.A. as Co-Agent (incorporated by reference to Exhibit 10(b) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). *10(c) -- Amendment dated as of April 14, 1993, to Revolving Term and Credit Agreement dated as of May 20, 1992, among Santa Fe Energy Resources, Inc., the banks signatory thereto and Texas Commerce Bank National Association as Co-Agent and Administrative Agent and NationsBank of Texas, N.A. as Co-Agent. *10(d) -- Letter of Credit Agreement dated as of May 19, 1993, among Santa Fe Energy Resources, Inc., the banks signatory thereto and Texas Commerce Bank National Association as Co-Agent and Administrative Agent and NationsBank of Texas, N.A. as Co-Agent. *10(e) -- Credit Agreement dated as of June 30, 1987 among Santa Fe Energy Operating Partners, L. P. Morgan Guaranty Trust Company as Agent, and the Lenders thereunder. 70 10(f) -- Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the Santa Fe Pacific Corporation ('SFP') Affiliated Group, as amended, dated December 23, 1983 (incorporated by reference to Exhibit 10.8 of the Form S-2 Registration Statement of SFER, Inc. Commission File No. 33-32831). 10(g) -- Santa Fe Energy Resources, Inc. Incentive Compensation Plan (incorporated by reference to Exhibit 10(d) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(h) -- Santa Fe Energy Resources, Inc. 1990 Incentive Stock Compensation Plan, as amended (incorporated by reference to Exhibit 10(h) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). 10(i) -- Example of employment agreements entered into with executive officers of SFER, Inc (incorporated by reference to Exhibit 10(f) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(j) -- Example of Indemnification Agreement with SFER, Inc. directors and officers (incorporated by reference to Exhibit 10(g) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(k) -- Spin Off Tax Indemnification Agreement between SFER, Inc. and SFP (incorporated by reference to Exhibit 10(h) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(l) -- Agreement Concerning Taxes among the Company, certain subsidiaries of the Company and SFP (incorporated by reference to Exhibit 10(i) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(m) -- Agreements for the Allocation of the Combined State Income Tax Liability Among the Members of the Santa Fe Pacific Corporation Affiliated Group for the States of Arizona, California, Illinois, Kansas, New Mexico, Oregon and Utah (incorporated by reference to Exhibit 10(j) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(n) -- Agreement of Limited Partnership, South Belridge Limited Partnership, dated as of October 31, 1990, by and between Santa Fe Energy Resources, Inc. and the Prudential Insurance Company of America (incorporated by reference to Exhibit 10(k) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). 10(o) -- Santa Fe Energy Resources Supplemental Retirement Plan, effective as of December 4, 1990 (incorporated by reference to Exhibit 10(l) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1990). *10(p) -- Santa Fe Energy Resources, Inc. Deferred Compensation Plan, effective as of January 1, 1991 as amended and restated, effective February 1, 1994. 10(q) -- Stock Ownership and Registration Rights Agreement dated December 10, 1991, by, between and among SFER, Inc., Minorco, and Minorco (U.S.A.) Inc. (incorporated by reference to Exhibit 10(r) of the Form S-4 Registration Statement of SFER, Inc., Commission File No. 33-45043). 10(r) -- Form of Net Profits Conveyance from Santa Fe Energy Resources, Inc. to Texas Commerce Bank, Trustee of the Santa Fe Energy Royalty Trust (incorporated by reference to Exhibit 10.1 of the Form S-1/S-3 Registration of Santa Fe Energy Resources, Inc. and Santa Fe Energy Trust, Commission File No. 33-51760). 10(s) -- Form of Wasson Conveyance from Santa Fe Energy Resources, Inc. to Texas Commerce Bank, Trustee of the Santa Fe Energy Royalty Trust (incorporated by reference to Exhibit 10.2 of the Form S-1/S-3 Registration of Santa Fe Energy Resources, Inc. and Santa Fe Energy Trust, Commission File No. 33-51760). 71 *10(t) -- Gas Marketing Agreement, dated as of December 14, 1993, between Santa Fe Energy Resources, Inc., Santa Fe Energy Operating Partners, L.P. and Adobe Gas Pipeline Company. *10(u) -- Agreement of Sale and Purchase by and among Santa Fe Energy Resources, Inc., Santa Fe Energy Operating Partners, L.P. and Bridge Oil (U.S.A.) Inc. dated December 2, 1993. *10(v) -- Amended and Restated Revolving Credit Agreement dated as of March 16, 1994 among Santa Fe Energy Resources, Inc., the banks signatory thereto, and Texas Commerce Bank National Association as Co-Agent and Administrative Agent and NationsBank of Texas, N.A. as Co-Agent. *10(w) -- Letter of Credit Agreement dated as of March 16, 1994 among Santa Fe Energy Resources, Inc., the banks signatory thereto, and Texas Commerce Bank National Association as Co-Agent and Administrative Agent and NationsBank of Texas, N.A. as Co-Agent. 22(a) -- Subsidiaries of the registrant (incorporated by reference to Exhibit 22(a) to SFER, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). *23(a) -- Consent of Independent Accountants with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541 and 33-44542). *23(b) -- Consent of Ryder Scott Company with respect to Registration Statements on Form S-8 (Nos. 33-37175, 33-44541 and 33-44542). *24 -- Powers of Attorney * Included in this report.
B. REPORTS ON FORM 8-K. DATE ITEM February 8, 1994 5 72 EX-4.D 2 AMENDMENT 12/31/93 TO NOTE AGREEMENT 3/30/90 EXHIBIT 4(d) FOURTH AMENDMENT TO NOTE AGREEMENT This FOURTH AMENDMENT TO NOTE AGREEMENT (this "Amendment") dated as of December 31, 1993 is among SANTA FE ENERGY RESOURCES, INC., a Delaware corporation (the "Company"), and the entities identified on the signature pages hereof as the holders (the "Required Holders") of at least 51% of the aggregate principal amount of the Company's senior promissory notes (the "Notes") outstanding, which were issued in seven series in the aggregate principal amount of $365,000,000 pursuant to the Note Agreement, dated as of March 31, 1990, among the Company and the original Purchasers of the Notes, as amended by the First Amendment to Note Agreement dated as of November 1, 1990, the Second Amendment to Note Agreement dated as of September 1, 1991 and the Third Amendment to Note Agreement dated as of November 1, 1992 (as so amended, the "Agreement"). All capitalized terms defined in the Agreement and not otherwise defined herein shall have the same meanings herein as in the Agreement. PRELIMINARY STATEMENT The Company and the Required Holders have agreed, upon the terms and conditions specified herein, to amend the Agreement as hereinafter set forth. NOW THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the Company and the Required Holders hereby agree as follows: -1- SECTION 1. AMENDMENT TO PARAGRAPH 5A OF THE AGREEMENT. The final paragraph of Paragraph 5A is hereby amended by inserting the following sentence immediately before the final sentence of said paragraph: "Together with each delivery of financial statements required by clause (i) or (ii) above, the Company will deliver to each holder a pro forma statement of operations of the Company and its Restricted Subsidiaries for the same fiscal period as such financial statements that assumes that the impairments of oil and gas properties taken by the Company and its Restricted Subsidiaries in the fourth quarter of 1993 in the amount of up to $100 million as reflected in the Company's consolidated financial statements for the year ended December 31, 1993, shall not have occurred and a calculation in reasonable detail showing the determination of Consolidated Net Earnings and Unimpaired Consolidated Net Earnings for such fiscal period." SECTION 2. AMENDMENT TO PARAGRAPH 6A OF THE AGREEMENT. Paragraph 6A is hereby amended by amending the definition of Consolidated Net Earnings Available for Restricted Payments and Restricted Investments contained in such Paragraph by replacing the term "Consolidated Net Earnings" in each place where it appears in such definition with the term "Unimpaired Consolidated Net Earnings". SECTION 3. AMENDMENT TO PARAGRAPH 6B(1) OF THE AGREEMENT. Paragraph 6B(1) is hereby amended by inserting the following phrase before the comma at the end of clause (vi) of said Paragraph: "and shall not secure any portion of the Company's or any Restricted Subsidiary's Debt representing any advance (other than advances with respect to the Adobe Debt) made to the Company or any of its Restricted Subsidiaries, other than advances the proceeds of which are paid solely to the Person (or any successor or assignee of such Person) which is the acquiree in such acquisition or that is providing such construction, development or improvement". -2- SECTION 4. AMENDMENTS TO PARAGRAPH 6B(2) OF THE AGREEMENT. (a) Paragraph 6B(2) is hereby amended by inserting the following phrase at the beginning of clause (iii)(c) of said Paragraph: "(1) for any such creation, incurrence or assumption occurring prior to December 31, 1998, Priority Debt (other than Existing Priority Debt) shall not exceed the lesser of (A)(I) 40% of Consolidated Net Tangible Assets minus (II) Existing Priority Debt and (B) 33% of Consolidated Net Tangible Assets, and (2) for any such creation, incurrence or assumption occurring on or after December 31, 1998, Priority Debt shall not exceed 33% of Consolidated Net Tangible Assets, and,". (b) Paragraph 6B(2) is hereby further amended by inserting the following phrase at the beginning of clause (iv)(c) of said Paragraph: "(1) for any such creation, incurrence or assumption occurring prior to December 31, 1998, Priority Debt (other than Existing Priority Debt) shall not exceed the lesser of (A)(I) 40% of Consolidated Net Tangible Assets minus (II) Existing Priority Debt and (B) 33% of Consolidated Net Tangible Assets, and (2) for any such creation, incurrence or assumption occurring on or after December 31, 1998, Priority Debt shall not exceed 33% of Consolidated Net Tangible Assets, and,". SECTION 5. AMENDMENTS TO PARAGRAPH 10 OF THE AGREEMENT. (a) Paragraph 10 is hereby amended by adding thereto in alphabetical order the following definitions: "ADOBE DEBT" at any time shall mean with respect to the Debt of the Company incurred as of May 20, 1992, in connection with the merger of Adobe Resources Corporation into the Company, as such Debt may have been or hereafter may be renewed, extended or otherwise modified, the maximum principal amount of such Debt that can be outstanding at such time, but only to the extent that such amount is equal to or less than (i) $90,000,000, at any time during the period from and including December 31, 1993, to and including December 30, 1994, (ii) $72,000,000, at any time during the period from and including December 31, 1994, to and including December 30, 1995, (iii) $54,000,000, at any time during the period from and including December 31, 1995, to and including December 30, 1996, (iv) $36,000,000, at any time during the period from and including December 31, 1996, to and -3- including December 30, 1997, (v) $18,000,000, at any time during the period from and including December 31, 1997, to and including December 30, 1998, and (vi) $0.00 at any time thereafter. "EXISTING PRIORITY DEBT" at any time shall mean, to the extent that it is otherwise Priority Debt, an amount equal to the sum of (i) the Adobe Debt at such time, (ii) the outstanding principal amount of Debt under the Springing Lien Agreement at such time, and (iii) the outstanding principal amount of Debt under those certain Credit Agreements of Petrolera Santa Fe S.A., dated as of June 25, 1991 and April 28, 1992, at such time. "HADSON" shall mean Hadson Corporation, a Delaware corporation, and any successor corporation thereto. "HADSON STOCK" shall mean, to the extent held continuously by the Company or any of its Restricted Subsidiaries after the merger of SFER Pipeline, Inc. into the Company, (i) any of the 2,080,000 shares of the Senior Cumulative Preferred Stock, Series A, par value $.01 per share, of Hadson and the 10,395,665 shares of the common stock, par value $.01 per share of Hadson, acquired by the Company or any of its Subsidiaries on or before January 31, 1994, (ii) any stock acquired by virtue of one or more stock splits or recapitalizations involving such common stock or Senior Cumulative Preferred Stock and not involving any additional economic consideration on the part of the Company or any of its Subsidiaries, and (iii) any dividend paid on such common stock or Senior Cumulative Preferred Stock solely in the capital stock of Hadson. "PRIORITY DEBT" at any time shall mean an amount equal to the sum of (without duplication) the amount of all Special Debt outstanding at such time and the amount of all Debt of the Company and its Restricted Subsidiaries outstanding at such time that is secured by one or more Liens permitted under clause 6B(1)(iv), (v), (vi), (vii), (viii), (ix), (x), (xi) or (xii). "UNIMPAIRED CONSOLIDATED NET EARNINGS" for any period shall mean the amount of Consolidated Net Earnings for such period except that with respect to the oil and gas properties impairments taken by the Company and its Restricted Subsidiaries in the fourth quarter of 1993 in the amount of up to $100 million as reflected in the Company's consolidated financial statements for the year ended December 31, 1993: (i) for any calculation of "Unimpaired Consolidated Net Earnings" for any fiscal period of the Company and its Restricted Subsidiaries ending on or after December 31, 1993, -4- the net earnings of the Company and its Restricted Subsidiaries shall not be reduced by the amount of such oil and gas properties impairments; and (ii) for any such calculation for any fiscal period of the Company and its Restricted Subsidiaries ending on or after December 31, 1993, the depreciation, depletion and amortization expenses of the Company and its Restricted Subsidiaries shall be calculated on a pro forma basis as if such oil and gas properties impairments had never occurred. (b) Paragraph 10 is hereby further amended by deleting the phrase "but not including in gross revenues any dividends, distributions or other payments received by the Company and its Restricted Subsidiaries from the Special Subsidiary" in its entirety from the definition of "Consolidated Net Earnings" in such Paragraph and replacing said phrase with the following phrase: "but not including in gross revenues any dividends, distributions or other payments received by the Company or any of its Restricted Subsidiaries in connection with the Hadson Stock, unless received in the form of cash, or any dividends, distributions or other payments received by the Company or any of its Restricted Subsidiaries from the Special Subsidiary". (c) Paragraph 10 is hereby further amended by inserting the following phrase at the end of clause (A)(5) of the definition of "Consolidated Net Tangible Assets" in such paragraph immediately prior to the period in such clause: "(other than Restricted Investments in the capital stock of Hadson)". (d) Paragraph 10 is hereby further amended by deleting clause (x) of the definition of "Restricted Investment" in such Paragraph and replacing said clause with the following two clauses: "(x) Investments in the Hadson Stock, or -5- (xi) Investments not otherwise permitted hereunder in an aggregate principal amount not to exceed $10,000,000." SECTION 6. CONDITIONS OF EFFECTIVENESS. This Amendment shall become effective when, and only when the Company and the Required Holders shall have executed a counterpart hereof and delivered the same to the Company. SECTION 7. REFERENCE TO THE AGREEMENT AND EFFECT ON THE NOTES AND OTHER DOCUMENTS EXECUTED PURSUANT TO THE AGREEMENT. (a) Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement," "hereunder," "herein," "hereof" or words of like import shall mean and be a reference to the Agreement, as affected and amended hereby. (b) Upon the effectiveness of this Amendment, each reference in the Notes and the other documents and agreements delivered or to be delivered pursuant to the Agreement shall mean and be a reference to the Agreement, as affected and amended hereby. (c) The Agreement, as amended and modified by the amendment referred to above, shall remain in full force and effect and is hereby ratified and confirmed. SECTION 8. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. -6- SECTION 9. GOVERNING LAW. THIS AMENDMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA. SECTION 10. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. -7- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed effective as of the date first stated herein, by their respective officers thereunto duly authorized. SANTA FE ENERGY RESOURCES, INC. By: MICHAEL J. ROSINSKI Name: Michael J. Rosinski Title: Vice President and Chief Financial Officer REQUIRED HOLDERS: ALLSTATE INSURANCE COMPANY By: Name: Title: AMERICAN ENTERPRISE LIFE INSURANCE COMPANY By: Name: Title: -8- AMERICAN GENERAL LIFE INSURANCE COMPANY By: Name: Title: AMERICAN GENERAL LIFE INSURANCE COMPANY OF DELAWARE By: Name: Title: CENTRAL LIFE ASSURANCE COMPANY By: Name: Title: COVENANT LIFE ASSURANCE COMPANY By: William Blair & Company, Agent By: Name: Title: -9- EQUITABLE VARIABLE LIFE INSURANCE COMPANY By: Name: Title: THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES By: Name: Title: THE EQUITABLE OF COLORADO, INC. By: Name: Title: FARM BUREAU LIFE INSURANCE COMPANY By: RICHARD D. WARMING Name: Richard D. Warming Title: VP-Chief Investment Officer -10- FARM FAMILY LIFE INSURANCE COMPANY By: Name: Title: FARM FAMILY MUTUAL INSURANCE COMPANY By: Name: Title: FBL INSURANCE COMPANY By: RICHARD D. WARMING Name: Richard D. Warming Title: VP-Chief Investment Officer GENERAL AMERICAN LIFE INSURANCE COMPANY By: Name: Title: -11- GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: DAVID SULLIVAN Name: David Sullivan Title: Vice President Private Placement Investments By: WAYNE T. HOFFMANN Name: Wayne T. Hoffmann Title: Vice President Private Placement Investments IDS LIFE INSURANCE COMPANY By: Name: Title: KANSAS PUBLIC EMPLOYEES RETIREMENT SYSTEM By: The Boston Safe Deposit and Trust Company, Agent By: Name: Title: -12- KEYPORT LIFE INSURANCE CO. By: Stein Roe & Farnham Incorporated, as Agent By: RICHARD A. HEGWOOD Name: Richard A. Hegwood Title: Vice President MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By: RICHARD C. MORRISON Name: Richard C. Morrison Title: Vice President MELLON SECURITY TRUST By: Name: Title: MERRIL LYNCH LIFE INSURANCE COMPANY By: DAVID M. DUNFORD Name: David M. Dunford Title: Senior Vice President -13- MODERN WOODMEN OF AMERICAN By: Name: Title: THE MUTUAL BENEFIT LIFE INSURANCE COMPANY By: Name: Title: OHIO CASUALTY INSURANCE COMPANY By: Name: Title: OHIO LIFE INSURANCE COMPANY By: Name: Title: -14- PAN-AMERICAN LIFE INSURANCE COMPANY By: Name: Title: PRINCIPAL MUTUAL LIFE INSURANCE COMPANY By: STEPHEN G. SKRIVANEK Name: Stephen G. Skrivanek Title: Counsel By: CLINT WOODS Name: Clint Woods Title: Counsel PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY By: Name: Title: PROVIDENT NATIONAL ASSURANCE COMPANY By: Name: Title: -15- THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: PruCapital Management, Inc., Agent By: STEVEN ARNOLD Name: Steven Arnold Title: Vice President SECURITY MUTUAL LIFE INSURANCE COMPANY OF NEW YORK By: Name: Title: SMA LIFE ASSURANCE COMPANY By: SCOTT C. HYNEY Name: Scott C. Hyney Title: Assistant Treasurer STATE MUTUAL LIFE ASSURANCE COMPANY OF AMERICA By: SCOTT C. HYNEY Name: Scott C. Hyney Title: Assistant Treasurer -16- SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) By: L. BROCK THOMSON Name: L. Brock Thomson Title: Treasurer SUN LIFE INSURANCE AND ANNUITY COMPANY OF NEW YORK By: L. BROCK THOMSON Name: L. Brock Thomson Title: Treasurer THE TRAVELERS INDEMNITY COMPANY By: JOHN GILSENAN Name: John Gilsenan Title: 2nd Vice President THE TRAVELERS INSURANCE COMPANY By: JOHN GILSENAN Name: John Gilsenan Title: 2nd Vice President -17- UNITED OF OMAHA LIFE INSURANCE COMPANY By: Name: Title: USG ANNUITY & LIFE COMPANY By: Name: Title: WEST AMERICAN INSURANCE COMPANY By: Name: Title: -18- EX-10.C 3 AMENDMENT 4/14/93 TO CREDIT AGREEMENT 5/20/92 EXHIBIT 10(c) AGREEMENT AND SECOND AMENDMENT TO REVOLVING AND TERM CREDIT AGREEMENT THIS AGREEMENT AND SECOND AMENDMENT TO REVOLVING AND TERM CREDIT AGREEMENT, hereinafter referred to as this "AMENDMENT", dated as of April 14, 1993, is made and entered into by and among SANTA FE ENERGY RESOURCES, INC. (the "COMPANY"), a Delaware corporation; each of the lenders which is a signatory hereto (individually a "BANK" and collectively the "BANKS"); TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), a national banking association, as Administrative Agent for the Banks (in such capacity, together with its successors in such capacity, the "AGENT"); and TCB and NATIONSBANK OF TEXAS, N.A. ("NATIONSBANK"), a national banking association, as Co-Agents (in such capacity, the "CO-AGENTS"). RECITALS: 1. The Company, the Agent, the Co-Agents and the Banks have entered into a Revolving and Term Credit Agreement dated as of May 20, 1992 (which Revolving and Term Credit Agreement, as amended to the date hereof, is herein called the "CREDIT AGREEMENT"). 2. The parties hereto desire to amend the Credit Agreement in certain respects to provide, among other things, that the Company, subject to certain terms and conditions, may reborrow any amounts prepaid on the unpaid principal balance of the Term Loans at the option of the Company, all as is more fully provided hereinbelow. AGREEMENTS: NOW, THEREFORE, in consideration of the premises and the mutual agreements, representations and warranties herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties hereto do hereby agree as follows: SECTION 1. DEFINITIONS DELETED. The Credit Agreement is hereby amended by deleting in its entirety the definition of "Term Loan Principal Installment" contained in Section 1.1 of the Credit Agreement. SECTION 2. DEFINITIONS AMENDED. (a) The definition of "Applicable Margin" contained in Section 1.1 of the Credit Agreement is hereby amended by deleting the following parenthetical phrase each place that it appears therein: (assuming the Available Amount is fully drawn for determinations related to the Independent Engineering Report and on the basis of the actual aggregate amount of outstanding Revolving Loans and Letter of Credit Liabilities for all other determinations) and substituting therefor the following in each such place: (assuming the Available Amount is fully drawn and that the aggregate unpaid principal balance of the Term Notes is equal to the Term Loan Maximum Amount for determinations related to the Independent Engineering Report and on the basis of the actual aggregate amount of outstanding Revolving Loans, Term Loans and Letter of Credit Liabilities for all other determinations) (b) The definition of "Interest Period" contained in Section 1.1 of the Credit Agreement is hereby amended by deleting the phrase "due date of the final Term Loan Principal Installment" where it appears in clause (z) thereof and substituting therefor the phrase "December 31, 1996." (c) The following definitions contained in Section 1.1 of the Credit Agreement are hereby each amended in their entireties to be and read, respectively, as follows: "TERM LOAN" shall mean a Loan (including a Term Loan Readvance) made pursuant to SECTION 2.1(a). "TERM LOAN COMMITMENT" shall mean, as to any Bank, the obligation, if any, of such Bank to make Term Loans to the Company in an initial aggregate principal amount up to but not exceeding the amount, if any, set forth opposite such Bank's name on the signature pages hereof under the caption "Term Loan Commitment," and such Bank's obligation, if any, to make Term Loan Readvances to the Company in an aggregate principal amount at any one time outstanding equal to such Bank's Commitment Percentage times the Term Loan Unused Readvance Commitment then in effect. SECTION 3. DEFINITIONS ADDED. Section 1.1 of the Credit Agreement is hereby amended by adding thereto the following definitions: "APPLICABLE PERIODS" shall have the meaning ascribed to it in the definition of Term Loan Maximum Amount. "MARGINAL REDUCTION AMOUNT" shall mean, on any date and for any Applicable Period, the difference of the Term Loan Maximum Amount for such Applicable Period from the Term Loan Maximum Amount for the immediately preceding Applicable Period, all as of such date. -2- "TERM LOAN MATURITY DATE" shall mean the earlier of (a) the date the Agent declares the principal amount then outstanding of and the accrued interest on the Loans and all fees and all other amounts payable hereunder and under the Notes to be due and payable pursuant to SECTION 10.1 or (b) December 31, 1996. "TERM LOAN MAXIMUM AMOUNT" shall mean, on any day occurring during the periods (the "APPLICABLE PERIODS") indicated below, an amount equal to the amount indicated below (as each of said amounts may be decreased from time to time pursuant to the terms of SECTION 2.2): TERM LOAN MARGINAL PERIOD MAXIMUM AMOUNT REDUCTION AMOUNT March 31, 1993 through June 29, 1993 $ 103,000,000 $ -0- June 30, 1993 through December 30, 1993 $ 99,417,000 $ 3,583,000 December 31, 1993 through June 29, 1994 $ 90,460,000 $ 8,957,000 June 30, 1994 through December 30, 1994 $ 70,308,000 $ 20,152,000 December 31, 1994 through June 29, 1995 $ 50,156,000 $ 20,152,000 June 30, 1995 through December 30, 1995 $ 39,408,000 $ 10,748,000 December 31, 1995 through June 29, 1996 $ 25,078,000 $ 14,330,000 June 30, 1996 through December 30, 1996 $ 12,539,000 $ 12,539,000 On the Term Loan Termination Date $ -0- $ 12,539,000 -3- "TERM LOAN OPTIONAL PREPAYMENT" shall mean any prepayment of the Term Notes made pursuant to SECTION 3.2(a). "TERM LOAN READVANCE" shall mean a readvance made pursuant to SECTION 2.1(a)(ii) of any Term Loan Optional Prepayment. "TERM LOAN TERMINATION DATE" shall mean the earliest of (a) the date the Term Loan Commitment is permanently terminated in its entirety by the Company pursuant to SECTION 2.2(b), (b) the Term Loan Maturity Date or (c) the date the Agent declares the Term Loan Commitment terminated pursuant to SECTION 10.1. "TERM LOAN UNUSED READVANCE COMMITMENT" shall mean, on any date, the difference of (a) the Term Loan Maximum Amount MINUS (b) the aggregate outstanding principal balance of the Term Notes, all determined on such date. SECTION 4. TERM LOANS; TERM LOAN READVANCES. Section 2.1(a) of the Credit Agreement is hereby amended in its entirety to be and read as follows: (a) TERM LOANS; TERM LOAN READVANCES. (i) On the date hereof, each Bank shall make to the Company (and the Company shall borrow from each Bank) a Loan under this SECTION 2.1(a) in an amount equal to such Bank's Term Loan Commitment. The aggregate of the Term Loan Commitments on the date hereof is $145,000,000. (ii) From time to time after the date hereof and prior to the Term Loan Termination Date, each Bank shall readvance Term Loan Optional Prepayments under this SECTION 2.1(a) to the Company in an aggregate principal amount at any one time outstanding up to but not exceeding such Bank's Commitment Percentage of the Term Loan Unused Readvance Commitment. Each Term Loan Readvance shall be in an amount that is an integral multiple of $1,000,000. Subject to the conditions herein, any such Term Loan Optional Prepayment made prior to the Term Loan Termination Date may be reborrowed pursuant to the terms of this Agreement; PROVIDED, that any and all Term Loans shall be due and payable in full at the Term Loan Maturity Date. (iii) Notwithstanding anything herein to the contrary, (1) no Bank shall be required to make Term Loan Readvances at any one time outstanding in excess of such Bank's Commitment Percentage of the Term Loan Unused -4- Readvance Commitment, and (2) if a Bank fails to make a Term Loan Readvance as and when required hereunder and the Company subsequently makes a repayment on the Term Notes, such repayment shall be split among the non-defaulting Banks ratably in accordance with their respective Commitment Percentages until each Bank has its Commitment Percentage of all of the outstanding Term Loans, and the balance of such repayment shall be divided among all of the Banks in accordance with their respective Commitment Percentages. (iv) Notwithstanding anything in this Agreement to the contrary, no Bank shall be required to make a Term Loan Readvance (but each Bank shall permit Rollovers) during the existence of an Engineering Shortfa1l. SECTION 5. REVOLVING LOANS. Section 2.1(b) of the Credit Agreement is hereby amended by adding at the end thereof a new Subsection (vi), which shall be and read as follows: (vi) Notwithstanding anything contained in the foregoing provisions of this Section which may appear to be to the contrary and except in the case of a Rollover or a Revolving Loan to satisfy a Reimbursement Obligation pursuant to SECTION 4.1, the Company may not obtain Revolving Loans at any time unless the Term Loan Unused Readvance Commitment is equal to zero at such time. SECTION 6. TERMINATIONS, REDUCTIONS AND CHANGES OF COMMITMENTS AND TERM LOAN MAXIMUM AMOUNTS. Section 2.2 of the Credit Agreement is hereby amended in its entirety to be and read as follows: 2.2. TERMINATIONS, REDUCTIONS AND CHANGES OF COMMITMENTS AND TERM LOAN MAXIMUM AMOUNTS. (a) MANDATORY. (1) On the Term Loan Termination Date, all Term Loan Commitments shall be terminated in their entirety. On the Termination Date, all Revolving Commitments shall be terminated in their entirety. (2) In the event that the Company is required to make a prepayment of the Term Loans pursuant to SECTION 3.2(b)(2)(A) or 3.2(b)(2)(B), the Term Loan Maximum Amount for the then current Applicable Period shall be reduced by the amount of such prepayment and an amount equal to such prepayment shall be applied to reduce the Term Loan Maximum Amounts for each subsequent Applicable Period PRO RATA based on the respective Marginal Reduction Amounts as in effect immediately prior to such reduction; PROVIDED, that if such pro rata -5- application does not result in compliance by the Company with all Required Ratios, then such amount shall be reallocated among such subsequent Applicable Periods as the Company shall direct to the extent necessary to bring the Company into compliance with the Required Ratios. (3) Except only in the case of any noncompliance resulting solely from an Engineering Shortfall, and then only during the cure period permitted by SECTION 10.l(e), the Company shall from time to time on demand by the Agent reduce the Term Loan Maximum Amount for any particular Applicable Period by the amount necessary so that the Company is in compliance with the Required Ratios at each delivery of a Coverage Report and prepay the Term Loans so that the aggregate unpaid principal balance of the Term Notes does not exceed the Term Loan Maximum Amount then in effect, as so reduced pursuant to SECTION 2.2(a)(5). (4) In addition, in the event the Company is required to make a prepayment of the Term Loans pursuant to SECTION 3.2(b)(3), an amount equal to such prepayment shall be applied to reduce the Term Loan Maximum Amount for any particular Applicable Period in the manner necessary to bring the Company into compliance with the Required Ratios. (5) Except where reductions in the Term Loan Maximum Amounts for the Applicable Periods are made PRO RATA pursuant to SECTION 2.2(a)(2), if the Term Loan Maximum Amount is reduced for a particular Applicable Period pursuant to SECTION 2.2(a)(2), 2.2(a)(3) or 2.2(a)(4) to bring the Company in compliance with the Required Ratios, the Term Loan Maximum Amount for the then current Applicable Period and each subsequent Applicable Period to occur prior to such particular Applicable Period shall be reduced by a like amount. (b) THE COMPANY'S OPTION. The Company shall have the right to terminate or reduce the unused portion of the Revolving Commitments at any time or from time to time; PROVIDED that (1) the Company shall give notice of each such termination or reduction to the Agent as provided in SECTION 5.5; (2) each such partial reduction shall be in an integral multiple of $5,000,000, and (3) the Company may not cause the Available Amount to be less than the aggregate principal amount of the Revolving Loans then outstanding plus the Letter of Credit Liabilities then outstanding. No voluntary reduction in the Available Amount prior to any scheduled reduction in the Available Amount shall affect the Available Amount after such scheduled reduction date unless such -6- voluntarily reduced Available Amount is less than the amount scheduled to be the Available Amount after such scheduled reduction date, in which case the Available Amount after such scheduled reduction date shall be no greater than such voluntarily reduced Available Amount. The Company shall have the right to (y) terminate or reduce the Term Loan Unused Readvance Commitment at any time or from time to time or (z) reduce the Term Loan Maximum Amount for any particular Applicable Period at any time or from time to time; PROVIDED that (1) the Company shall give notice of each such termination or reduction to the Agent as provided in SECTION 5.5, and (2) the Company may not cause the Term Loan Maximum Amount to be less than the aggregate principal amount of the Term Loans then outstanding. If the Company voluntarily reduces the Term Loan Maximum Amount for a particular Applicable Period, the Term Loan Maximum Amount for the then current Applicable Period and each subsegment Applicable Period to occur prior to such particular Applicable Period shall be reduced by a like amount. (c) NO REINSTATEMENT. Any reduction in or termination of the Commitments pursuant to SECTION 2.2 or any reduction in any Term Loan Maximum Amount may not be reinstated without the written approval of the Agent and the Banks. SECTION 7. TERM LOAN COMMITMENT FEES. Section 2.3 of the Credit Agreement is hereby amended by adding at the end thereof the following: In consideration of the Term Loan Commitments, the Company shall pay to the Agent for the account of each Bank in accordance with its Commitment Percentage commitment fees (the "TERM LOAN COMMITMENT FEES") for the period from the date of the execution of this Agreement to and including the Term Loan Termination Date at a rate per annum equal to 1/2% of the Term Loan Unused Readvance Commitment. The Term Loan Commitment Fees shall be computed for each day and shall be based on the Term Loan Unused Readvance Commitment for such day. Accrued Term Loan Commitment Fees shall be payable in arrears, within three days after demand therefor on or about the Quarterly Dates, and within three days after demand therefor on or about the Term Loan Termination Date. All past due Term Loan Commitment Fees shall bear interest at the Post-Default Rate. Upon receipt, the Agent shall disburse the Term Loan Commitment Fees to the Banks in accordance with their Commitment Percentages. -7- SECTION 8. RELEASE OF MORTGAGES. Section 2.8 of the Credit Agreement is hereby amended by deleting the following parenthetical phrase where it appears therein: (each calculated assuming that the Available Amount then in effect is fully drawn) and substituting therefor the following in each such place: (each calculated assuming the Available Amount is fully drawn and that the aggregate unpaid principal balance of the Term Notes is equal to the Term Loan Maximum Amount) SECTION 9. USE OF PROCEEDS. Section 2.9 of the Credit Agreement is hereby amended by adding at the end thereof the following: The proceeds of the Term Loan Readvances shall be used by the Company for working capital and for general corporate purposes. SECTION 10. OPTIONAL PREPAYMENTS. The last sentence of Section 3.2(a) of the Credit Agreement is hereby amended in its entirety to be and read as follows: Optional prepayments of Term Loans shall be applied to the aggregate unpaid principal balance then owing on the Term Notes. SECTION 11. MANDATORY PREPAYMENTS. (a) Section 3.2(b)(1) of the Credit Agreement is hereby amended by adding at the end thereof the following: In addition, the Company shall from time to time on demand by the Agent prepay the Term Loans in such amounts as shall be necessary so that at all times the aggregate outstanding principal amount of the Term Loans (including Term Loan Readvances) shall not be in excess of the Term Loan Maximum Amount. (b) Sections 3.2(b)(2)(A) and (B) of the Credit Agreement are hereby amended by deleting the term "to the Term Loan Principal Installments as herein provided" where it appears in those sections and substituting therefor in each such place the phrase "to the unpaid principal balance of the Term Notes." (c) Section 3.2(b)(2)(C) of the Credit Agreement is hereby amended in its entirety to be and read as follows: (C) All amounts prepaid pursuant to Section 3.2(b)(2)(A) or (B) shall be applied to the unpaid -8- principal balance of the Term Notes. The Company may in its discretion defer making the prepayment required by Section 3.2(b)(2) (A) or (B) until the earlier of (i) the time the aggregate amount of such prepayments so deferred equals or exceeds $1,000,000 or (ii) one month after the date the first such prepayment would otherwise be due. (d) The second to the last sentence of Section 3.2(b)(3) of the Agreement is hereby amended in its entirety to be and read as follows: If the Company upon any such redetermination shall not be in compliance with all Required Ratios, the Company shall prepay on the Business Day following the date of such sale an amount of the proceeds of all sales of any Adobe Properties not previously prepaid for application to the unpaid principal balance on the Term Notes. SECTION 12. SECTIONS DELETED. (a) The Credit Agreement is hereby amended by deleting therefrom Section 3.2(b)(4) of the Credit Agreement in its entirety and renumbering Section 3.2(b)(5) of the Credit Agreement to now be Section 3.2(b)(4). (b) The Credit Agreement is hereby amended by deleting therefrom Section 4.1(b) in its entirety and renumbering Section 4.1(c) of the credit Agreement to now be Section 4.1(b). SECTION 13. ASSIGNMENTS. (a) Clause (2) of Section 12.6(c) of the Credit Agreement is hereby amended in its entirety to be and read as follows: (2) the aggregate amount of the Commitments and/or Loans of the assigning Bank subject to each such assignment (determined as of the date the Assignment Agreement with respect to such assignment is delivered to the Agent) shall in no event be less $10,000,000 (or $1,000,00O in the case of an assignment between Banks) (except for certain exceptions approved by the Company and the Agent or where all of a Bank's Commitments and Loans are being assigned) and shall be in an amount that is an integral multiple of $1,000,000 (except for certain exceptions approved by the Company and the Agent or where all of a Bank's Commitments and loans are being assigned); (b) The Agent, the Co-Agents, the Banks and the Company hereby ratify and consent to the sale of all of WestPac Banking Corporation's Commitment Percentage of all of the Commitments, Loans and Letter of Credit Liabilities to one or more of the Banks, notwithstanding the fact that such sales were not in multiples of $1,000,000 as required under the Credit Agreement or $75,000, as required under the Letter of Credit Agreement. -9- SECTION 14. EXHIBITS. Exhibit C to the Credit Agreement is hereby deleted, and there is hereby substituted therefor a new Exhibit C, which shall be identical to EXHIBIT A, hereto attached and hereby made a part hereof by reference for all purposes. SECTION 15. CONDITIONS. This Amendment shall not become effective until the Company shall have delivered to the Agent each of the following: (a) a certificate of the Secretary or any Assistant Secretary of the Company, in form and substance satisfactory to the Agent, the Co-Agents and the Banks, dated as of the date hereof, as to (i) the resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance of this Amendment and of all instruments contemplated herein to be executed and delivered by the Company in connection herewith (a copy of such resolutions to be attached to such certificate), such certificate to state that said copy is a true and correct copy of such resolutions and that such resolutions were duly adopted and have not been amended, superseded, revoked or modified in any respect and remain in full force and effect as of the date of such certificate; (ii) the election, incumbency and signatures of the officer or officers of the Company executing and delivering this Amendment and each other instrument or document furnished in connection herewith; (iii) the Certificate of Incorporation of the Company in effect as of the date hereof (a copy of such Certificate of Incorporation to be attached to the certificate or such certificate to contain a representation that there have been no changes to such Certificate of Incorporation since May 20, 1992, when a true, correct and complete copy of such Certificate of Incorporation was delivered to the Agent); (iv) the Bylaws of the Company in effect as of the date hereof (a copy of such By-Laws to be attached to the certificate or such certificate to contain a representation that there have been no changes to such Bylaws since May 20, 1992, when true, correct and complete copies of such Bylaws were delivered to the Agent); and (v) such other documents and information as the Agent, the Co-Agents or any of the Banks shall reasonably request; and (b) the opinion of Andrews & Kurth, L.L.P., counsel to the Company, substantially in the form of ANNEX I attached hereto. SECTION 16. REPRESENTATIONS TRUE; NO DEFAULT. The Company represents and warrants that the representations and warranties contained in Section 8 of the Credit Agreement and in the other Credit Documents are true and correct in all material respects on and as of the date hereof as though made on and as of such date. The Company hereby certifies that no event has occurred and is continuing which constitutes an Event of Default under the Credit -10- Agreement or any of the other Credit Documents or which upon the giving of notice or the lapse of time or both would constitute such an Event of Default. SECTION 17. RATIFICATION; LIENS NOT AFFECTED. Except as expressly amended hereby, the Credit Agreement and the other Credit Documents shall remain in full force and effect and the Security Documents secure and shall continue to secure the Term Loans (including the Term Loan Readvances, as that term is defined in the Credit Agreement as amended hereby) and the Term Notes. The Credit Agreement, as hereby amended, and all rights and powers created thereby or thereunder and under the other Credit Documents are in all respects ratified and confirmed and remain in full force and effect. The Company hereby warrants and represents to the Agent, the Co-Agents and the Banks that the execution and delivery of this Amendment does not and will not result in any termination, invalidity, unperfection, diminution, lapse or loss of any rights or remedies under any of the Liens of the Security Documents or of any of the Security Documents themselves. SECTION 18. DEFINITIONS AND REFERENCES. Terms used herein which are defined in the Credit Agreement or in the other Credit Documents shall have the meanings therein ascribed to them. The term "Agreement" as used in the Credit Agreement and the term "Credit Agreement," as used in the other Credit Documents or any other instrument, document or writing furnished to any or all of the Agent, the Co-Agents and the Banks by the Company shall mean the Credit Agreement as hereby amended. SECTION 19. EXPENSES; ADDITIONAL INFORMATION. The Company shall pay to the Agent all reasonable expenses incurred in connection with the execution of this Amendment. The Company shall furnish to the Agent, the Co-Agents and the Banks all such other documents, consents and information relating to the Company or otherwise, as the Agent, the Co-Agents and the Banks may reasonably require. SECTION 20. MISCELLANEOUS. This Amendment (a) shall be binding upon and inure to the benefit of the Company and the Agent, the Co-Agents and the Banks and their respective successors, assigns, receivers and trustees (provided, however, that the Company shall not assign its rights hereunder without the prior written consent of all of the Banks); (b) may be modified or amended only in accordance with Section 12.5 of the Credit Agreement; (c) shall be governed by and construed in accordance with the laws of the State of Texas and the United States of America; (d) may be executed in several counterparts, and by the parties hereto on separate counterparts, and each counterpart, when so executed and delivered, shall constitute an original agreement, and all such separate counterparts shall constitute but one and the same agreement; and (e) together with the other Credit Documents, embodies the entire agreement and understanding between the parties -11- with respect to the subject matter hereof and of the other Credit Documents and supersedes all prior agreements, consents and understandings relating to such subject matter. The headings herein shall be accorded no significance in interpreting this Amendment. Wherever the term "including" or a similar term is used in this Amendment, it shall be read as if it were "including by way of example only and without in any way limiting the generality of the clause or concept referred to." Any exhibits, appendices and annexes described in this Amendment as being attached to it are hereby incorporated into it. SECTION 21. DTPA WAIVER. The Company waives all rights, remedies, claims, demands and causes of action based upon or related to the Texas Deceptive Trade Practices-Consumer Protection Act as described in Sections 17.41 et seq. of the Texas Business & Commerce Code, as the same pertains or may pertain to this Amendment or any of the transactions contemplated therein, to the maximum extent that such rights, etc. may lawfully and effectively be waived. In furtherance of this waiver, the Company hereby represents and warrants to the Agent, the Co-Agents and the Banks that (a) the Company is represented by legal counsel in connection with the negotiation, execution and delivery of this Amendment, (b) the Company has a choice other than to enter into this waiver in that it can obtain the Loans from another institution and (c) the Company does not consider itself to be in a significantly disparate bargaining position relative to Agent, the Co-Agents or any of the Banks with respect to this Amendment. SECTION 22. RELEASE. The Company hereby releases, discharges and acquits forever the Agent, the Co-Agents, the Banks and their respective officers, directors, trustees, agents, employees and counsel (in each case, past, present or future) from any and all Claims existing as of the date hereof (or the date of actual execution hereof by the applicable person or entity, if later). As used herein, the term "CLAIM" shall mean any and all liabilities, claims, defenses, demands, actions, causes of action, judgments, deficiencies, interest, liens, costs and expenses (including court costs, penalties, attorneys' fees and disbursements, and amounts paid in settlement) of any kind and character whatsoever, including claims for usury, breach of contract, breach of commitment, negligent misrepresentation or failure to act in good faith, in each case whether now known or unknown, suspected or unsuspected, asserted or unasserted or primary or contingent, and whether arising out of written documents, unwritten undertakings, course of conduct, tort, violations of laws or regulations or otherwise; in each case to the extent, but only to the extent, such matters relate to this Amendment, the Credit Agreement and the other Credit Documents and the transactions evidenced and contemplated hereby and thereby. To the maximum extent permitted by applicable law, the Company hereby waives all rights, remedies, claims and defenses based upon or related to SECTIONS 51.003, 51.004 and 51.005 of the Texas Property -12- Code, to the extent the same pertain or may pertain to any enforcement of this Amendment. NOTICE PURSUANT TO TEX. BUS. AND COMM. CODE SECTION 26.02 THIS AMENDMENT AND ALL OTHER CREDIT DOCUMENTS EXECUTED BY ANY OF THE PARTIES BEFORE OR SUBSTANTIALLY CONTEMPORANEOUSLY WITH THE EXECUTION HEREOF, TOGETHER CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. -13- IN WITNESS WHEREOF, the parties have caused this Amendment to be signed by their respective duly authorized officers, effective as of the date which first appears hereinabove. SANTA FE ENERGY RESOURCES, INC., a Delaware corporation By: M. J. ROSINSKI M. J. Rosinski, Vice President and Chief Financial Officer TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually, as Administrative Agent and as Co-Agent By: JAMES R. MCBRIDE James R. McBride Senior Vice President NATIONSBANK OF TEXAS, N.A., individually and as Co-Agent By: H. GENE SHIGLS Name: H. Gene Shigls Title: Vice President THE BANK OF NEW YORK By: M. B. DAVIS Name: M. B. Davis Title: Vice President THE BANK OF NOVA SCOTIA By: F. C. H. ASHBY Name: F. C. H. Ashby Title: Senior Assistant Agent BANK OF MONTREAL By: MARK GREEN Name: Mark Green Title: Director CIBC, INC. By: BRIAN R. SWINFORD Name: Brian R. Swinford Title: Vice President BANQUE PARIBAS HOUSTON AGENCY By: BARTON D. SCHOUEST Name: Barton D. Schouest Title: Group Vice President By: MEI WAN TONG Name: Mei Wan Tong Title: Group Vice President THE FIRST NATIONAL BANK OF BOSTON By: GEORGE W. PASSELA Name: George W. Passela Title: Managing Director ABN AMRO Bank, N.V.--HOUSTON AGENCY By: RONALD A. MAHLE Name: Ronald A. Mahle Title: Vice President By: CHERYL I. LIPSHUTZ Name: Cheryl I. Lipshutz Title: Vice President The undersigned legal counsel for Borrower signs this Agreement not as a party to it but solely for the purpose of complying with the provisions of Section 17.42(a)(3) of the Texas Deceptive Trade Practices-Consumer Protection Act described in Section 21 hereof. DAVID L. HICKS David L. Hicks Illinois Bar No. 06186418 EX-10.D 4 LETTER OF CREDIT AGREEMENT 5/19/93 EXHIBIT 10(d) LETTER OF CREDIT AGREEMENT dated as of May 19, 1993 among SANTA FE ENERGY RESOURCES, INC.; the Banks signatory hereto, and TEXAS COMMERCE BANK NATIONAL ASSOCIATION as Co-Agent and Administrative Agent and NATIONSBANK OF TEXAS, N.A. as Co-Agent TABLE OF CONTENTS Section 1. Definitions and Accounting Matters,. . . . . . . 1 1.1 Certain Defined Terms . . . . . . . . . . . . . . 1 1.2 Accounting Terms and Determinations . . . . . . . 26 Section 2. Commitments. . . . . . . . . . . . . . . . . . . 27 2.1 Letters of Credit . . . . . . . . . . . . . . . . 27 2.3 Reductions and Changes of Commitments . . . . . . 33 2.4 Several Obligations . . . . . . . . . . . . . . . 33 2.5 Fees . . . . . . . . . . . . . . . . . . . . . . 33 Section 3. Prepayments . . . . . . . . . . . . . . . . . . 34 3.1 (a)Commitment Amount . . . . . . . . . . . . . . 34 Section 4. Payments of Principal and Interest . . . . . . . 34 4.1 Repayment of Reimbursement Obligations . . . . . 34 4.2 Interest . . . . . . . . . . . . . . . . . . . . 34 Section 5. Payments: Pro Rata Treatment: Computations, Etc. 35 5.1 Payments . . . . . . . . . . . . . . . . . . . . 35 5.2 Pro Rata Treatment. . . . . . . . . . . . . . . . 35 5.3 Computations. . . . . . . . . . . . . . . . . . . 35 5.4 Minimum And Maximum Amounts . . . . . . . . . . . 36 5.5 Certain Actions, Notices. Etc . . . . . . . . . . 36 5.6 Non-Receipt of Funds by the Agent . . . . . . . . 36 5.7 Sharing of Payments, Etc. . . . . . . . . . . . . 37 5.8 Other Expenses . . . . . . . . . . . . . . . . . 38 Section 6. Yield Protection and Illegality. . . . . . . . . 38 6.1 Additional Costs in Respect of Letters of Credit. . . . . . . . . . . . . . . . . . . . . . 38 6.2 Capital Adequacy. . . . . . . . . . . . . . . . . 39 Section 7. Conditions Precedent . . . . . . . . . . . . . . 40 7.1 Closing Conditions . . . . . . . . . . . . . . . 40 7.2 All Letters of Credit . . . . . . . . . . . . . . 41 Section 8. Representations and Warranties . . . . . . . . . 42 8.1 Corporate Existence . . . . . . . . . . . . . . . 42 8.2 Information . . . . . . . . . . . . . . . . . . . 42 8.3 Litigation; Compliance. . . . . . . . . . . . . . 43 8.4 No Breach . . . . . . . . . . . . . . . . . . . . 43 8.5 Corporate Action . . . . . . . . . . . . . . . . 43 8.6 Approvals . . . . . . . . . . . . . . . . . . . . 43 8.7 Regulations G, U and X . . . . . . . . . . . . . 44 8.8 ERISA . . . . . . . . . . . . . . . . . . . . . . 44 8.9 Taxes . . . . . . . . . . . . . . . . . . . . . . 44 8.10 Subsidiaries . . . . . . . . . . . . . . . . . . 44 8.11 Investment Company Act . . . . . . . . . . . . . 44 8.12 Public Utility Holding Company Act . . . . . . . 45 -i- 8.13 Environmental Matters . . . . . . . . . . . . . . 45 Section 9. Covenants. . . . . . . . . . . . . . . . . . . . 45 9.1 Financial Statements and Certificates . . . . . . 45 9.2 Inspection of Property. . . . . . . . . . . . . . 49 9.3 Compliance with Environmental Laws . . . . . . . 49 9.4 Payment of Taxes . . . . . . . . . . . . . . . . 50 9.5 Maintenance of Insurance . . . . . . . . . . . . 50 9.6 Restricted Payments And Restricted Investments. . 50 9.7 Lien, Debt and Other Restrictions . . . . . . . . 52 9.8 Issuance of Stock by Restricted Subsidiaries. . . 62 Section 10. Defaults . . . . . . . . . . . . . . . . . . . 63 10.1 Events of Default. . . . . . . . . . . . . . . . 63 Section 11. The Agent . . . . . . . . . . . . . . . . . . . 67 11.1 Appointment, Powers and Immunities . . . . . . . 67 11.2 Reliance By Agent. . . . . . . . . . . . . . . . 67 11.3 Defaults . . . . . . . . . . . . . . . . . . . . 68 11.4 Rights as a Bank . . . . . . . . . . . . . . . . 68 11.5 Indemnification. . . . . . . . . . . . . . . . . 68 11.6 Non-Reliance on the Agent and Other Banks. . . . 69 11.7 Failure to Act . . . . . . . . . . . . . . . . . 69 11.8 Resignation or Removal of the Agent. . . . . . . 69 Section 12. Miscellaneous . . . . . . . . . . . . . . . . . 70 12.1 Waiver . . . . . . . . . . . . . . . . . . . . . 70 12.2 Notices. . . . . . . . . . . . . . . . . . . . . 70 12.3 Expenses, Etc. . . . . . . . . . . . . . . . . . 70 12.4 Indemnification. . . . . . . . . . . . . . . . . 71 12.5 Amendments, Etc. . . . . . . . . . . . . . . . . 72 12.6 Successors and Assigns . . . . . . . . . . . . . 72 12.7 Survival; Term; Reinstatement. . . . . . . . . . 75 12.8 Limitation of Interest . . . . . . . . . . . . . 76 12.9 Captions . . . . . . . . . . . . . . . . . . . . 77 12.10 Counterparts . . . . . . . . . . . . . . . . . . 77 12.11 Governing Law. . . . . . . . . . . . . . . . . . 77 12.12 Severability . . . . . . . . . . . . . . . . . . 77 12.13 Chapter 15 Not Applicable. . . . . . . . . . . . 77 -ii- LETTER OF CREDIT AGREEMENT This Letter of Credit Agreement (as amended, modified, supplemented and restated from time to time, this "AGREEMENT") dated as of May 19, 1993, is by and among SANTA FE ENERGY RESOURCES, INC. (the "COMPANY"), a Delaware corporation; each of the lenders which is or which may from time to time become a Signatory hereto (individually a "BANK" and collectively the "BANKS"); TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), a national banking association, as Administrative Agent for the Banks (in such capacity, together with its successors in such capacity, the "Agent"); and TCB and NATIONSBANK OF TEXAS, N.A., a national banking association, as Co-Agents (in such capacity, the "CO- AGENTS"). The parties agree as follows: Section 1. DEFINITIONS AND ACCOUNTING MATTERS. 1.1 CERTAIN DEFINED TERMS. As used herein, the following terms shall have the following meanings: "ADDITIONAL COSTS" shall have the meaning ascribed to such term in SECTION 6.1. "ADOBE" shall mean Adobe Resources Corporation, a Delaware corporation. "ADOBE PROPERTIES" shall mean oil, gas and mineral properties and other assets owned by Adobe at the time of the Merger. "AFFILIATE" shall mean, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person; and with respect to an individual, "AFFILIATE" shall also mean any individual related to such individual by blood or marriage. As used in this definition, "CONTROLS", "CONTROLLED BY" and "UNDER COMMON CONTROL WITH" shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "ALTERNATE ANNUAL DEBT SERVICE COVERAGE RATIO" shall mean, as of any date of determination and for the Calculation Period in which such date occurs and for each Calculation Period thereafter to and including the Calculation Period including the Termination Date, the lowest of the ratios obtained by dividing (a) Combined CFADS (calculated on the basis of the Most Recent Engineering Report) for such Calculation Period by (b) Alternate Debt Service of the Company and the Restricted Subsidiaries for such Calculation Period PLUS, at all times and to the extent the Special Subsidiary Qualifying conditions are met, the Special Subsidiary Percentage times the Alternate Debt Service of the Special Subsidiary for such Calculation Period (in each case calculated on the basis set forth in the most recent Coverage Report delivered to the Agent pursuant to SECTION 9.1 and taking into account any incurrence or prepayment of Covered Debt by the Company or any of the Restricted Subsidiaries or the Special Subsidiary since the date of such Coverage Report). "ALTERNATE BASE RATE" shall mean, for any date, a rate per annum (rounded upwards, if necessary, to the next higher 1/100%) equal to the greater of (a) the Prime Rate in effect on such day or (b) the Fed Funds Rate in effect for such day plus 1/2%. Any change in the Alternate Base Rate due to a change in the Fed Funds Rate shall be effective on the effective date of such change in the Fed Funds Rate. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Fed Funds Rate for any reason, including the inability or failure of the Agent to obtain sufficient bids or publications in accordance with the terms hereof, the Alternate Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. "ALTERNATE DEBT SERVICE" shall mean, for any Calculation Period and with respect to any Person, the total of principal payments in respect of Covered Debt of such Person and the total of interest payments (using, with respect to interest to accrue, the interest rates set forth in the most recent Approved Assumptions for such Covered Debt not bearing interest at a fixed rate; if some or all of such Covered Debt bears interest at one or more fixed rates as of the date of determination of Alternate Debt Service but such Covered Debt will not bear interest at such fixed rate or rates to the end of such Calculation Period, then interest payments in respect of Alternate Debt Service with respect to such Covered Debt shall be calculated on the basis of such fixed rate or rates for such time as the same shall be applicable to such Covered Debt, and then at the interest rates set forth in the most recent Approved Assumptions) in respect of Covered Debt of such Person, in each case paid and scheduled to be paid during such Calculation Period; PROVIDED that the principal amount of any Covered Debt of such Person which by its terms matures on a date within such Calculation Period but which may reasonably be expected to be reborrowed in a Rollover on such date shall not be deemed, for purposes of this definition, to be scheduled to be paid on such date; and PROVIDED FURTHER that for purposes of this definition it shall be assumed that (a) surety bonds for environmental purposes and letters of credit issued for the account of a Person will be fully drawn upon their respective expiry dates, (b) the reimbursement obligations of a Person with respect to all surety bonds for environmental purposes and letters of credit issued for -2- its account shall be satisfied immediately and considered as a "principal payment" for purposes of this definition. "ANNUAL DEBT SERVICE COVERAGE RATIO" shall mean, as of any date of determination and for the Calculation Period in which such date occurs and for each Calculation Period thereafter to and including the Calculation Period including the Termination Date, the lowest of the ratios obtained by dividing (a) Combined CFADS (calculated on the basis of the Most Recent Engineering Report) for such Calculation Period by (b) Debt Service of the Company and the Restricted Subsidiaries for such Calculation Period PLUS, at all times and to the extent the Special Subsidiary Qualifying Conditions are met, the Special Subsidiary Percentage times the Debt Service of the Special Subsidiary for such Calculation Period (in each case calculated on the basis set forth in the most recent Coverage Report delivered to the Agent pursuant to SECTION 9.1 and taking into account any incurrence or prepayment of Covered Debt by the Company and the Restricted Subsidiaries and the Special Subsidiary since the date of such Coverage Report). "APPLICABLE ENVIRONMENTAL LAWS" shall mean all applicable environmental or pollution-control Legal Requirements governing, without limitation, wastewater effluent, solid and hazardous waste or substances and air emissions, together with any other applicable requirements for conducting, on a timely basis, reporting, record keeping, periodic tests and monitoring for contamination of ground water, surface water, air and land and for biological toxicity of the aforesaid, including, without limitation, the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended by the Superfund Amendments and Reauthorization Act), the Toxic Substances Control Act, the Safe Drinking Water Act, the Hazardous Materials Transportation Act, the Clean Air Act, the Clean Water Act, the Oil Pollution Act, the Texas Water Code, the Texas Health and Safety Code, the Texas Natural Resources Code, the Louisiana Environmental Quality Act, the Louisiana Air Control Law, the Louisiana Water Control Law, the Louisiana Solid Waste Management and Resource Recovery Law, the Louisiana Hazardous Waste Control Law, the Louisiana Oil Spill Prevention and Response Act, the Louisiana Resource Recovery and Development Act, the Louisiana Waste Reduction Law, the Louisiana Hazardous Material Information Development, Preparedness, and Response Act, the Louisiana State and Local Coastal Resources Management Act of 1978, the Louisiana Coastal Wetlands Conservation and Restoration Act, the Louisiana Abandoned Oilfield Waste Site Law, and the Louisiana Mineral Code, in each case as amended from time to time. "APPLICABLE LENDING OFFICE" shall mean, for each Bank the office of such Bank (or of an Affiliate of such Bank) designated below its name on the signature pages hereof or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from time to time specify to the Agent and the Company as the -3- office by which its Letters of Credit are to be issued and maintained. "APPLICABLE MARGIN" for Letters of Credit shall mean 1.00% per annum. "APPLICATION" shall mean each application and agreement for a Letter of Credit, or similar instrument or agreement, substantially in the form of EXHIBIT A, now or hereafter executed by the Company in connection with any Letter of Credit at any time issued or to be issued hereunder; to the extent that an Application is inconsistent with this Agreement, this Agreement shall control. "APPROVED ASSUMPTIONS" shall mean (a) until the first delivery of an Independent Engineering Report hereunder, those assumptions set forth on SCHEDULE III and (b) thereafter, for each Independent Engineering Report hereunder, assumptions as to product prices, interest rates, escalation rates, discount rates and future levels of production curtailment, which assumptions shall be determined by the Co-Agents after consultation with the Company and set forth (x) in the case of each Required Reserve Report, in a notice sent to the Banks on or before January 21 of each such year and in a notice from the Agent to the Company on or prior to the next succeeding February 1 or (y) in the case of each Optional Reserve Report, in a notice sent to the Banks within 30 days of the delivery of the notice to the Co-Agents required by SECTION 2.2(d) and in a notice from the Agent to the Company on or prior to a date 10 days after the date of such notice to the Banks; PROVIDED that such assumptions are, within ten days after any such notice is sent to the Banks, approved (as indicated in one or more notices received by the Agent within such ten-day period) by Banks with aggregate Commitment Percentages of 75% or more. If the assumptions proposed by the Co-Agents are not approved, the Banks will work to determine and approve alternative assumptions in good faith in accordance with their customary oil and gas lending practices. Approved Assumptions set forth in a notice to the Company shall govern until new Approved Assumptions are set forth in a notice to the Company as provided herein, and shall be used, without limitation, in preparation of the next Independent Engineering Report required to be delivered pursuant to SECTION 9.1 or permitted to be delivered pursuant to SECTION 2.2(d). "ASSIGNMENT AGREEMENT" shall mean an Assumption and Assignment Agreement substantially in the form of EXHIBIT B. "ATTRIBUTABLE DEBT" shall mean the lesser of (a) the fair market value of the assets sold pursuant to any Sale and Leaseback Transaction (which determination shall be based upon a written opinion (the cost of which shall be borne exclusively by the Company) as to valuation from an independent valuation expert selected by the Company) or (b) the present value (discounted -4- according to GAAP at the interest rate implicit in the lease) of the obligations of the lessee for rental payments during the term of any lease constituting a part of such Sale and Leaseback Transaction. "AVAILABLE AMOUNT" shall mean subject always to the limitation set forth in SECTION 2.2(e), the Preliminary Available Amount from time to time in effect, as the same may be adjusted upward and downward in accordance with SECTION 2.2 or permanently decreased in accordance with SECTION 2.3. "BOARD" shall mean the Board of Governors of the Federal Reserve System of the United States. "BUSINESS DAY" shall mean any day other than a day on which commercial banks are authorized or required to close in Houston, Texas or New York, New York. "CALCULATION PERIOD" shall mean the year ending on the last day of a February; with respect to calculations for a Calculation Period determined with reference to amounts for two calendar years, it shall be assumed (unless such amounts are due on scheduled dates, in which case such calculations shall be made with reference to such dates) that each such calendar year amount is spread evenly over the appropriate calendar year, with the result that each such amount for a Calculation Period beginning on a March 1 shall be composed of (a) 10/12 of the calendar year amount for the calendar year containing such March 1 plus (b) 2/12 of the calendar year amount for the next calendar year. "CAPITAL GAINS" shall mean gains (net of expenses and income taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (I.E., assets other than current assets). "CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which, under GAAP, is or will be required to be capitalized on the books of the Company or any Restricted Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with such principles. "CFADS" shall mean, for any Calculation Period and with respect to any Person, (a) Net Oil and Gas Income (PROVIDED that in calculating Combined CFADS, no more than 25% of Net Oil and Gas Income may be attributable to proved nonproducing and proved undeveloped Recognized Proved Reserves) LESS (b) Projected G & A Expense LESS (c) Projected Income Tax Expense PLUS (d) anticipated net income (or minus anticipated net losses) from the Price Protection Agreements (determined on the basis of the Approved Assumptions), (e) PLUS any anticipated gain, and MINUS any anticipated loss, on Interest Rate Protection Agreements (determined on the basis of the Approved Assumptions), PLUS (f) -5- other income from operations as reasonably projected under the Approved Assumptions, not to exceed 5% of Combined CFADS, and PLUS (g) proceeds of sales of assets permitted by the Credit Documents, to the extent (but only to the extent) such proceeds are applied as prepayments pursuant to SECTION 3.1, in each case for such Calculation Period and such Person. "CHANGE OF CONTROL" shall mean any change so that any Person (or any Persons acting together which would constitute a Group), together with any Affiliates or Related Persons thereof, shall at any time either (1) Beneficially Own more than 50% of the aggregate Voting power of all classes of Voting Stock of the Company or (2) succeed in having sufficient of its or their nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the Board of Directors of the Company after such election who is an Affiliate or Related Person of such Person or Group, shall constitute a majority of the Board of Directors of the Company. As used herein (a) "BENEFICIALLY OWN" shall mean beneficially own as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or any successor provision thereto; (b) "GROUP" shall mean a "group" for purposes of Section 13(d) of the Exchange Act; (c) "RELATED PERSON" of any Person shall mean any other Person owning (1) 5% or more of the outstanding common stock of such Person or (2) 5% or more of the Voting Stock of such Person, 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. "CHAPTER ONE" shall mean Chapter One of the Texas Credit Code, as in effect on the date the document using such term was executed. "CODE" shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, together with all publicly available written regulations, rulings and interpretations thereof or thereunder by the Internal Revenue Service. "COLLATERAL" shall mean all property at any time subject to the Security Documents under the Revolving and Term Credit Agreement. "COMBINED CFADS" shall mean, for any Calculation Period, the sum of (a) CFADS of the Company and the Restricted Subsidiaries PLUS, at all times and to the extent all Special Subsidiary Qualifying Conditions are met, but not at any other time, (b) the product of (1) the Special Subsidiary Percentage times (2) the CFADS of the Special Subsidiary, in each case for such Calculation Period. -6- "COMBINED COVERED DEBT" shall mean, as of any date, the sum of (a) the Covered Debt of the Company and the Restricted Subsidiaries, PLUS, at all times and to the extent all Special Subsidiary Qualifying Conditions are met, (b) the product of (1) the Special Subsidiary Percentage times (2) the Covered Debt of the Special Subsidiary, all as of such date. "COMBINED GROUP" shall mean the Company, the Restricted Subsidiaries and the Special Subsidiary. "COMBINED RESERVE VALUE" shall mean, as of any date, the sum of (a) the Reserve Value of the Company and the Restricted Subsidiaries PLUS, at all times and to the extent all Special Subsidiary Qualifying Conditions are met, (b) the product of (1) the Special Subsidiary Percentage times (2) the Reserve Value of the Special Subsidiary, all as of such date. In calculating the Combined Reserve Value, no more than 25% of such Combined Reserve Value may be attributable to the combination of proved nonproducing and proved undeveloped Recognized Proved Reserves. "COMMITMENT" shall mean, as to any Bank, the obligation, if any, of such Bank to incur Letter of Credit Liabilities in an aggregate principal amount at any one time outstanding up to but not exceeding such Bank's Commitment Percentage times the difference between (a) the Available Amount then in effect, and (b) the aggregate unpaid balance of the Revolving Notes, which amount shall be up to but not exceeding the amount set forth opposite such Bank's name on the signature pages hereof under the caption "COMMITMENT" (as the same may be reduced from time to time pursuant to SECTION 2.3). "COMMITMENT FEE" shall mean the fee payable by the Company to the Agent for the account of the Banks in their Commitment Percentages as provided in SECTION 2.5. "COMMITMENT PERCENTAGE" shall mean, as to any Bank, the percentage equivalent of a fraction, the numerator of which is the amount of such Bank's Commitment as shown opposite such Bank's name on the signature pages hereof under the caption "Commitment", subject to reduction and the identification of new Banks pursuant to SECTION 12.6, and the denominator of which is the aggregate amount of the Commitments of all the Banks. "CONSOLIDATED NET EARNINGS" shall mean consolidated gross revenues (including Capital Gains) of the Company and the Restricted Subsidiaries less all operating and non-operating expenses of the Company and the Restricted Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues any dividends, distributions or other payments received by the Company and the Restricted Subsidiaries -7- from the Special Subsidiary or gains resulting from write-up of assets, any equity of the Company or any Restricted Subsidiary in the unremitted earnings of any Person which is not a Restricted Subsidiary, any earnings of any Person acquired by the Company or any Restricted Subsidiary through purchase, merger or consolidation or otherwise for any year prior to the year of acquisition, or any deferred credit representing the excess of equity in any Restricted Subsidiary at the date of acquisition over the cost of the investment in such Restricted Subsidiary; all determined in accordance with GAAP. "CONSOLIDATED NET EARNINGS AVAILABLE FOR FIXED CHARGES" shall mean for any period the sum of (a) Consolidated Net Earnings for such period (PROVIDED that the maximum amount of Capital Gains included therein shall be $3,000,000 through December 31, 1990 and such maximum amount shall increase by $150,000 on the first day of each year thereafter); without duplication, (b) cash distributions received during such period by the Company and the Restricted Subsidiaries on their Investment in the Special Subsidiary to the extent not reinvested in the Special Subsidiary; to the extent deducted from gross revenues in determining Consolidated Net Earnings, (c) all provisions for any federal, state or other income taxes made by the Company and the Restricted Subsidiaries during such period; (d) Fixed Charges of the Company and the Restricted Subsidiaries during such period; (e) depreciation, depletion and amortization charges of the Company and the Restricted Subsidiaries for such period, and (f) all other non-cash charges of the Company and the Restricted Subsidiaries for such period, all determined in accordance with GAAP. "CONSOLIDATED NET TANGIBLE ASSETS" shall mean the aggregate net tangible assets of the Company and the Restricted Subsidiaries, determined as follows: (a) The MLP Investment (at such times as SFEP is treated as the Special Subsidiary) plus the aggregate gross book value of all the assets of the Company and the Restricted Subsidiaries, both real and personal, shall be computed, EXCLUDING, however, the following items: (i) all franchises, licenses, permits, patents, patent applications, copyrights, trademarks, trade names, goodwill, experimental or organizational expense, unamortized debt discount and expense, and all other assets which under GAAP are deemed intangible; (ii) any reacquired shares or reacquired Debt of the Company or the Restricted Subsidiaries; (iii) any write-up of assets made after December 31, 1989; -8- (iv) 50% of the value of all assets of the Company and the Restricted Subsidiaries acquired after April 1, 1990 which are located outside the United States of America and Canada and not freely returnable to the United States of America or Canada, including any notes or accounts receivable from any debtor having any substantial part of its business, operations or properties located outside the United States of America and Canada, except notes or accounts receivable from such a debtor which arose in the ordinary course of business of the Company or any Restricted Subsidiary, as the case may be, to which such notes or accounts receivable are payable and which otherwise constitute current assets, but only to the extent of an amount of dollars readily realizable from such notes or accounts receivable by liquidation either directly or through a currency freely convertible into dollars; and (v) all Restricted Investments of the Company and the Restricted Subsidiaries. (b) From the gross book value of the tangible assets of the Company and the Restricted Subsidiaries, determined as provided in the preceding CLAUSE (a), there shall be deducted the following items: (i) all reserves for depreciation, depletion, obsolescence and amortization of the assets of the Company and the Restricted Subsidiaries (other than assets excluded as provided in the preceding CLAUSE (a), all proper reserves (other than reserves for deferred taxes and general contingency reserves and other reserves representing mere appropriations of surplus) which in accordance with GAAP should be set aside in connection with the business conducted by them; (ii) all Current Debt of the Company and the Restricted Subsidiaries; and (iii) all other liabilities of the Company and the Restricted Subsidiaries, including the reduction in equity attributable to minority interests but excluding deferred taxes, Funded Debt of the Company and the Restricted Subsidiaries, capital shares, surplus and general contingency reserves and other reserves representing mere appropriations of surplus. (c) In the determination of Consolidated Net Tangible Assets, no amount shall be included therein on account of any excess cost of acquisition of shares of any Restricted Subsidiary over the net book value of the assets of such Restricted Subsidiary attributable to such shares at the date of such acquisition or on account of any excess of the net book value of the assets of any Restricted Subsidiary attributable to any shares of such Restricted Subsidiary at the date of acquisition of such shares over the cost of acquisition of such shares. -9- "COVERAGE REPORT" shall mean a report substantially in the form of SCHEDULE IV setting forth the calculation of the Life-of-Reserves Coverage Ratio, the Annual Debt Service Coverage Ratio and the Alternate Annual Debt Service Coverage Ratio. "COVERED DEBT" shall mean, without duplication, (a) all obligations for borrowed money; (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business; (d) all Capitalized Lease Obligations; (e) all obligations in respect of production payments, proceeds production payments and similar financing arrangements; (f) all reimbursement obligations and all letter of credit advances with respect to letters of credit issued for the account of such Person, including the Letter of Credit Liabilities; (g) surety bonds for environmental purposes; (h) all obligations of the types described in CLAUSES (a) through (g) of this definition (collectively, "ORDINARY DEBT") of another Person secured by a Lien on any property of the Person as to which Covered Debt is being determined, regardless of whether such Ordinary Debt is assumed by such Person, and (i) all Ordinary Debt of another Person guaranteed (but excluding the obligations of the Company and the Restricted Subsidiaries arising solely by virtue of their serving as general partner of SFEP) by such Person; PROVIDED that Covered Debt shall not include Ordinary Debt or any obligation of the types described in CLAUSES (h) or (i) of this definition which is (1) non-recourse (either directly or contingently) as to all members of the Combined Group and (2) secured only by assets which are not Recognized Proved Reserves. "CREDIT DOCUMENTS" shall mean this Agreement, all Applications, all Letters of Credit, the Notice of Entire Agreement, the Revolving and Term Credit Agreement and all instruments, certificates and agreements now or hereafter executed or delivered to the Agent or any Bank pursuant to any of the foregoing. "CURRENT DEBT" shall mean any obligation for borrowed money (and any notes payable and drafts accepted representing obligations for borrowed money) payable on demand or within a period of one year from the date of the creation thereof and any Guaranty with respect to Current Debt (of the kind otherwise described in this definition) of another Person; PROVIDED that any obligation shall be treated as Funded Debt, regardless of this term, if such obligation is renewable pursuant to the terms thereof or of a revolving credit or similar agreement effective for more than one year after the date of the creation of such obligation, or may be payable out of the proceeds of a similar obligation pursuant to the terms of such obligation or of any such agreement. -10- "DEBT" shall mean Funded Debt and/or Current Debt, as the case may be. "DEBT SERVICE" shall mean, for any Calculation Period, the total of principal payments in respect of Covered Debt of the Person as to which Debt Service is to be determined and the total of interest payments (using, with respect to interest to accrue, the interest rates set forth in the most recent Approved Assumptions for such Covered Debt not bearing interest at a fixed rate; if some or all of such Covered Debt bears interest at one or more fixed rates as of the date of determination of Debt Service but such Covered Debt will not bear interest at such fixed rate or rates to the end of such Calculation Period, then interest payments in respect of Debt Service with respect to such Covered Debt shall be calculated on the basis of such fixed rate or rates for such time as the same shall be applicable to such Covered Debt, and then at the interest rates set forth in the most recent Approved Assumptions) in respect of Covered Debt of such Person, in each case paid and scheduled to be paid during such Calculation Period; PROVIDED that the principal amount of any Covered Debt of such Person which by its terms matures on a date within such Calculation Period but which may reasonably be expected to be reborrowed in a Rollover on such date shall not be deemed, for purposes of this definition, to be scheduled to be paid on such date; and PROVIDED FURTHER that for purposes of this definition it shall be assumed (to the extent relevant with respect to such Person) that (a) Letters of Credit will be fully drawn upon their respective expiry dates; (b) other letters of credit issued for the account of such Person will not be drawn; (c) surety bonds for environmental purposes issued on behalf of such Person will not be drawn, and (d) the reimbursement obligations of the Company under the Letter of Credit Agreement shall be satisfied immediately and considered as a "principal payment" for purposes of this definition. "DEFAULT" shall mean an Event of Default or an event which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "EBITD" shall mean for any period Consolidated Net Earnings for such period, plus the aggregate amounts deducted in determining Consolidated Net Earnings in respect of (a) all provisions for any federal, state or other income taxes made by the Company and the Restricted Subsidiaries during such period; (b) Fixed Charges of the Company and the Restricted Subsidiaries during such period; (c) depreciation, depletion and amortization charges of the Company and the Restricted Subsidiaries for such period, and (d) all other non-cash charges of the Company and the Restricted Subsidiaries for such period, all determined in accordance with GAAP. "ELIGIBLE ASSIGNEE" means (a) a commercial bank having total assets in excess of $1,000,000,000 or (b) a finance company, insurance company, other financial institution or fund, acceptable -11- to the Agent and the Company, which is regularly engaged in making, purchasing or investing in loans and having total assets in excess of $1,000,000,000. "ENGINEERING SHORTFALL" shall mean, during the pendency of a Default described in SECTION 10.1(e), the amount, if any, by which the sum of (a) the aggregate outstanding principal balance of the Revolving Notes PLUS (b) the aggregate Letter of Credit Liabilities shall exceed the Available Amount at the time of any delivery of (and as determined in accordance with) an Independent Engineering Report and its related Coverage Report. "ENVIRONMENTAL CLAIM" means any claim, demand, action, cause of action, suit, judgment, governmental or private investigation relating to remediation or compliance with Applicable Environmental Laws, proceeding or lien, whether threatened, sought, brought or imposed, that seeks to recover costs, damages, punitive damages, expenses, fines, criminal liability, judgments, response costs, investigative and monitoring costs, abatement costs, attorney's fees, expert's fees or consultant's fees, or seeks to impose liability regarding the Company or any of its Subsidiaries, or any of their sites or properties for violations of Applicable Environmental Laws or for pollution, contamination, preservation, protection, remediation or clean up of the air, surface water, ground water, soil or wetlands, or otherwise in relation to the use, storage, generation, release, handling or disposal of materials and substances that is regulated by or subject to Applicable Environmental Laws. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations and interpretations by the Internal Revenue Service or the Department of Labor thereunder. "ERISA AFFILIATE" shall mean any trade or business (whether or not incorporated) which on and after December 5, 1990 is under common control with the Company within the meaning of the regulations under Section 414 of the Code. "EVENT OF DEFAULT" shall have the meaning assigned to such term in SECTION 10. "EXISTING LETTERS OF CREDIT" shall mean the letters of credit listed on SCHEDULE IX. "FDIC" means the Federal Deposit Insurance Corporation or any entity succeeding to any or all of its functions. "FED 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 -12- federal funds brokers, as published on the succeeding 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 the day of such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. "FIXED CHARGES" shall mean (without duplication) for any period the sum of interest expense in respect of all Debt of the Person for which the determination is made (calculated, in the case of Debt which bears interest at a floating rate, at the rate in effect at the time of calculation), including imputed interest expense in respect of Capitalized Lease Obligations. "FUNDED DEBT" shall mean and include, without duplication, any obligation (including the current maturities thereof) (a) payable more than one year from the date of creation thereof (1) for borrowed money; (2) evidenced by bonds, debentures, notes or reimbursement obligations in respect of letters of credit or other similar instruments (other than letters of credit and surety bonds relating to trade obligations incurred in the ordinary course of business and includable, under GAAP, in current liabilities on a balance sheet or in the notes relating thereto); (3) for the payment of the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business; (4) constituting Capitalized Lease Obligations; (5) in respect of production payments, proceeds production payments or similar financing arrangements; (6) which is, under GAAP, shown on a balance sheet (after giving effect, in the case of the balance sheet of the Company or a Restricted Subsidiary, to the eliminating entries, if any, for the Unrestricted Subsidiaries as a group and the Special Subsidiary) as long-term debt (excluding provisions for deferred income taxes, unfunded pension obligations, unfunded liabilities for other post-employment benefits and other reserves or provisions to the extent that such reserves or provisions do not constitute an obligation), or (7) for any item described in any of the foregoing CLAUSES (1) through (6) which is secured by any Lien on property owned by the Company or any Restricted Subsidiary, whether or not the obligations secured thereby shall have been assumed by the Company or such Restricted Subsidiary; or (b) payable more than one year from the date of creation thereof, which under GAAP is shown on the balance sheet as a long-term liability (EXCLUDING provisions for deferred income taxes, unfunded pension obligations, unfunded liabilities for other post-employment benefits and other reserves or provisions to the extent that such reserves or provisions do not constitute an obligation); or (c) constituting a Guaranty with respect to Funded Debt (of the kind otherwise described in CLAUSES (A) and (b) of this -13- definition) of another Person, including any obligation by the Company or a Restricted Subsidiary for Funded Debt of SFEP or any other Person, regardless of the percentage of equity interest owned therein by the Company or a Restricted Subsidiary, by virtue of its capacity as a general partner of SFEP or such other Person. "GAAP" shall mean, as to a particular Person, such accounting practice as, in the opinion of the independent accountants of recognized national standing regularly retained by such Person and acceptable to the Agent, conforms at the time to generally accepted accounting principles, consistently applied. Generally accepted accounting principles means those principles and practices which are (a) recognized as such by the Financial Accounting Standards Board; (b) applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the financial statements of the relevant Person dated December 31, 1991 and for the period then ended, and (c) consistently applied for all periods after the date hereof so as to reflect properly the financial condition and results of operations of such Person. "GOVERNMENTAL AUTHORITY" shall mean any sovereign governmental authority, the United States of America, any State of the United States and any political subdivision of any of the foregoing, and any agency, instrumentality, department, commission, board, bureau, central bank, authority, court or other tribunal, in each case whether executive, legislative, judicial, regulatory or administrative, having jurisdiction over the Company, any of the Company's Subsidiaries, any of their respective property, the Agent, the Co-Agent or any Bank. "GUARANTY" shall mean and include, without limitation, any obligation of the Company or a Restricted Subsidiary (a) constituting a guaranty, endorsement (other than an endorsement of a negotiable instrument for collection in the ordinary course of business) or other contingent liability (whether direct or indirect) in connection with the obligations, stock or dividends of any Person (other than the Company or a Restricted Subsidiary); (b) payable under any contract (other than the Tax Indemnification Agreement and any other tax indemnification or sharing agreement) providing for the making of loans, advances or capital contributions to any Person (other than the Company or a Restricted Subsidiary), or for the purchase of any property from any Person, in each case in order primarily to enable such Person to maintain working capital, net worth or any other balance sheet condition or to pay debts, dividends or expenses; (c) payable under any contract for the purchase of materials, supplies or other property or services (other than any natural gas -14- transportation contract or any electrical, water supply, steam purchase or other utility supply contract) if such contract (or any related document) requires that payment for such materials, supplies or other property or services shall be made regardless of whether or not delivery of such materials, supplies or other property or services is ever made or tendered; PROVIDED that the exceptions contained in this CLAUSE (c) shall not apply to any contract for the purchase or transportation of natural gas where payment is required regardless of whether the delivery of such natural gas is ever made or tendered, unless at the time such contract is entered into the aggregate of payments under such contract and all such existing contracts would not exceed $20,000,000 in any calendar year based on existing rates and automatic escalations in such rates under such contracts; (d) payable under any contract to rent or lease (as lessee) any real or personal property (other than any oil and gas leases) if such contract (or any related document) provides that the obligation to make payments thereunder is absolute and unconditional under conditions not customarily found in commercial leases then in general use or requires that the lessee purchase or otherwise acquire securities or obligations of the lessor; or (e) payable under any other contract which, in economic effect, is substantially equivalent to a guarantee for any payment or performance of an obligation of a Person other than the Company or a Restricted Subsidiary. "HIGHEST LAWFUL RATE" shall mean, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal or Texas law permits the higher interest rate, stated as a rate per annum. On each day, if any, that Chapter One establishes the Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" (as defined in Chapter One) for that day. "HYDROCARBONS" shall mean crude oil, condensate, natural gas, natural gas liquids and associated substances. "INDEPENDENT ENGINEERING REPORT" shall mean a report prepared by an Independent Petroleum Engineer which sets forth the gross and net volume of Hydrocarbons projected to be produced from the Petroleum Properties, by calendar years, for the remaining economic life of the Petroleum Properties. The Petroleum Properties of the Special Subsidiary shall be segregated from the Petroleum Properties of the other members of the Combined Group, and the Adobe Properties shall be separately identified. Each Independent Engineering Report shall also contain a list of Petroleum Properties of the members of the Combined Group and indicate the Net Oil and Gas Income for each calendar year attributable thereto, all in reasonable detail. Each such report shall identify which of the Petroleum Properties covered thereby are "proved developed -15- producing," "proved developed non-producing" and "proved undeveloped" (as defined in the "Definitions for Oil and Gas Reserves" as published by the Society of Petroleum Engineers). Each such report shall be prepared in accordance with established criteria generally accepted in the oil and gas industry and standards customarily used by independent petroleum engineers well regarded in the industry in making reserve determinations or appraisals, and shall be based on Approved Assumptions and such other assumptions, estimates and projections as are fully disclosed in such Independent Engineering Report. "INDEPENDENT PETROLEUM ENGINEER" shall mean Ryder Scott Company Petroleum Engineers or another independent petroleum engineer retained by the Company acceptable to the Required Banks. "INTEREST RATE PROTECTION AGREEMENTS" shall mean an interest rate swap agreement, interest rate cap agreement or other similar arrangement which satisfies all of the following requirements: (a) a member of the Combined Group is a party to such agreement; (b) the Company has given evidence (satisfactory to the Agent) of such agreement to the Agent; (c) the terms and parties to such agreement, taking into account all similar agreements to which members of the Combined Group are parties, are satisfactory to the Required Banks; and (d) such agreement is in full force and effect and has not been unwound. "INVESTMENT" shall mean any purchase or other acquisition of the stock, obligations or securities of, or any interest in, or any capital contribution, loan or advance to, or any Guaranty in respect of the obligations of (but excluding the obligations of the Company and the Restricted Subsidiaries arising solely by virtue of their serving as general partner of SFEP) any Person, but in any event shall include as an investment in any Person the amount of all Debt owed by such Person, and all accounts receivable from such Person which are not current assets or did not arise from sales to such Person in the ordinary course of business. As used herein, any capital contribution of assets by the Company or any Restricted Subsidiary shall be valued at the book value of such assets as reflected in the consolidated financial statements of the Company and the Restricted Subsidiaries as at the end of the quarter ending immediately prior to each contribution. "LEGAL REQUIREMENT" shall mean any applicable law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation by any Governmental Authority of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, in each case as now or hereafter in effect. "LETTER OF CREDIT" shall have the meaning ascribed to each term in SECTION 2.1(a). -16- "LETTER OF CREDIT FEE" shall mean with respect to any Letter of Credit issued pursuant hereto a fee equal to 1% per annum of the face amount of each such Letter of Credit issued; PROVIDED, that each Letter of Credit Fee shall in no event be less than $600. "LETTER OF CREDIT LIABILITIES" shall mean, at any time and in respect of Letters of Credit under this Agreement, the sum of (i) the aggregate amounts then or thereafter available for drawings under such outstanding Letters of Credit PLUS (without duplication) (ii) the aggregate unpaid amount of all Reimbursement Obligations at the time due and payable in respect of previous drawings made under such Letters of Credit. "LIEN" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code of any jurisdiction or any other type of preferential arrangement. "LIFE-OF-RESERVES COVERAGE RATIO" shall mean, as of any date of determination, the ratio of (a) the Combined Reserve Value to (b) the Combined Covered Debt, in each case as of such date. "LOANS" shall mean the loans and Rollover of loans provided for by the Revolving and Term Credit Agreement. "MATERIAL ADVERSE CHANGE" shall mean an occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding), which after taking into account actual insurance coverage and effective indemnification with respect to such occurrence, (a) has a material adverse effect on the financial condition, business, operations or properties of the Company and its Subsidiaries taken as a whole and (b) impairs in any material respect either (1) the ability of the Company to perform any of its obligations under the Credit Documents or (2) the ability of the Banks to enforce any of such obligations or any of their remedies under the Credit Documents. "MERGER" shall mean the merger of Adobe into the Company described in the Registration Statement. "MLP INVESTMENT" shall mean, at any time, the lesser of (a) the book value of the Investment of the Company and the Restricted Subsidiaries in the Special Subsidiary, as determined from the most recent consolidated balance sheet of the Company or (b) the product of (1) the average closing price of the publicly traded limited partner interests of the Special Subsidiary for the 30 days immediately preceding the date upon which such determination is made multiplied by (2) the total limited partner interests in the -17- Special Subsidiary owned by the Company and the Restricted Subsidiaries on the date such determination was made. "MOST RECENT ENGINEERING REPORT" shall mean, as of any date of determination, (a) until the first Independent Engineering Report is delivered pursuant to SECTION 9.1 or SECTION 2.2(d), the Independent Engineering Report of Ryder Scott Company Petroleum Engineers dated February 10, 1992; (b) thereafter, the most recent Independent Engineering Report delivered pursuant to either Section 9.1 or SECTION 2.2(d) on or prior to such date of determination. "NET OIL AND GAS INCOME" shall mean, for any calendar year (or portion thereof) and for any Person, (a) an amount (or, with respect to any portion of a calendar year, PRO RATA in accordance with the number of days in such portion of such calendar year) of projected gross revenues (based on the prices set forth in the Approved Assumptions) from the sale of Hydrocarbons produced from the Recognized Proved Reserves to be received, subject to no entitlement of any other Person but including appropriate adjustments for over- and under-produced statue, by such Person during such calendar year as set forth in the Most Recent Engineering Report LESS (b) an amount (or, with respect to any portion of a calendar year, PRO RATA in accordance with the number of days in such portion of such calendar year) of projected royalties and windfall profit, production, ad valorem, severance and all other similar taxes and operating and capital expenditures required to be incurred during each calendar year in order to generate such gross revenues (but not including general and administrative expenses or principal and interest payable with respect to Debt), as set forth in the Most Recent Engineering Report. "NOTICE OF ENTIRE AGREEMENT" shall mean that certain Notice of Entire Agreement, DTPA Waiver and Release of Claims of even date herewith between the Company and the Agent. "OBLIGATIONS" shall mean, as at any date of determination thereof, the sum of (a) the aggregate principal amount of Loans outstanding under the Revolving and Term Credit Agreement PLUS (b) the aggregate amount of the Reimbursement Obligations. "OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the Company by its President, one of its Vice Presidents or its Treasurer. "OPTIONAL RESERVE REPORT" shall mean the Independent Engineering Report permitted by Section 2.2(d). "ORGANIZATIONAL DOCUMENT" shall mean, with respect to a corporation, the certificate of incorporation, articles of incorporation and bylaws of such corporation; with respect to a -18- partnership or a limited partnership, the partnership agreement establishing such partnership; with respect to a joint venture, the joint venture agreement establishing such joint venture; and with respect to a trust, the instrument establishing such trust; in each case including any and all modifications thereof as of the date of the Credit Document referring to such Organizational Document. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERSON" shall mean and include an individual or legal entity in the form of a partnership, a joint venture, a corporation, a trust, an unincorporated organization or a government or any department or agency thereof. The term "Person" shall not, however, mean and include an arrangement that is not a separate legal entity such as the legal arrangement between two or more parties owning interests in the same property or unit. "PETROLEUM PROPERTIES" shall mean, at any time and with respect to any Person, all Recognized Proved Reserves which are (a) owned by such Person at such time free and clear of any Lien (other than Liens permitted by SECTION 9.7) and (b) covered in the Most Recent Engineering Report. "PLAN" shall mean an employee benefit plan which is covered by ERISA which is either (a) maintained by the Company or any ERISA Affiliate for employees of the Company or such ERISA Affiliate or (b) a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which (i) the Company, (ii) any ERISA Affiliate or (iii) any trade or business which was previously under common control with the Company within the meaning of Section 414 of the Code (but only with respect to such period of common control with the Company), has an obligation to make contributions (or with respect to (iii) above, had an obligation to make contributions during any portion of time that the limitations period under Section 4301(f) of ERISA with respect to such obligation has not expired). "POST-DEFAULT RATE" shall mean, in respect of any principal of any Reimbursement Obligation or any other amount payable by the Company under any Credit Document which is not paid when due (whether at stated maturity, by acceleration, or otherwise), a rate per annum on each day during the period commencing on the due date until such amount is paid in full equal to the lesser of (a) the Alternate Base Rate as in effect for that day PLUS the Applicable Margin in effect for that day plus 2% or (b) the Highest Lawful Rate for that day. "PRELIMINARY AVAILABLE AMOUNT" shall mean (a) $20,000,000 on and after the date hereof and prior to February 28, 1994, (b) $5,000,000 on and after February 28, 1994 and prior to December 31, 1994, and (c) notwithstanding the foregoing, $0 on and after the -19- Termination Date (as defined in the Revolving and Term Credit Agreement). "PRICE PROTECTION AGREEMENT" shall mean a product price protection agreement which satisfies all of the following requirements: (a) a member of the Combined Group is a party to such agreement; (b) the Company has given evidence (satisfactory to the Agent) of such agreement to the Agent; (c) the terms and parties to such agreement, taking into account all similar agreements to which members of the Combined Group are parties, are satisfactory to the Required Banks; and (d) such agreement is in full force and effect and has not been unwound. The agreements described on SCHEDULE III hereto are Price Protection Agreements for purposes of this Agreement as of the date hereof. "PRIME RATE" shall mean, as of a particular date, the prime rate most recently announced by TCB and thereafter entered in the minutes of TCB's Loan and Discount Committee, automatically fluctuating upward and downward with and at the time specified in each such announcement without special notice to the Company or any other Person, which prime rate may not necessarily represent the lowest or best rate actually charged to a customer. "PRINCIPAL OFFICE" shall mean the principal banking building of the Agent, presently located at 712 Main Street, Houston, Harris County, Texas 77002. "PROJECTED G & A EXPENSE" shall mean, for any Person, the appropriate projected annual levels of general and administrative expense and district overhead to be used in the calculation of CFADS of such Person, as mutually agreed among the Agent, the Co-Agent and the Company as soon as practical after the delivery of the Most Recent Engineering Report. "PROJECTED INCOME TAX EXPENSE" shall mean, for any Person, the appropriate projected annual levels of income tax expense to be used in the calculation of CFADS of such Person, as determined by the Agent after consultation with the Company and based on such Person's current tax position projected into the future and the Most Recent Engineering Report; the Agent will give written notice of the Projected Income Tax Expense of each such Person to the Company as soon as practical after the delivery of the Most Recent Engineering Report. "PROVED RESERVES" shall mean reserves of Hydrocarbons in place which are estimated to be recoverable with reasonable certainty and are consistent with the "Definitions for Oil and Gas Reserves" as published by the Society of Petroleum Engineers. "QUARTERLY DATES" shall mean the last day of each March, June, September and December; PROVIDED that if any such date is not a -20- Business Day, the relevant Quarterly Date shall be the next succeeding Business Day. "RECOGNIZED PROVED RESERVES" shall mean Proved Reserves if (a) the designation of such Proved Reserves was by an Independent Petroleum Engineer; (b) a member of the Combined Group owns such Proved Reserves; (c) the estimates with respect to such Proved Reserves were made on the basis of the most recent Approved Assumptions, and (d) either (1) such Proved Reserves are located onshore or offshore the United States or Canada or (2) the Required Banks have consented to the inclusion of such Proved Reserves in the Recognized Proved Reserves. "REGISTRATION STATEMENT" shall mean the Registration Statement on Form S-4 filed by the Company with the Securities and Exchange Commission and declared effective by the Commission on February 27, 1992, true and correct copies of which have been delivered to the Banks. "REGULATION D" shall mean Regulation D of the Board as the same may be amended or supplemented from time to time and any successor or other regulation relating to reserve requirements. "REGULATORY CHANGE" shall mean, with respect to any Bank, any change on or after the date of this Agreement in any Legal Requirement (including Regulation D) or the adoption or making on or after such date of any official interpretation, directive or request applying to a class of banks including such Bank under any Legal Requirement (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "REIMBURSEMENT OBLIGATIONS" shall mean, at any date, the obligations of the Company then outstanding in respect of Letters of Credit under this Agreement to reimburse the Banks for the amount paid by such Banks in respect of any drawing under such Letters of Credit or otherwise owing under this Agreement. "REQUIRED BANKS" shall mean Banks having equal to or greater than 66-2/3% of the Commitments. "REQUIRED RATIOS" shall mean (a) an Annual Debt Service Coverage Ratio of at least 1.15 to 1; (b) an Alternate Annual Debt Service Coverage Ratio of at least 1.0 to 1, and (c) a Life-of-Reserves Coverage Ratio of at least 1.75 to 1. "REQUIRED RESERVE REPORT" shall mean each Independent Engineering Report required to be provided pursuant to SECTION 9.1(a). "RESERVE VALUE" shall mean, as of any date and with respect to a Person, the net present value (discounted at the discount rate -21- set forth in the most recent Approved Assumptions) of projected Net Oil and Gas Income (calculated on the basis of the Most Recent Engineering Report) attributable to the Petroleum Properties of such Person for the period commencing on such date and ending at the end of the economic life of such Petroleum Properties. "RESTRICTED INVESTMENT" shall mean any Investment other than: (a) Investments in the Company or a Restricted Subsidiary or in an entity which immediately after or concurrently with such Investment will be a Restricted Subsidiary; (b) Investments in the Special Subsidiary; (c) readily marketable direct full faith and credit obligations of the United States of America or any agency thereof or obligations unconditionally guaranteed by the full faith and credit of the United States of America or any agency thereof, due within three years of the making of the Investment; (d) readily marketable direct obligations of any State of the United States of America or any political subdivision of any such State having a credit rating of at least "Aa" by Moody's Investors Service, Inc ("MOODY'S") or "AA" by Standard & Poor's Corporation ("S&P"), in each case due within three years from the making of the Investment; (e) domestic and Eurodollar certificates of deposit maturing within one year from the making of the Investment issued by, deposits in, Eurodollar deposits through, and banker's acceptances of, commercial banks incorporated under the laws of the United States or any State thereof, Canada, Japan or any Western European country, and having combined capital, surplus and undivided profits of at least $100,000,000; (f) readily marketable commercial paper of any commercial bank or corporation doing business and incorporated under the laws of the United States of America or any State thereof having a credit rating of at least "A-l" from S&P or at least "P-1" by Moody's, in each case due within 270 days after the making of the Investment; (g) money market investment programs which primarily invest in the types of Investments described in CLAUSES (C) through (F) above and which are classified as a current asset in accordance with GAAP and which are administered by broker-dealers acceptable to the Agent; (h) repurchase agreements with major dealers or banks, pursuant to which physical delivery of the respective securities is required, except for obligations of the U.S. Treasury to be delivered through the Federal Reserve book entry system; -22- (i) travel and other like advances to officers and employees of the Company or a Restricted Subsidiary in the ordinary course of business; or (j) Investments not described in CLAUSES (A) through (I) of this definition in an aggregate principal amount not to exceed $10,000,000. "RESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company designated as a Restricted Subsidiary on SCHEDULE I, together with any Subsidiary hereafter created or acquired and, at the time of creation or acquisition, not designated by the Board of Directors of the Company as an Unrestricted Subsidiary. Any Subsidiary of the Company designated as an Unrestricted Subsidiary for purposes of this Agreement may thereafter be designated a Restricted Subsidiary upon 30 days' prior written notice to the Banks if, at the time of such designation and after giving effect thereto and to the concurrent retirement of any Debt, (a) no Default shall have occurred and be continuing; (b) such Subsidiary is organized under the laws of the United States or any state thereof; (c) 80% or more of each class of voting stock outstanding of such Subsidiary is owned by the Company or a wholly owned Restricted Subsidiary, and (d) such Subsidiary could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(4). "REVOLVING AND TERM CREDIT AGREEMENT" shall mean that certain Revolving and Term Credit Agreement dated as of May 20, 1992, among the Company, the Agent, the Co-Agent, and the Banks. "REVOLVING COMMITMENTS" shall have the meaning ascribed to such term in the Revolving and Term Credit Agreement. "REVOLVING LOAN" shall mean a Loan made pursuant to SECTION 2.1(b) of the Revolving and Term Credit Agreement. "REVOLVING NOTES" shall mean the Revolving Notes of the Company under (and as defined in) the Revolving and Term Credit Agreement. "ROLLOVER" shall mean any reborrowing from a lender of a loan which is prepaid, or by its terms is due, to such lender on the date of such reborrowing if the instrument or agreement governing such Debt specifically contemplates the periodic prepayment or repayment and simultaneous reborrowing of such loan, PROVIDED that such reborrowing results in no net increase in the aggregate outstanding principal balance of such loan; without limiting the generality of the foregoing, "Rollover" shall include specifically the repayment of a Loan at the end of the Interest Period applicable thereto and the simultaneous reborrowing by the Company of a new Loan in the same principal amount. -23- "SALE AND LEASEBACK TRANSACTION" shall mean any arrangement in which the Company or a Restricted Subsidiary shall sell its buildings, equipment or surface real properties, which was acquired or occupied by the Company or a Restricted Subsidiary for more than 180 days, and within 180 days from the date of such sale, enter into a lease as lessee of such buildings, equipment or surface real properties having a term (including terms of renewal or extension at the option of the lessor or the lessee, whether or not such option has been exercised) expiring three or more years after the commencement of the initial term. "SECURED DEBT" shall mean all Funded Debt that is secured by a Lien permitted by SECTION 9.7(a)(13) on any property or assets of the Company or any Restricted Subsidiary. "SERIAL NOTE AGREEMENT" shall mean that certain Note Agreement dated as of March 31, 1990, evidencing the issuance of Series A, B, C, D, E, F and G Notes by the Company in the aggregate amount of $365,000,000, as amended from time to time. "SFEP" shall mean, collectively, Santa Fe Energy Partners, L.P. and Santa Fe Energy Operating Partners, L.P., each a Delaware limited partnership. "SFP GROUP" shall mean Santa Fe Pacific Corporation and its affiliated group of corporations which together constitute an affiliated group of corporations within the meaning of Section 1504(a) of the Code. "SPECIAL DEBT" shall mean the sum of (a) Attributable Debt; (b) Secured Debt, and (c) Funded Debt of the Restricted Subsidiaries. "SPECIAL SUBSIDIARY" shall mean SFEP until (a) the Company designates SFEP a Restricted Subsidiary pursuant to the terms of the Serial Note Agreement or (b) the Company designates or continues to designate SFEP as an Unrestricted Subsidiary subsequent to the acquisition by the Company and the Restricted Subsidiaries of all of the outstanding limited partnership interests in SFEP. "SPECIAL SUBSIDIARY PERCENTAGE" shall mean, as of any date, the percentage ownership interest of the Company and the Restricted Subsidiaries in the Special Subsidiary on such date. "SPECIAL SUBSIDIARY QUALIFYING CONDITIONS" shall mean all of the following conditions: (a) the Company or a Restricted Subsidiary owns more than 50% of the outstanding indicia of equity rights issued by Santa Fe Energy Partners, L.P. and serves as the sole managing general partner of Santa Fe Energy Partners, L.P.; (b) Santa Fe Energy Partners, L.P. owns more than 50% of the outstanding indicia of equity rights issued by Santa Fe Energy -24- Operating Partners, L.P.; (c) the Company or a Restricted Subsidiary serves as the sole managing general partner of Santa Fe Energy Operating Partners, L.P., and (d) both Santa Fe Energy Partners, L.P. and Santa Fe Energy Operating Partners, L.P. are permitted (by applicable law and applicable contract) to make distributions to their partners. "SPIN-OFF" shall mean (a) the distribution, by dividend to the stockholders of Santa Fe Pacific Corporation of the shares of capital stock of the Company owned by Santa Fe Pacific Corporation, which distribution was commenced on December 4, 1990, and (b) the distribution by SFP Properties, Inc. to Santa Fe Pacific Corporation of the capital stock of the Company that was made on December 27, 1989. "SPRINGING LIEN" shall mean the Liens on real property of SFEP that come into existence at any time SFEP is a Restricted Subsidiary pursuant to section 5.08(b) or 5.11 of the Credit Agreement (the "SPRINGING LIEN AGREEMENT") dated as of June 30, 1987 among Santa Fe Energy Operating Partners, L.P., the lenders listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as the Agent, as the same may be amended, PROVIDED that (a) the Debt under the Springing Lien Agreement is not increased, extended or renewed and (b) the Springing Lien Agreement is not amended in any way which would increase the likelihood or potential circumstances under which such Liens may arise; if either clause of the foregoing proviso is violated, then such Liens shall not be "Springing Liens" for purposes of this Agreement. "SUBSIDIARY" shall mean, with respect to any Person (the "PARENT"), any corporation or entity, a majority of the shares of voting stock (or in the case of an entity which is not a corporation, of the equity interests that provide the power to manage or direct the management of such entity) of which is at the time any determination is being made, owned, directly or indirectly, by the parent. "TAX ALLOCATION AGREEMENTS" shall mean those nine certain agreements among the SFP Group, dated as of January 1, 1990 unless otherwise specified in this definition and styled as follows: (a) Agreement for the Allocation of the Combined Utah Franchise Tax Liability; (b) Agreement for the Allocation of the Combined Oregon Excise Tax Liability; (c) Agreement for the Allocation of the Consolidated New Mexico Income Tax Liability; (d) Agreement for the Allocation of the Combined Kansas Income Tax Liability; (e) Agreement for the Allocation of the Combined Illinois Income Tax Liability; (f) Agreement for the Allocation of the Combined California Franchise Tax Liability; (g) Agreement for the Allocation of the Combined Arizona Income Tax Liability; (h) Agreement Concerning Taxes, and (i) Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of -25- the Santa Fe Southern Pacific Corporation Affiliated Group, dated as of January 1, 1987. "TAX INDEMNIFICATION AGREEMENT" shall mean any agreement pursuant to which the Company agrees to indemnify Santa Fe Pacific Corporation or any member of the SFP Group from and against any and all federal, state or local taxes, interest, penalties or additions to tax imposed upon or incurred by the SFP Group or any member thereof as a result of the Spin-Off to the extent specified in any such agreement. "TERMINATION DATE" shall mean the earliest of (a) the date determined by the Agent pursuant to SECTION 10.1, (b) the date the Commitments are terminated by the Company pursuant to SECTION 2.3, or (c) May 18, 1994. "TEXAS CREDIT CODE" shall mean Title 79, Revised Civil Statutes of Texas, 1925, as amended. "UNFUNDED LIABILITIES" shall mean, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan (in accordance with GAAP), but only to the extent that such excess represents a potential liability of the Company or any ERISA Affiliate to the PBGC or a Plan under Title IV of ERISA. "UNRESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company designated as an Unrestricted Subsidiary on SCHEDULE I, together with any Subsidiary of the Company which is hereafter designated by the Board of Directors of the Company as an Unrestricted Subsidiary. Unless designated as a Restricted Subsidiary after the date hereof, SFEP shall be treated hereunder as an Unrestricted Subsidiary except as SFEP is otherwise treated hereunder as a Special Subsidiary. Any Subsidiary may be designated an Unrestricted Subsidiary upon 30 days' prior written notice to the Banks if, at the time of such designation and after giving effect thereto and to the concurrent retirement of any Debt, (a) no Default shall have occurred and be continuing; (b) such Subsidiary does not own, directly or indirectly, any Funded Debt or capital stock of the Company or a Restricted Subsidiary, and (c) the Company could incur at least $l.00 of additional Funded Debt without violation of SECTION 9.7(b)(3). "UNUSED COMMITMENT" shall mean, on any date, the difference of (a) the Available Amount minus (b) the sum of (1) the aggregate outstanding principal balance of the Revolving Notes plus (2) the Letter of Credit Liabilities, all determined on such date. 1.2 ACCOUNTING TERMS AND DETERMINATIONS. Except where specifically otherwise provided: -26- (a) The symbol "$" and the word "dollars" shall mean lawful money of the United States of America. (b) Any accounting term not otherwise defined shall have the meaning ascribed to it under GAAP. (c) Unless otherwise expressly provided, any accounting concept and all financial covenants shall be determined on a consolidated basis, and financial measurements shall be computed without duplication. (d) Wherever the term "including" or any of its correlatives appears in the Credit Documents, it shall be read as if it were written "including (by way of example and without limiting the generality of the subject or concept referred to)". (e) Wherever the word "herein" or "hereof" is used in any Credit Document, it is a reference to that entire Credit Document and not just to the subdivision of it in which the word is used. (f) References in any Credit Document to Section numbers are references to the Sections of such Credit Document. (g) References in any Credit Document to Exhibits, Schedules, Annexes and Appendices are to the Exhibits, Schedules, Annexes and Appendices to such Credit Document, and they shall be deemed incorporated into such Credit Document by reference. (h) Any term defined in the Credit Documents which refers to a particular agreement, instrument or document shall also mean, refer to and include all modifications, amendments, supplements, restatements, renewals, extensions and substitutions of the same; PROVIDED that nothing in this subsection shall be construed to authorize any such modification, amendment, supplement, restatement, renewal, extension or substitution except as may be permitted by other provisions of the Credit Documents. (i) All times of day used in the Credit Documents mean local time in Houston, Texas. (j) Defined terms may be used in the singular or plural, as the context requires. Section 2. COMMITMENTS. 2.1 LETTERS OF CREDIT. (a) COMMITMENTS. Subject to the terms and conditions of this Agreement, the Agent agrees, upon receipt by Agent of an Application therefor, to issue, and each Bank severally agrees to purchase from the Agent a participation in (according to such Bank's Commitment Percentage), letters of credit containing such provisions not inconsistent with the terms of this Agreement as the Company may reasonably request and such provisions -27- not inconsistent with the terms of this Agreement as the Banks may reasonably require (together with the Existing Letters of Credit, the "LETTERS OF CREDIT") for the account of the Company and on behalf of the Company, or for the joint and several account of and on behalf of the Company and one or more of its Subsidiaries, as follows. From time to time on or after the conditions herein set forth to issue such Letters of Credit have been satisfied, and prior to the Termination Date, the Agent shall issue and/or may have outstanding Letters of Credit under this SECTION 2.1 in an aggregate principal amount at any one time outstanding (including all Letter of Credit Liabilities at such time) up to but not exceeding the lesser of (1) $15,000,000 (as adjusted downward from time to time in accordance herewith) or (2) the Available Amount less the aggregate unpaid principal balance of the Revolving Notes; PROVIDED, that the aggregate Letter of Credit Liabilities at any one time outstanding together with the aggregate principal amount of Revolving Loans at any time outstanding shall never exceed the Available Amount and PROVIDED, that anything to the contrary in this Agreement notwithstanding, the Agent shall have no obligation to issue any Letter of Credit on or after the Termination Date. Upon the date of the issuance of a Letter of Credit on or after the date hereof, the Agent shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Agent, a participation, to the extent of such Bank's Commitment Percentage, 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. Each Bank has heretofore purchased participations in each of the Existing Letters of Credit and the related Letter of Credit Liabilities, to the extent of such Bank's Commitment Percentage. Such participations are hereby ratified and confirmed and made subject hereto. All provisions of this Agreement applicable to participations in Letters of Credit hereunder shall be deemed to apply to participations in the Existing Letters of Credit. (b) ADDITIONAL PROVISIONS. The following additional provisions shall apply to each Letter of Credit: (i) The Company shall give the Agent and each other Bank at least five Business Days' irrevocable prior notice (effective upon receipt) specifying the date such Letter of Credit is to be issued and describing the proposed terms of such Letter of Credit and the nature of the transaction proposed to be supported thereby. The Company shall furnish such additional information regarding such transaction as the Agent may reasonably request. Upon receipt of such notice, the Agent shall promptly notify each Bank of such Bank's Commitment Percentage of the amount of the proposed Letter of Credit and not later than two Business Days prior to the requested issuance date for such Letter of Credit shall furnish to each Bank and the Company a proposed form of an Application for -28- such Letter of Credit. The issuance by the Agent of each Letter of Credit shall, in addition to the conditions precedent set forth in SECTION 7, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the Agent and that the Company shall have executed and delivered to the Agent an Application and such other instruments and agreements relating to such Letter of Credit not inconsistent with terms of this Agreement as the Agent shall have reasonably requested and are not inconsistent with the terms of this Agreement. (ii) No Letter of Credit may be issued if after giving effect thereto the sum of (a) the aggregate outstanding principal amount of the Revolving Loans plus (b) the aggregate Letter of Credit Liabilities would exceed the 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 been terminated, the Revolving Commitment of each Bank shall be deemed to be utilized for all purposes hereof in an amount equal to such Bank's Commitment Percentage of the amount then or thereafter available for drawings under such Letter of Credit. (iii) In consideration of the issuance of each Letter of Credit the Company agrees to pay to the Agent, for the ratable benefit of the Banks, the Letter of Credit Fee. The Letter of Credit Fee shall be payable concurrently with the issuance of each such Letter of Credit and shall be separate from and in addition to interest on any Reimbursement Obligation. The Agent will pay to each Bank, promptly after receiving any payment in respect of Letter of Credit Fees, an amount equal to such Bank's Commitment Percentage of such Letter of Credit Fees. (iv) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment thereunder, the Agent shall promptly notify the Company and each Bank as to the amount to be paid as a result of such demand and the payment date. If at any time the Agent shall have made a payment to a beneficiary of a Letter of Credit in respect of a drawing or in respect of an acceptance created in connection with a drawing under such Letter of Credit, each Bank will pay to the Agent immediately upon demand (or, if such demand is made after 1:00 p.m., on the next succeeding Business Day) by the Agent at any time during the period commencing after such payment until reimbursement thereof in full by the Company, an amount equal to such Bank's Commitment Percentage of such payment, together with interest on such amount for each day from the later of (x) the date such payment is due as provided in the preceding sentence or (y) the date such payment is made under such Letter of Credit to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Fed Funds Rate for such period. No interest shall be due from any Bank that makes full payment to the Agent on the date such payment is due. Nothing herein shall be deemed to require any Bank to pay to the Agent any -29- amount as reimbursement for any payment made by the Agent to acquire (discount) for its own account prior to maturity thereof any acceptance created under a Letter of Credit. (v) The Company shall be irrevocably and unconditionally obligated forthwith to reimburse the Agent for the account of each Bank for any amount paid by the Agent or such Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind all of which are hereby expressly waived by the Company. Each drawing under any Letter of Credit shall bear interest at the Post-Default Rate until the Company shall have made reimbursement for such drawing. If the Company shall fail to make reimbursement for any such drawing prior to noon on the second Business Day after such notice is given, the Agent may in its discretion and without the consent of (but with concurrent notice to) the Company effect such reimbursement of any Letter of Credit, subject to the satisfaction of the conditions in SECTION 7 of the Revolving and Term Credit Agreement and to the existence of Revolving Commitments, by borrowing of Revolving Loans and the application of the proceeds thereof to the related Reimbursement Obligations. The Reimbursement Obligations shall survive the Termination Date and the termination of this Agreement. The Agent will pay to each Bank such Bank's Commitment Percentage of all amounts received from the Company for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Agent in respect of such Letter of Credit pursuant to CLAUSE (iv) above. Nothing herein shall be deemed to require the Agent to pay to any Bank any part of the proceeds of disposition (rediscount) by the Agent for its own account to any other Person of any acceptance created under a Letter of Credit which is acquired (discounted) by the Agent prior to the maturity thereof or to require any Bank to reimburse the Agent for the consequences of the Agent's own gross negligence or willful misconduct. (vi) The obligations of the Company to pay Reimbursement Obligations under this Agreement shall be absolute, unconditional and irrevocable and shall be paid or performed strictly in accordance with the terms of this Agreement under all circumstances whatsoever, including, without limitation, the following circumstances: (a) any lack of legality, validity, regularity or enforceability of this Agreement, any Letter of Credit, any Application or any agreement or document related to any of the foregoing; (b) any amendment or waiver of (including any default), or any consent to departure from, any Letter of Credit, this Agreement, any Application or any agreement or document related to any of the foregoing; -30- (c) the existence of any claim, set-off, defense or other rights which the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Persons or entities for which such beneficiary or any such transferee may be acting), the Agent, any Bank or any other Person, whether in connection with this Agreement, any Letter of Credit, any Application or any agreement or document related to any of the foregoing, the transactions contemplated hereby or any unrelated transaction; (d) any statement, certificate, draft or any other document presented under any Letter of Credit proves to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein proves to have been untrue or inaccurate in any respect whatsoever; (e) payment by the Agent under any Letter of Credit against presentation of a draft or certificate which appears on its face to comply but does not in fact comply with the terms of such Letter of Credit; (f) any defense based upon the failure of any beneficiary or any transferee to receive all or any part of the proceeds of a draw under any Letter of Credit transmitted by the Agent, or any non-application or misapplication by any beneficiary or other transferee of the proceeds of demand for payment under any Letter of Credit; and (g) any bankruptcy, insolvency, reorganization, arrangement, assignment for the benefit of creditors, readjustment of debt, dissolution, liquidation or other similar event with respect to the Company. PROVIDED, that no such payment shall impair any claim the Company may have against the Agent or any Bank. (c) ILLEGALITY. In the event that any restriction or limitation is imposed upon or determined or held to be applicable to the Agent, any Bank or the Company by, under or pursuant to any Legal Requirement, which in the reasonable judgment of the Agent or any Bank would prevent the Agent or such Bank from legally incurring liability under or in respect of a Letter of Credit issued or proposed to be issued hereunder, then the Agent shall give prompt written notice thereof to the Company, whereupon the Agent and the Bank or Banks affected shall have no obligation to issue or purchase participations in any such Letter of Credit. 2.2 AVAILABLE AMOUNT (a) Concurrently with the delivery of each Independent Engineering Report and related Coverage Report required or permitted hereby, there shall be determined, based on the Most -31- Recent Engineering Report and Approved Assumptions, the total maximum amount of Revolving Loans and Letters of Credit to be available to the Company hereunder without violation of the Required Ratios. Upon each such delivery, the Company may by notice to the Co-Agents designate as the Available Amount any amount (not to exceed $50,000,000) equal to or less than such total maximum amount. The Available Amount so designated shall remain in effect as the Available Amount until the next determination under this SECTION 2.2. If no different amount is designated in accordance with this SECTION 2.2, the Available Amount shall be the lesser of (a) the Preliminary Available Amount then in effect or (b) such total maximum amount. (b) Notwithstanding anything herein to the contrary, (1) no Bank shall be required to have aggregate Letters of Credit Liabilities at any one time outstanding in excess of such Bank's Commitment Percentage of the lesser of (x) $15,000,000 and (y) the difference between (i) the Available Amount and (ii) the aggregate Revolving Loans, and (2) if a Bank fails to participate in a Letter of Credit as and when required hereunder and the Company subsequently makes a repayment on the Reimbursement Obligations with respect to such Letter of Credit, such repayment shall be split among the non-defaulting Banks ratably in accordance with their respective Commitment Percentages until each Bank has its Commitment Percentage of all of the outstanding Reimbursement Obligations, and the balance of such repayment shall be divided among all of the Banks in accordance with their respective Commitment Percentages. (c) Notwithstanding anything in this Agreement to the contrary, the Agent shall not be required to issue any Letter of Credit during the existence of an Engineering Shortfall. (d) The Company may from time to time at its option, exercisable by giving written notice to the Co-Agents not more often than once in any Calculation Period, provide to the Co-Agents an Independent Engineering Report. Upon the receipt of such notice, the Co-Agents shall consult with the Company to determine new Approved Assumptions, which shall be furnished to the Banks by a notice as provided in the definition of "Approved Assumptions" and shall be subject to the proviso therein. The Optional Reserve Report shall be based on the new Approved Assumptions and shall be accompanied by a Coverage Report as of the date such Report is furnished. The Annual Debt Service Coverage Ratio, the Alternate Annual Debt Service Coverage Ratio and the Life-of-Reserves Coverage Ratio shall each be redetermined in accordance with this Agreement on the basis of each such Optional Reserve Report and Coverage Report, and the Available Amount recalculated as provided in this SECTION 2.2. -32- (e) Notwithstanding any other provision of this Agreement to the contrary, should both (x) the Company at any time designate as the Available Amount an amount less than the maximum amount then offered to it as the Available Amount by the Co-Agents and (y) as a result the Company shall obtain the release of any Mortgaged Properties under the Revolving and Term Credit Agreement, the Available Amount may never thereafter exceed the amount so designated by the Company. 2.3 REDUCTIONS AND CHANGES OF COMMITMENTS. (a) MANDATORY. On the Termination Date the aggregate Commitments shall be terminated in their entirety. (b) THE COMPANY'S OPTION. The Company shall have the right to terminate or reduce the unused portion of the Commitments at any time or from time to time; PROVIDED that: (i) the Company shall give notice of each such termination or reduction to the Agent as provided in SECTION 5.5; (ii) each such partial reduction shall be in minimum increments equal to $5,000,000; and (iii) the Company may not cause the Available Amount to be less than the aggregate principal amount of the Revolving Loans then outstanding plus the Letter of Credit Liabilities then outstanding. Any voluntary reduction in the Available Amount prior to any scheduled reduction in the Available Amount shall not affect the Available Amount after such scheduled reduction date unless such voluntarily reduced Available Amount is less than the amount scheduled to be the Available Amount after such scheduled reduction date, in which case the Available Amount after such scheduled reduction date shall be no greater than such voluntarily reduced Available Amount. 2.4 SEVERAL OBLIGATIONS. The failure of any Bank to participate in any Letter of Credit shall not relieve any other Bank of its obligation to participate in any Letter of Credit (the face amount of which shall be reduced dollar for dollar by the amount of the share of the Bank that failed to participate in such Letter of Credit) on such date, but neither the Agent nor any Bank shall be responsible for the failure of any other Bank to participate in any Letter of Credit. 2.5 FEES. In consideration of the Commitments, the Company shall pay to the Agent for the account of each Bank in accordance with its Commitment Percentage commitment fees (the "COMMITMENT FEES") for the period from the date of the execution of this Agreement to and including the earlier of the date the Commitments are terminated or the Termination Date at a rate per annum equal to 1/2% of the Unused Commitment. The Company shall be entitled to credit on the Commitment Fees any amount paid pursuant to SECTION 2.3 of the Revolving and Term Credit Agreement. The Commitment Fees shall be computed for each day and shall be based on the Unused Commitment for such day. Accrued Commitment Fees shall be payable in arrears on the date of the initial Letter of -33- Credit, within three days after demand therefor on or about the Quarterly Dates, and within three days after demand therefor on or about the Termination Date. All past due Commitment Fees shall bear interest at the Post-Default Rate. Upon receipt, the Agent shall disburse the Commitment Fees to the Banks in accordance with their Commitment Percentages. Section 3. PREPAYMENTS. 3.1 (a) COMMITMENT AMOUNT. The Company shall from time to time on demand by the Agent prepay the Revolving Loans or reduce Letter of Credit Liabilities in such amounts as shall be necessary so that at all times the aggregate outstanding principal amount of all Revolving Loans and all Letter of Credit Liabilities hereunder shall not be in excess of the aggregate of the Revolving Commitments and the Commitments. Any such payment shall be allocated between Revolving Loans, Letter of Credit Liabilities (and if to Letter of Credit Liabilities, first, to Reimbursement Obligations) and other obligations as the Company may elect. (b) AVAILABLE AMOUNT. The Company shall from time to time on demand by the Agent and on the Termination Date prepay the Revolving Loans or reduce Letter of Credit Liabilities in such amounts as shall be necessary so that at all times the aggregate outstanding principal amount of all Revolving Loans and all Letter of Credit Liabilities of the Company hereunder shall be less than or equal to the Available Amount. Any such payment shall be allocated between Revolving Loans, Letter of Credit Liabilities (and if to Letter of Credit Liabilities, first, to Reimbursement Obligations) and other obligations as the Company may elect. Section 4. PAYMENTS OF PRINCIPAL AND INTEREST. 4.1 REPAYMENT OF REIMBURSEMENT OBLIGATIONS. The Company will pay to the Agent for the account of each Bank the amount of each Reimbursement Obligation forthwith upon its incurrence. The amount of any Reimbursement Obligation may, if the applicable conditions precedent specified in SECTION 7 of the Revolving and Term Credit Agreement have been satisfied, be paid with the proceeds of Revolving Loans. 4.2 INTEREST. Subject to SECTION 12.8, the Company will pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Reimbursement Obligation owed to such Bank for the period commencing on the date such Reimbursement Obligation arises to but excluding the date such Reimbursement Obligation shall be paid in full, at the Post-Default Rate. Accrued interest shall be due and payable from time to time on demand of the Agent or the Required Banks (through the Agent). -34- Section 5. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC. 5.1 PAYMENTS. (a) Except to the extent otherwise provided herein, all payments of principal of or interest on the Reimbursement Obligations and other amounts to be made by the Company hereunder shall be made in dollars, in immediately available funds, to the Agent at its Principal Office (or in the case of a Successor Agent, at the principal office of such successor Agent in the United States), not later than 11:00 a.m. on the date on which such payment Shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) The Company shall, at the time of making each payment hereunder, specify to the Agent the Reimbursement Obligations or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that it fails so to specify, such payment shall be applied as the Agent may designate to the amounts then due and payable); PROVIDED that if no Reimbursement Obligations are then due and payable or an Event of Default has occurred and is continuing, the Agent may apply such payment to the Obligations in such order as it may elect in its sole discretion, but subject to the other terms and conditions of this Agreement, including SECTION 5.2). Each payment received by the Agent hereunder for the account of a Bank shall be paid promptly to such Bank, in immediately available funds for the account of such Bank's Applicable Lending Office. (c) If the due date of any payment hereunder falls on a day which is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. 5.2 PRO RATA TREATMENT. Except to the extent otherwise provided herein, (a) each issuance of a Letter of Credit and each termination or reduction of the Commitments of the Banks under SECTION 2.3 shall be made PRO RATA according to the Banks' respective Commitments; (b) each payment by the Company of principal of or interest on any Reimbursement Obligation shall be made to the Agent for the account of the Banks PRO RATA in accordance with the respective unpaid principal amounts of such Reimbursement Obligation held by the Banks; and (c) the Banks (other than the Agent) shall purchase from the Agent participations in the Letters of Credit in accordance with their respective Commitment Percentages. 5.3 COMPUTATIONS. Interest based on the Alternate Base Rate (to the extent determined by reference to the Prime Rate), and fees hereunder, will be computed on the basis of 365 (or 366) days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. All other interest -35- shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable, unless the effect of so computing shall be to cause the rate of interest to exceed the Highest Lawful Rate (in which event interest shall be calculated on the basis of the actual number of days elapsed in a year composed of 365 or 366 days, as the case may be). 5.4 MINIMUM AND MAXIMUM AMOUNTS. Each Letter of Credit shall be in a face amount at least equal to $100,000. 5.5 CERTAIN ACTIONS, NOTICES, ETC. Notices to the Agent of any termination or reduction of Commitments, prepayments under SECTION 3.1 and requests for the issuance of Letters of Credit shall be irrevocable and shall be effective only if received by the Agent not later than 11:00 a.m. on the number of Business Days prior to the date of the relevant issuance, termination, reduction, and/or prepayment specified below: Number of Business Days Prior Notice Termination or reduction of Commitments 10 Issuance of Letters of Credit 5 Prepayments 1 Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of prepayment shall specify the amount to be prepaid (subject to SECTION 3.1) and the date of prepayment (which shall be a Business Day). The Agent shall promptly notify the Banks of the contents of each such notice or Application. Notice of any prepayment having been given, the principal amount specified in such notice, together with interest thereon to the date of prepayment, shall be due and payable on such prepayment date. 5.6 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been notified by a Bank prior to noon on the date on which such Bank is to make payment to the Agent of any amount to be paid by such Bank to reimburse the Agent for a drawing under any Letter of Credit or by the Company prior to the date on which the Company is to make a payment to the Agent for the account of one or more of the Banks, as the case may be (such Bank or the Company being herein called the "PAYOR" and such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption -36- (but shall not be required to), make the amount thereof available to the intended recipient on the date that such Required Payment is to be made. If the Payor is the Company and the Company has not in fact made the Required Payment to the Agent on or before such date, the recipient of such payment (or, if the recipient is the beneficiary of a Letter of Credit, the Company, and, if the Company fails to pay the amount thereof to the Agent on demand, then the Banks, to the extent not already paid, ratably in proportion to their respective Commitment Percentages) shall, on demand, pay to the Agent the amount made available by the Agent, together with interest thereon from the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Fed Funds Rate for the first three days and thereafter at the Fed Funds Rate plus 2%. If the Payor is a Bank and such Bank has not in fact made the Required Payment to the Agent on or before such date, then such Bank shall pay to the Agent the amount made available by the Agent on behalf of such Bank, together with interest thereon from the date such amount was so made available by the Agent until the Agent recovers such amount at a rate per annum equal to the Fed Funds Rate for the first three days and thereafter at the Fed Funds Rate plus 2%. 5.7 SHARING OF PAYMENTS, ETC. If a Bank or any participant of a Bank shall obtain payment of any obligation to it under this Agreement, through the exercise of any right of set-off, banker's lien, counterclaim or similar right, or otherwise, then such Bank or participant shall promptly purchase from the other Banks participations in the Reimbursement Obligations or other obligations held by the other Banks in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Banks and participants shall share the benefit of such payment (net of any expenses which may be incurred by such Bank or its participant in obtaining or preserving such benefit) PRO RATA in accordance with the unpaid principal and interest on such obligations then due to each of them. To such end all the Banks and their participants shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Company agrees, to the fullest extent it may effectively do so under applicable law, that any Bank so purchasing a participation in the Reimbursement Obligations or other obligations held by other Banks may exercise all rights of set-off, bankers' lien, counterclaims or similar rights with respect to such participation as fully as if such Bank were a direct holder of Reimbursement Obligations or other obligations in the amount of such participation. Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. -37- 5.8 OTHER EXPENSES. The Company agrees to pay the Agent, for the account of the Agent, the usual and customary charges of TCB for each extension, amendment and wire advice of and drawing under the Letters of Credit. Section 6. YIELD PROTECTION AND ILLEGALITY. 6.1 ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT. If as a result of any Regulatory Change there shall be imposed, modified or deemed applicable any tax, reserve, special deposit or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder and the result shall be to increase the cost to the Agent or any Bank of issuing or maintaining or participating in any Letter Of Credit or reduce any amount receivable by the Agent or any Bank hereunder in respect of any Letter of Credit or participation therein, then such Bank shall notify the Company through the Agent, and upon demand therefor by such Bank through the Agent, the Company (subject to SECTION 12.8) shall pay to the Agent or such Bank, from time to time as specified by the Agent or such Bank, such additional amounts as shall be sufficient to compensate the Agent or such Bank for such increased costs or reductions in amount. Before making such demand pursuant to this SECTION 6.1, the Agent or such Bank will designate a different available Applicable Lending Office for the Letter of Credit or participation or take such other action as the Company may request, if such designation or action will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of the Agent or such Bank, be disadvantageous to the Agent or such Bank. A statement as to such increased costs or reductions in amount incurred by the Agent or such Bank, submitted by the Agent or such Bank to the Company, shall cover amounts accruing under this section with respect to a period beginning not earlier than 120 days from the date thereof and be conclusive as to the amount thereof, absent manifest error. In the event any Bank shall seek compensation pursuant to this SECTION 6.1, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to assume the Commitment of such Bank and to purchase and assume its outstanding Letter of Credit Liabilities. Each Bank requesting compensation pursuant to this SECTION 6.1 agrees to sell its Commitment and interest in this Agreement and in the Obligations and in the Revolving and Term Credit Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to the sum of the outstanding unpaid principal of and accrued interest on such Obligations plus all other fees and amounts (including any compensation claimed by such Bank under this SECTION 6.1) owing to such Bank hereunder and under the Revolving and Term Credit Agreement calculated, in each case, to the date such Commitment, Obligations and interests are purchased, whereupon such Bank shall -38- have no further Commitment or other obligation to the Company hereunder or under the Revolving and Term Credit Agreement. 6.2 CAPITAL ADEQUACY. If any Bank shall have determined that the adoption after the date hereof or effectiveness after the date hereof (regardless of whether previously announced) of any applicable Legal Requirement or treaty regarding capital adequacy, or any change after the date hereof in any existing or future Legal Requirement or treaty regarding capital adequacy, or any change in the interpretation or administration thereof after the date hereof by any Governmental Authority or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive after the date hereof regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority or comparable agency has or would have the effect of reducing the rate of return on the capital of such Bank (or any holding company of which such Bank is a part) as a consequence of its obligations hereunder and under or in respect of the Letters of Credit to a level below that which such Bank or holding company could have achieved but for such adoption, change or compliance by an amount deemed by such Bank to be material, then from time to time, upon demand by such Bank (with a copy to the Agent), the Company (subject to SECTION 12.8) shall pay to such Bank such additional amount or amounts as will compensate such Bank or holding company for such reduction. The certificate of any Bank setting forth such amount or amounts as shall be necessary to compensate it and the basis therefor shall cover amounts accruing under this SECTION 6.2 with respect to a period beginning not earlier than 120 days from the date thereof and shall be conclusive and binding, absent manifest error. The Company shall pay the amount shown as due on any such certificate upon delivery of such certificate. In preparing such certificate, a Bank may employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable and may use any reasonable averaging and attribution method. In the event any Bank shall seek compensation pursuant to this SECTION 6.2, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to assume the Commitment of such Bank and to purchase and assume its outstanding Letter of Credit Liabilities. Each Bank requesting compensation pursuant to this SECTION 6.2 agrees to sell its Commitment and interest in this Agreement and in the Obligations and in the Revolving and Term Credit Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to the sum of the outstanding unpaid principal of and accrued interest on such Obligations plus all other fees and amounts (including any compensation claimed by such Bank under this SECTION 6.2) owing to such Bank hereunder and under the Revolving and Term Credit Agreement calculated, in each case, to the date such Commitment, Obligations, and interests are purchased, whereupon such Bank shall -39- have no further Commitment or other obligation to the Company hereunder or under the Revolving and Term Credit Agreement. Section 7. CONDITIONS PRECEDENT. 7.1 CLOSING CONDITIONS. The effectiveness of this Agreement is subject to the following conditions precedent, each of which shall have been fulfilled or waived to the satisfaction of the Agent: (a) CORPORATE ACTION AND STATUS. The Agent shall have received copies of the Organizational Documents of the Company certified by the Secretary of the Company, and resolutions of the Board of Directors of the Company, certified by the Secretary of the Company, for all corporate action taken by the Company authorizing the execution, delivery and performance of the Credit Documents and all other documents related to this Agreement, together with such certificates as may be appropriate to demonstrate the qualification and good standing of and payment of taxes by each member of the Combined Group in each jurisdiction set forth on SCHEDULE VIII. (b) INCUMBENCY. The Company shall have delivered to the Agent a certificate in respect of the name and signature of each officer who (1) is authorized to sign on its behalf the applicable Credit Documents related to any Letter of Credit and (2) will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with any Letter of Credit hereunder. The Agent and each Bank may conclusively rely on such certificates until they receive notice in writing from the Company to the contrary. (c) FEES AND EXPENSES. The Company shall have paid to the Agent all fees in the amounts previously agreed upon in writing among the Company and the Agent. (d) OPINION OF COUNSEL TO THE COMPANY. The Agent shall have received the opinion of Andrews & Kurth, L.L.P. and David L. Hicks, counsel to the Company, substantially in the forms of SCHEDULES VI and VII hereto, respectively. (e) COUNTERPARTS. The Agent shall have received counterparts of each of the Credit Documents duly executed and delivered by or on behalf of each of the parties thereto (or, in the case of any Bank as to which the Agent shall not have received such a counterpart, the Agent shall have received evidence satisfactory to it of the execution and delivery by such Bank of a counterpart hereof). (f) CONSENTS. The Agent shall have received evidence satisfactory to it that all consents of each Governmental Authority and of each other Person, if any, required in connection with (1) -40- the Letters of Credit and (2) the execution, delivery and performance of the Credit Documents have been received and remain in full force and effect. (g) REVOLVING AND TERM CREDIT AGREEMENT. The Revolving and Term Credit Agreement shall be executed and delivered by the parties thereto and shall be in full force and effect. (h) OTHER DOCUMENTS. The Agent shall have received such other documents consistent with the terms of this Agreement and relating to the transactions contemplated hereby as the Agent may reasonably request. All provisions and payments required by this SECTION 7.1 are subject to the provisions of SECTION 12.8. 7.2 ALL LETTERS OF CREDIT. In addition to the conditions precedent described in SECTION 2, the obligation of the Agent to issue and each Bank to participate in any Letter of Credit is subject to the additional conditions precedent that, as of the date of such issuance and after giving effect thereto: (a) no Default shall have occurred and be continuing, and no "Default" shall have occurred and be continuing under the Revolving and Term Credit Agreement; (b) there has been no Material Adverse Change since December 31, 1991; (c) the representations and warranties made in each Credit Document shall be true and correct in all material respects on and as of the date of the issuance of such Letter of Credit, with the same force and effect as if made on and as of such date; (d) the Company shall have delivered to the Agent an Application within the time specified in SECTION 5.5; (e) the issuance of such Letter of Credit shall not be prohibited by, or subject any Bank to any penalty under, any Legal Requirement applicable to any Bank; and (f) after giving effect to such Letter of Credit the Company shall be in compliance with all Required Ratios and no Engineering Shortfall shall exist. Each request for issuance of a Letter of Credit by the Company hereunder shall include a representation and warranty by the Company to the effect set forth in SUBSECTIONS (a) through (d) and SUBSECTION (f) (if applicable) of this SECTION 7.2 (both as of the date of such notice and, unless the Company otherwise notifies the Agent prior to the date of such issuance, as of the date of such issuance). -41- Section 8. REPRESENTATIONS AND WARRANTIES. To induce the Agent and the Banks to enter into this Agreement and to issue and participate in Letters of Credit, the Company represents and warrants (such representations and warranties to survive any investigation and the issuance of Letters of Credit) to the Banks and the Agent as follows: 8.1 CORPORATE EXISTENCE. Each member of the Combined Group (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite power, and has all licenses, permits, authorizations, consents and approvals necessary, to own its property and carry on its business as now being conducted, and (c) is qualified to do business, and is in good standing, in (1) all jurisdictions in which any of the Recognized Proved Reserves which it owns are located and (2) any other jurisdiction in which the nature of the business conducted by it makes such qualification necessary or advisable, unless (for purposes only of this CLAUSE (2)) the failure to be so qualified or in good standing would not individually or in the aggregate have a material adverse effect on the business, financial condition or results of operations of the Combined Group taken as a whole. 8.2 INFORMATION. (a) (i) The most recent consolidated balance sheet of the Company and its Subsidiaries and the related consolidated statements of operations, changes in financial position and cash flows for the period then ended, together with the respective notes thereto, delivered to each of the Banks prior to the execution of this Agreement (which financial statements are dated December 31, 1991) or in accordance with the provisions of SECTION 9.1(a) or (b), as the case may be (the latest of such financial statements and the notes thereto being referred to herein as the "MOST RECENT FINANCIAL STATEMENTS"), fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of such date and their consolidated results of operations for the period then ended in conformity with GAAP. (ii) The Company and its Subsidiaries did not on the date of the Most Recent Financial Statements, and do not on the date as of which this representation is made in accordance with the terms of this Agreement, have any material contingent liabilities, material liabilities for taxes, unusual and material forward or long-term commitments or material unrealized or anticipated losses from any commitments, except (A) as referred to or reflected or provided for in the Most Recent Financial Statements; (B) as otherwise hereafter disclosed to the Banks in writing in accordance with the terms of this Agreement, or (C) in connection with the obligations of the Company under this Agreement and the Revolving and Term Credit Agreement. -42- (b) Since December 31, 1991, there has been no Material Adverse Change. 8.3 LITIGATION; COMPLIANCE. Except as disclosed in the Registration Statement, or as hereafter disclosed to the Banks in accordance with the provisions of SECTION 9.1(e), there are no legal or arbitral proceedings or any proceedings by or before any Governmental Authority now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its Subsidiaries which, if adversely determined, would cause a Material Adverse Change. The Company and its Subsidiaries comply in all material respects with all applicable material (based on the Company and its Subsidiaries taken as a whole) Legal Requirements other than the Applicable Environmental Laws. Neither the Company nor any of its Subsidiaries is in default in any material respect under or violation of any material (based on the Company and its Subsidiaries taken as a whole) judgment, order or decree of any Governmental Authority. 8.4 NO BREACH. None of the execution and delivery of the Credit Documents, the consummation of the transactions therein contemplated or compliance with the terms and provisions thereof will conflict with or result in a breach of, or require any consent that has not been obtained under, the Serial Note Agreement, the Organizational Documents of the Company or any of its Subsidiaries or any material Legal Requirement (including any securities law, rule or regulation) applicable to the Company or any of its Subsidiaries or (except for the Liens required or permitted by this Agreement) result in the creation or imposition of any Lien upon any of the revenues or property of the Company or any of its Subsidiaries. Such execution, delivery, consummation and compliance do not and will not conflict with or result in a breach of any material agreement or instrument to which the Company is a party or by which the Company is bound or to which it is subject, or constitute a default under any such agreement or instrument. 8.5 CORPORATE ACTION. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under the Credit Documents. The execution, delivery and performance of the Credit Documents by the Company have been duly authorized by all necessary corporate action. The Credit Documents have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general equitable principles. 8.6 APPROVALS. All authorizations, approvals and consents of, and all filings and registrations with, all Governmental Authorities and each other Person necessary for the execution, -43- delivery or performance of any Credit Document or for the validity or enforceability thereof, except for the filings and recordings of the Liens created pursuant to the Security Documents under the Revolving and Term Credit Agreement, have been obtained by the Company. 8.7 REGULATIONS G, U AND X. 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 of purchasing or carrying margin stock (within the meaning of Regulation G, U or X of the Board) and no Letter of Credit hereunder will be used to acquire or carry, directly or indirectly, any such margin stock. 8.8 ERISA. (a) The Company and each ERISA Affiliate have fulfilled their contribution obligations under each Plan subject to Title IV of ERISA and have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan subject to Title IV of ERISA, and in all other regard with respect to each Plan are in material compliance with the applicable provisions of ERISA, the Code, and all other applicable laws, regulations and rules, to the extent that noncompliance with such provisions would result in a Material Adverse Change. (b) The Company has no knowledge of any event with respect to each Plan which could result in a Material Adverse Change. 8.9 TAXES. Each of the Company and its Subsidiaries has filed all United States federal income tax returns and all other material tax returns which are required to be filed by it and has paid all taxes due pursuant to such returns or pursuant to any assessment received by it, except to the extent the same may be contested in good faith by appropriate proceedings diligently conducted for which adequate reserves have been established in accordance with GAAP. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges, as made on a periodic basis, are adequate. 8.10 SUBSIDIARIES. SCHEDULE I is a complete and correct list, as of the date of this Agreement, of all Subsidiaries of the Company. All shares or other indicia of equity interest of the Restricted Subsidiaries and the Special Subsidiary directly or indirectly owned by the Company are free and clear of Liens, and all such shares are validly issued, fully paid and non-assessable. 8.11 INVESTMENT COMPANY ACT. No member of the Combined Group is an investment company within the meaning of the Investment Company Act of 1940, as amended, or, to the best knowledge of the Company, directly or indirectly controlled by or acting on behalf of any Person which is an investment company, within the meaning of said Act. -44- 8.12 PUBLIC UTILITY HOLDING COMPANY ACT. No member of the Combined Group is a "public utility company", or, to the knowledge of the Company, an "affiliate" or a "subsidiary company" of a "public utility company", or a "holding company", or an "affiliate" or a "subsidiary company" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 8.13 ENVIRONMENTAL MATTERS. Except as disclosed in the Registration Statement, the Company and its Subsidiaries, and the plants and sites of each, have complied with all Applicable Environmental Laws, except, in any such case, where such failure to so comply would not result in a Material Adverse Change. Without limiting the generality of the preceding sentence, neither the Company nor any of its Subsidiaries has received notice of or has actual knowledge of any actual or claimed or asserted failure so to comply with Applicable Environmental Laws or of any other Environmental Claim which alone or together with all other such failures or Environmental Claims is material and would result in a Material Adverse Change. Except as disclosed in the Registration Statement, neither the Company nor any of its Subsidiaries nor their plants or other sites manage, generate or dispose of, or during their respective period of use, ownership, occupancy or operation by the Company or its Subsidiaries have managed, generated, released or disposed of, any hazardous wastes, hazardous substances, hazardous materials, toxic substances or toxic pollutants, as those terms are used or defined in the Applicable Environmental Laws, in material violation of or in a manner which would result in liability under the Applicable Environmental Laws or any other applicable Legal Requirement, or in a manner which would result in an Environmental Claim except where such noncompliance or liability or Environmental Claim would not result in a Material Adverse Change. The representation and warranty contained in this SECTION 8.13 is based in its entirety upon (a) current interpretations and enforcement policies that have been publicly disseminated and are used by Governmental Authorities charged with the enforcement of the Applicable Environmental Laws or which apply to the Company or any of its Subsidiaries with respect to any property or sites in a particular jurisdiction and (b) current levels of publicly disseminated scientific knowledge concerning the detection of, and the health and environmental risks associated with the discharge of, substances and pollutants regulated pursuant to the Applicable Environmental Laws. Section 9. COVENANTS. The Company agrees with the Banks and the Agent that until the termination of this Agreement: 9.1 FINANCIAL STATEMENTS AND CERTIFICATES. The Company will deliver in duplicate: -45- (a) to each Bank, as soon as practicable and in any event within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated and consolidating statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such quarterly period, setting forth (1) as to each account affected thereby, all eliminating entries for the Unrestricted Subsidiaries as a group and for the Special Subsidiary, respectively, and (2) the resulting consolidated and consolidating figures for the Company and the Restricted Subsidiaries, and setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and unaudited but certified by an authorized financial officer of the Company as fairly presenting the financial position and results of operations of the Company and its Subsidiaries as of the date thereof and the period then ended, subject to changes resulting from year-end adjustments; (b) to each Bank, as soon as practicable and in any event within 90 days after the end of each fiscal year, consolidated and consolidating statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for such year, and a consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such fiscal year, setting forth (1) as to each account affected thereby, all eliminating entries for the Unrestricted Subsidiaries as a group and for the Special Subsidiary, respectively, and (2) the resulting consolidating figures for the Company and the Restricted Subsidiaries, and setting forth in each case in comparative form corresponding consolidating figures from the preceding annual audit, all in reasonable detail and which shall be reported on by Price Waterhouse & Co. or other independent public accountants of recognized national standing selected by the Company whose report shall (A) contain an opinion that shall be unqualified as to the scope or limitations imposed by the Company and shall not be subject to any other material qualification and (B) state that such financial statements present fairly, in all material respects, the financial position of the Company and its Subsidiaries at the dates indicated and their cash flows and the results of their operations and the changes in their financial position for the periods indicated in conformity with GAAP, and shall be accompanied by a report of such independent public accountants stating that (W) such audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole; (X) the consolidating information set forth therein is presented for purposes of additional analysis rather than to present the financial position, results of operations and cash flows of the individual companies; (Y) such consolidating information has been subjected to the auditing procedures applied in the audit of the -46- basic financial statements, and (Z) in such independent public accountants' opinion, such consolidating information is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole, with such changes thereto as such accountants reasonably determine to be appropriate under the circumstances; (c) to each Bank, promptly upon transmission thereof, copies of all financial statements, proxy statements, notices and reports as it shall send to its public stockholders and copies of all registration statements (without exhibits, and other than registration statements and reports relating to employee benefit or compensation plans) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); (d) to each Bank, promptly upon receipt thereof, a copy of each other report submitted to the Company or any of its Subsidiaries by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any such Subsidiary; (e) to each Bank, as soon as practicable and in any event within 15 days after any executive officer of the Company obtains knowledge (1) of any Default or any condition or event which, in the opinion of management of the Company, would have a Material Adverse Change (to the extent affecting the Company and its Subsidiaries in a materially different manner or extent than the oil and gas industry generally); (2) that any Person has given any notice to the Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in SECTION 10.(b) or (m); (3) of the institution of any litigation involving claims against the Company or any of its Subsidiaries equal to or greater than $5,000,000 with respect to any single cause of action or of any adverse determination in any court proceeding in any litigation involving a potential liability to the Company or any of its Subsidiaries equal to or greater than $5,000,000 with respect to any single cause of action which makes the likelihood of an adverse determination in such litigation against the Company or such Subsidiary substantially more probable, or (4) of any regulatory proceeding which, if determined adversely to the Company, would have a Material Adverse Change (to the extent affecting the Company and its Subsidiaries in a materially different manner or extent than the oil and gas industry generally), an Officer's Certificate specifying the nature and period of existence of any such Default, condition or event, or specifying the notice given or action taken by such Person and the nature of any such claimed Default, event or condition, or specifying the details of such proceeding, litigation or dispute and, in each case, what action the Company or any of its -47- Subsidiaries has taken, is taking or proposes to take with respect thereto; (f) to each Bank, (1) promptly after the filing or receiving thereof, copies of all annual reports and such other material reports and notices which the Company or any ERISA Affiliate files under ERISA with the Internal Revenue Service, the PBGC or the U.S. Department of Labor with respect to a Plan that is subject to Title IV of ERISA; (2) promptly upon acquiring knowledge of any "reportable events" (as defined in Section 4043 of ERISA) or of any "prohibited transaction," as such term is defined in the Code or ERISA, in connection with any Plan which may result in a Material Adverse Change, a statement executed by the president or chief financial officer of the Company or the applicable ERISA Affiliate, setting forth the details thereof and the action which the Company or the ERISA Affiliate proposes to take with respect thereto and, when known, any action taken by the PBGC, the Internal Revenue Service or the U.S. Department of Labor with respect thereto; (3) promptly after the filing or receiving thereof by the Company or any ERISA Affiliate, any notice of the institution of any proceedings or other actions which may result in the termination of any Plan or notice of complete or partial withdrawal liability under Title IV of ERISA, and (4) each request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted by the Company or any ERISA Affiliate, to the Secretary of the Treasury, the U.S. Department of Labor or the Internal Revenue Service, as the case may be; (g) to each Bank, as soon as available but in no event later than February 28 of each year, an Independent Engineering Report reflecting data as of January 1 of such year; and (h) to each Bank, with reasonable promptness, such other information respecting the business, financial condition or results of operations of the Company or any of its Subsidiaries as such Bank may reasonably request. Together with each delivery of financial statements required by SUBSECTION (a) above, each Required Reserve Report and each Optional Reserve Report, the Company will deliver to each Bank an Officer's Certificate and a Coverage Report demonstrating (with computations in reasonable detail) compliance by the Company and the Restricted Subsidiaries with the provisions of SECTIONS 9.6, 9.7(b)(3), (4) and (6), 9.7(c)(2) and (3), 9.7(d), 9.7(e), 9.7(f), 9.7(g) and 9.9, demonstrating that no Default exists under SECTION 10.1(i) and stating that there then exists no Default, or, if any Default exists, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. -48- Together with each delivery of financial statements required by SUBSECTION (b) above, the Company will deliver to each Bank a certificate of such accountants stating that, in conducting the audit of the Company's consolidated financial statements in accordance with generally accepted auditing standards they have obtained no knowledge of any Default arising under SECTION 10.1(a), (b) or (i) or any Default arising under SECTION 10.1(d) that occurs as result of the breach or violation by the Company or the Restricted Subsidiaries of SECTIONS 9.6, 9.7(b), (c), (d), (e), (f), (g), (h), (i) or 9.8, or, if they have obtained knowledge of any such Default, specifying the nature and period of existence thereof. Such accountants, however, shall not be liable to the Agent or any Bank by reason of their failure to obtain knowledge of any such Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards. The Company also covenants that forthwith upon the chief executive officer, principal financial officer or principal accounting officer of the Company obtaining knowledge of a Default, it will deliver to each Bank an Officer's Certificate specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. 9.2 INSPECTION OF PROPERTY. The Company covenants that it will permit any Person designated in writing by any Bank, at such Bank's expense and risk, to visit and inspect any of the properties of the Company and its Subsidiaries; and also to examine the corporate books and financial records of the Company and its Subsidiaries and to make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of such Persons with the executive officers of the Company, the petroleum reserve engineers employed by the Company and its Subsidiaries and the Company's independent public accountants, all at such reasonable times, with a representative of the Company present and as often as such Bank may reasonably request, and will assist such Person or Persons in all such activities. 9.3 COMPLIANCE WITH ENVIRONMENTAL LAWS. The Company will, and will cause each of its Subsidiaries and each of its Affiliates that are controlled by the Company or its Subsidiaries to, comply in a timely fashion with, or operate pursuant to valid waivers of the provisions of, all Applicable Environmental Laws, except where non-compliance would not (a) result in a Material Adverse Change or (b) subject the Agent or any Bank to any liability for such non compliance (PROVIDED that the Company shall not be in default of this SUBSECTION (b) if the Company indemnifies each of the Agent, Banks or any of them subjected to such liability and provides collateral to secure such indemnification, all to the extent required by the Person subjected to such liability in its sole and unfettered discretion). The Company agrees to indemnify and hold the Agent and each Bank, and their respective officers, agents and employees harmless from any loss, liability, claim or expense which any such Person may incur or suffer as a result of a breach by the -49- Company or its Subsidiaries or Affiliates, as the case may be, of this covenant. The Company shall not be deemed to have breached or violated this SECTION 9.3 if the Company or its Subsidiary or Affiliate, as the case may be, are challenging in good faith by appropriate proceedings diligently pursued the application or enforcement of any such Applicable Environmental Laws for which adequate reserves have been established in accordance with GAAP. 9.4 PAYMENT OF TAXES. The Company will, and will cause each of its Subsidiaries to, pay, or have paid on its behalf, before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property, except to the extent contested in good faith by appropriate proceedings diligently conducted for which adequate reserves have been established in accordance with GAAP. 9.5 MAINTENANCE OF INSURANCE. The Company covenants that it and each of its Subsidiaries will carry and maintain insurance (subject to self-insurance in the maximum amount of $10,000,000, customary deductibles and retentions) in at least such amounts and against such liabilities and hazards and by such methods as customarily maintained by other companies operating similar businesses and, together with each delivery of financial statements required by SECTION 9.1(b), will deliver to the Agent for each Bank an Officer's Certificate specifying the details of such insurance in effect. Upon the request of the Agent or any Bank, the Company shall promptly deliver to the Agent one or more current certificates of the insurer or insurers providing the insurance required by this SECTION 9.5 to the effect that such insurance may not be canceled, reduced or affected in any manner without 30 days' prior written notice to the Agent. 9.6 RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS. The Company will not and will not permit any Restricted Subsidiary to (a) make any Restricted Investment; (b) pay or declare any dividend on any class of its stock or make any other distribution on account of any class of its stock, or redeem, purchase or otherwise acquire, directly or indirectly, any shares of its stock, or (c) make any additional Investment in the Special Subsidiary (all of the foregoing described in SUBSECTIONS (b) and (c) above being herein called "RESTRICTED PAYMENTS") (1) except out of Consolidated Net Earnings Available for Restricted Payments and Restricted Investments; PROVIDED that the Company or any wholly owned Restricted Subsidiary may, without violation of this clause, in a single transaction or a series of publicly announced related transactions to be completed within six months, make an Investment in the Special Subsidiary which results in the ownership by the Company and the wholly owned Restricted Subsidiaries of 100% of the outstanding general and limited partner interests in the Special Subsidiary; PROVIDED FURTHER that the amount of such Investment shall be included in any subsequent computations of Restricted Payments and of Consolidated Net Earnings Available for Restricted -50- Payments and Restricted Investments under this Section unless immediately after giving effect to such Investment in the Special Subsidiary, the Special Subsidiary is designated as a Restricted Subsidiary; (2) unless, after giving effect to any such Restricted Investment or Restricted Payment, as the case may be, (A) no Default shall have occurred and be continuing and (B) the Company could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(3), and (3) unless, in the case of Investments in the Special Subsidiary, such Investment shall otherwise be permitted by SECTION 9.7(g). "CONSOLIDATED NET EARNINGS AVAILABLE FOR RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS" shall mean an amount equal to (a) the sum of (1) $45,000,000; (2) 100% (or minus 100% in case of a deficit) of Consolidated Net Earnings for the period (taken as one accounting period) commencing on April 1, 1990 (the "COMMENCEMENT DATE") and terminating at the end of the last fiscal quarter preceding the date of any proposed Restricted Investment or Restricted Payment, as the case may be; (3) the net cash proceeds received by the Company or any Restricted Subsidiary from the sale of any shares of its stock on or after the Commencement Date, except (A) any such proceeds used as a basis, for a prepayment in respect of the then-outstanding notes issued under the Serial Note Agreement pursuant to Paragraphs 4A, 4B or 4C thereof and (B) any proceeds from the sale of stock to the Company or any of its Subsidiaries on or after the Commencement Date; (4) the net cash proceeds received by the Company or any Restricted Subsidiary from the sale, on or after the Commencement Date, of any convertible debt security which has been converted into stock of the Company or a Restricted Subsidiary, except (A) any such proceeds used as a basis for a prepayment in respect of the then-outstanding notes issued under the Serial Note Agreement pursuant to Paragraphs 4A, 4B or 4C thereof and (B) any proceeds from the sale of such convertible debt security to the Company or any of its Subsidiaries; (5) any cash distributions from the Special Subsidiary received by the Company or any Restricted Subsidiary on or after the Commencement Date, and (6) any return of capital from Unrestricted Subsidiaries or Restricted Investments received by the Company or any Restricted Subsidiary on or after the Commencement Date, less (b) the sum of all Restricted Investments and all Restricted Payments made on or after the Commencement Date. There shall not be included in Restricted Payments or in any computation of Consolidated Net Earnings Available for Restricted Payments and Restricted Investments (w) dividends paid or declared in respect of stock held by any Person, or distributions made to any Person, in stock of the Company or any Restricted Subsidiary; (x) exchanges of stock of one or more classes of the Company or any Restricted Subsidiary for common stock of the Company or such -51- Restricted Subsidiary, as the case may be, or for stock of the Company or such Restricted Subsidiary, as the case may be, of the same class, except to the extent that cash or other value is involved in such exchange; (y) dividends paid or declared in respect of stock held by, or distributions made to, or redemptions, purchases or other acquisitions of stock made from, the Company or a wholly owned Restricted Subsidiary, or (z) any advances to the Special Subsidiary not in excess of $20,000,000 in the aggregate at any one time outstanding that are repaid in full within 60 days pursuant to customary cash management services provided to the Special Subsidiary. The term "stock" as used in this Section shall include warrants, options to purchase stock and redeemable rights. 9.7 LIEN, DEBT AND OTHER RESTRICTIONS. The Company will not and will not permit any Restricted Subsidiary to: (a) LIENS. Create, assume or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired except (1) Liens for taxes or assessments or other governmental charges or levies not yet due or which are being actively contested in good faith by appropriate proceedings; (2) Liens (including mechanics' and materialmen's liens, landlord liens, easements, rights-of-way or the like) incidental to the conduct of its business or the ownership of its property and assets which are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (3) Liens for lessor's royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other similar burdens, production sales contracts, division orders, contracts for the sale, purchase, exchange, or processing of hydrocarbons, unitization and pooling designations, declarations, orders and agreements, operating agreements, agreements of development, area of mutual interest agreements, gas balancing or deferred production agreements, processing agreements, plant agreements, pipeline gathering and transportation agreements, injection, repressuring and recycling agreements, salt water or other disposal agreements, seismic or geophysical permits or agreements, and other agreements which are customary in the oil, gas and mineral exploration and development business or in the business of processing gas and gas condensate production for the extraction of products therefrom, if the net cumulative effect of -52- such burdens does not operate to reduce the net revenue interest of any oil and gas properties to less than (A) the "Net Revenue Interest" set forth in the Most Recent Engineering Report for those oil and gas properties included in the Most Recent Engineering Report or (B) the net revenue interest so acquired for those oil and gas properties acquired after the date of the Most Recent Engineering Report; PROVIDED that such Liens are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person; (4) Liens described in SCHEDULE II securing Debt of the Company or a Restricted Subsidiary set forth in SCHEDULE II; (5) the Springing Lien, Liens existing on any real property of any Person at the time such Person becomes a Restricted Subsidiary, or any Liens existing prior to the time of acquisition upon any real property acquired by the Company or any Restricted Subsidiary through purchase, merger or consolidation or otherwise, whether or not the obligation secured by such Lien is assumed by the Company or such Restricted Subsidiary; PROVIDED that except as otherwise permitted by SECTION 9.7(a), any such Springing Lien or Lien (A) shall not encumber any other property of the Company or any Restricted Subsidiary and (B) shall not have been created in anticipation of such Person becoming a Restricted Subsidiary or in anticipation of the acquisition by the Company or any Restricted Subsidiary of the real property secured thereby; (6) Liens placed on property at the time of acquisition, construction, development or improvement thereof, or created in respect of such property within six months after the time of acquisition thereof or the commencement of construction, development or improvement thereof, as the case may be, to secure all or a portion of (or to secure Debt incurred to pay all or a portion of) the purchase price of such acquisition, or the cost of such construction, development or improvement, as the case may be; PROVIDED that (A) such property is not and shall not thereby become encumbered in an amount in excess of the lesser of the cost or fair market value thereof; (B) except as otherwise permitted in SECTION 9.(a), any such Lien shall not encumber any other property of the Company or a Restricted Subsidiary, and (C) any such Lien shall not encumber property of the Company or a Restricted Subsidiary for the purpose of securing an obligation of the Company or a Restricted Subsidiary or securing a Guaranty by the Company or any Restricted Subsidiary in connection with the sale, exchange, transfer or other disposition by the Company or a Restricted Subsidiary of net profits interests; PROVIDED that the Company or a Restricted Subsidiary may assign all or part of the proceeds of production of property in which a net profits interest has been -53- granted to secure its obligation to make net profits interests payments therefrom; and PROVIDED FURTHER that any such Lien shall not encumber any other property of the Company or any Restricted Subsidiary; (7) Liens on the capital stock of a Restricted Subsidiary acquired after April 11, 1990 by the Company or a Restricted Subsidiary and created or assumed contemporaneously with such acquisition, to secure Debt assumed or incurred to finance all or a part of the purchase price of such acquisition; (8) Liens on the capital stock of an Unrestricted Subsidiary other than the Special Subsidiary; (9) from and after the time that the Company and the wholly owned Restricted Subsidiaries shall have become the owners of all of the outstanding general and limited partner interests in the Special Subsidiary, (A) Liens on all or any portion of the limited partner interests in SFEP, at such times as SFEP shall be an Unrestricted Subsidiary or (B) at such times as SFEP shall be a Restricted Subsidiary, Liens securing Debt incurred to finance all or a part of the purchase price of limited partner interests in the Special Subsidiary acquired by the Company and the wholly owned Restricted Subsidiaries from Persons other than the Special Subsidiary in a single transaction or a series of publicly announced related transactions that were completed within six months and that result in the ownership by the Company and the wholly owned Restricted Subsidiaries of 100% of the general and limited partner interests therein; PROVIDED that the Liens described in this CLAUSE (B) shall extend only to the limited partner interests so acquired; (10) Liens on property of the Company or a Restricted Subsidiary to secure Debt assumed or incurred in the form of Capitalized Lease Obligations or industrial revenue bonds, pollution control bonds or similar tax-exempt financings; PROVIDED that any such Lien shall not encumber any property of the Company or a Restricted Subsidiary other than the property the acquisition or construction of which is financed or refinanced, in whole or in part, with proceeds from such Debt; (11) Liens created pursuant to the Security Documents under the Revolving and Term Credit Agreement; (12) any Lien renewing or extending any Lien permitted by CLAUSES (4), (5), (6), (7), (8), (9), (10) or (11) above; PROVIDED that the principal amount of the Debt secured thereby is not increased and such Lien is not extended to other property; and (13) other Liens on any property of the Company or a Restricted Subsidiary securing any Funded Debt of the Company or a Restricted Subsidiary permitted by SECTION 9.7(b)(3)(C) or (4)(C). -54- (b) DEBT. Create, incur, assume or suffer to exist any Debt, except (1) Funded Debt of the Company under the Revolving and Term Credit Agreement and Funded Debt of the Company hereunder or represented by the notes issued pursuant to the Serial Note Agreement; (2) Funded Debt of the Company or any Restricted Subsidiary set forth in SCHEDULE II, which may not be renewed, extended, refunded or permitted to remain outstanding after the stated maturities thereof except by the Person primarily liable thereon and unless, after giving effect to such renewal, extension or refunding, neither the principal amount thereof nor the aggregate Funded Debt of the Company and the Restricted Subsidiaries is increased thereby; (3) Funded Debt of the Company if at the time it is created, incurred or assumed and after giving effect thereto, to the receipt of the proceeds thereof, and to the concurrent retirement of any Debt, (A) the aggregate amount of all Funded Debt of the Company and the Restricted Subsidiaries shall not exceed 65% of Consolidated Net Tangible Assets; (B) Consolidated Net Earnings Available for Fixed Charges for the four fiscal quarters of the Company (taken as a single period) most recently ended shall equal at least 225% of Fixed Charges for the four fiscal quarters of the Company (taken as a single period) commencing with and including the fiscal quarter during which such Funded Debt is created, incurred or assumed, and (C) if such Funded Debt is Secured Debt, Special Debt shall not exceed 10% of Consolidated Net Tangible Assets; (4) Funded Debt of a Restricted Subsidiary if at the time it is created, incurred or assumed and after giving effect thereto, to the receipt of the proceeds thereof, and to the concurrent retirement of any Debt, (A) the aggregate amount of all Funded Debt of the Company and the Restricted Subsidiaries shall not exceed 65% of Consolidated Net Tangible Assets; (B) Consolidated Net Earnings Available for Fixed Charges for the four fiscal quarters of the Company (taken as a single period) most recently ended shall equal at least 225% of Fixed Charges for the four fiscal quarters of the Company (taken as a single period) commencing with and including the fiscal quarter during which such Funded Debt is created, incurred or assumed, and (C) Special Debt shall not exceed 10% of Consolidated Net Tangible Assets; (5) Debt of the Company owing to a wholly owned Restricted Subsidiary which is subordinated to the Obligations upon terms set forth on SCHEDULE V, and Debt of a Restricted Subsidiary owing to the Company or any other wholly owned Restricted Subsidiary; and -55- (6) Current Debt of the Company not secured by any Lien on any property owned by the Company or the Restricted Subsidiaries; PROVIDED that for a period of at least 45 consecutive days in each period of 18 consecutive months commencing April 1, 1990, the amount of Current Debt (other than Current Debt existing pursuant to customary cash management services provided to the Special Subsidiary which is repaid in full within 60 days) permitted by this clause shall at no time exceed the maximum amount of Funded Debt that the Company could then incur under SECTION 9.7(b)(3) without violation thereof. For purposes of this SECTION 9.7(b), any Debt (i) which is extended, renewed or refunded shall be deemed to have been incurred when extended, renewed or refunded (except as provided pursuant to CLAUSE (2) above); (ii) of a Person when it becomes, or is merged into, or is consolidated with a Restricted Subsidiary or the Company shall be deemed to have been incurred at that time; (iii) which is permitted by CLAUSE (5) above and which is owing to a wholly owned Restricted Subsidiary when it ceases to be a wholly owned Restricted Subsidiary shall be deemed to have been incurred at that time; (iv) of a Restricted Subsidiary which is owing to the company or any other Restricted Subsidiary shall be deemed to have been incurred at the time the Company or such other Restricted Subsidiary disposes of such Debt to any Person other than the Company or a wholly owned Restricted Subsidiary; (v) which is Funded Debt of the Company or a Restricted Subsidiary consisting of a reimbursement obligation in respect of a letter of credit or similar instrument shall be deemed to be incurred when such letter of credit or similar instrument is issued, or (vi) which is Funded Debt of the type described in CLAUSE (b) of the definition of Funded Debt, or any Guaranty of such Funded Debt, shall not be deemed to have been created, incurred or assumed, as the case may be, at the time it becomes Funded Debt, but shall be included in all subsequent calculations of Funded Debt for all purposes of this Agreement. (c) SALE OF LESS THAN SUBSTANTIALLY ALL ASSETS. Sell, exchange, transfer or otherwise dispose of part, but less than all or substantially all, of their respective assets, unless (1) such sale, exchange, transfer or other disposition is made in the ordinary course of business (including abandonments, farm-ins, farm-outs, leases and subleases of developed or undeveloped properties owned or held by the Company or any Restricted Subsidiary that are made or entered into in the ordinary course of business, but EXCLUDING, however, any sale of net profits interests in developed oil and gas properties); or (2) after giving effect to such sale, exchange, transfer or other disposition, (A) the aggregate net book value of (i) all assets of the Company and the Restricted Subsidiaries (including the sale of net profits interests in developed oil and gas -56- properties) sold, exchanged, transferred or otherwise disposed of (on a consolidated basis) (but excluding assets sold, exchanged, transferred or otherwise disposed of in the ordinary course of business pursuant to SECTION 9.7(c)(1) during the period of 12 consecutive months immediately preceding such sale, exchange, transfer or other disposition and (ii) the assets of all Restricted Subsidiaries, the stock of which have been sold or otherwise disposed of pursuant to SECTION 9.7(d)(2)(A) during such 12-month period shall not exceed 10% of Consolidated Net Tangible Assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition, and (B) the assets described in the foregoing CLAUSE (A) shall not have contributed more than 10% of EBITD of the Company and the Restricted Subsidiaries for the four most recently completed fiscal quarters taken as a single accounting period; or (3) after giving effect to such sale, exchange, transfer or other disposition, (A) the aggregate net book value of (i) all assets of the Company and the Restricted Subsidiaries (including the sale of net profits interests in developed oil and gas properties) sold, exchanged, transferred or otherwise disposed of (on a consolidated basis) (but excluding assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(1) and (2)) during the period of 12 consecutive months immediately preceding such sale, exchange, transfer or other disposition and (ii) the assets of all Restricted Subsidiaries, the stock of which has been sold or otherwise disposed of pursuant to SECTION 9.7(d)(2)(B) during such 12-month period, shall not exceed 10% of Consolidated Net Tangible Assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition; (B) the assets described in the foregoing CLAUSE (A) shall not have contributed more than 10% of EBITD for the four most recently completed fiscal quarters taken as a single accounting period, and (C) within six months after such sale, exchange, transfer or other disposition, the net proceeds thereof are applied toward, or the exchange results in, (1) the acquisition by the Company or a Restricted Subsidiary of (i) assets which have an aggregate fair market value at least equal to the net proceeds received by the Company and its Restricted Subsidiaries from such sale, exchange, transfer or other disposition; (ii) if the assets so sold, exchanged, transferred or otherwise disposed of were located in the United States of America or Canada, the assets acquired are located in the United States of America or Canada, and (iii) the assets so acquired are of a type usual and customary in the oil and gas business; PROVIDED that no Liens shall at any time exist on the assets so acquired which secure any Debt except as permitted by SECTION 9.7(a)(13) or (2) the prepayment of an aggregate principal amount of all Obligations plus accrued interest and premium, if any, thereon in accordance with this Agreement and the Revolving and Term Credit Agreement, or the payment of an -57- aggregate principal amount of other Funded Debt (other than Funded Debt subordinate in right of payment to the Obligations) plus accrued interest and premium, if any, in either case in an amount at least equal to the aggregate net proceeds that the Company or a Restricted Subsidiary receives from the sale, exchange, transfer or other disposition of such assets. (d) SALE OF STOCK OF RESTRICTED SUBSIDIARIES. Sell or otherwise dispose of, or part with control of, any shares of stock of any Restricted Subsidiary, except (1) to the Company or another wholly owned Restricted Subsidiary and (2) that all shares of stock of any Restricted Subsidiary at the time owned by the Company and all Restricted Subsidiaries may be sold as an entirety for a cash consideration which represents the fair market value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock so sold; PROVIDED that for purposes of this exception: (A) (i) the net book value of the assets of such Restricted Subsidiary together with (x) the net book value of the assets of any other Restricted Subsidiary the stock of which was sold during the preceding 12-month period and (y) the net book value of the assets of the Company and all Restricted Subsidiaries sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(2) during the preceding 12-month period, does not represent more than 10% of Consolidated Net Tangible Assets as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition and (ii) the earnings of such Restricted Subsidiary together with (x) the earnings of any other Restricted Subsidiary the stock of which was sold or otherwise disposed of pursuant to the exception described in this CLAUSE (A) during the preceding 12-month period and (y) the earnings attributable to the assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(2) during such 12-month period, do not represent more than 10 of EBITD for the four most recently completed fiscal quarters taken as a single accounting period; and PROVIDED FURTHER that, at the time of such sale, such Restricted Subsidiary shall not own, directly or indirectly, any shares of stock of the Company or any other Restricted subsidiary unless all of the shares of stock of such other Restricted Subsidiary owned, directly or indirectly, by the Company and all Restricted Subsidiaries are simultaneously being sold as permitted by the exception described in this CLAUSE (A); or (B) (i) the net book value of the assets of such Restricted Subsidiary together with (x) the net book value of the assets of any other Restricted Subsidiary the stock of which was sold during the preceding 12-month period and (y) the net book value of the assets of the Company and any Restricted Subsidiary sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(3) during the preceding 12-month period, does not represent more than 10% of the Consolidated Net Tangible Assets as -58- of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition; (ii) the earnings of such Restricted Subsidiary together with (x) the earnings of any other Restricted Subsidiary the stock of which was sold or otherwise disposed of pursuant to the exception described in this CLAUSE (B) during the preceding 12-month period and (y) the earnings attributable to the assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(3) during such 12-month period, do not represent sore than 10% of EBITD for the four most recently completed fiscal quarters taken as a single accounting period, and (iii) within six months after such sale or other disposition, the proceeds thereof are applied toward (i) the acquisition by the Company or a Restricted Subsidiary of (1) assets which have an aggregate fair market value at least equal to the net proceeds received by the Company and the Restricted Subsidiaries from such sale or other disposition and (2) the assets so acquired are of a type usual and customary in the oil and gas business; PROVIDED that no Liens shall at any time exist on the assets so acquired which secure Any Debt except as permitted by SECTION 9.7(a)(13), or (ii) the prepayment of an aggregate principal amount of all Obligations in accordance with this Agreement and the Revolving and Term Credit Agreement, or the payment of an aggregate principal amount of other Funded Debt (other than Funded Debt subordinate in right of payment to the Obligations) plus accrued interest and premium, if any, in either case in an amount at least equal to the aggregate net proceeds that the Company or a Restricted Subsidiary receives from the sale or other disposition; and PROVIDED FURTHER that, at the time of such sale or other disposition, such Restricted Subsidiary shall not own, directly or indirectly, (y) any shares of stock of the Company or any other Restricted Subsidiary unless all of the shares of stock of such other Restricted Subsidiary owned, directly or indirectly, by the Company and all Restricted Subsidiaries are simultaneously being sold as permitted by the exception described in this CLAUSE (B). (e) MERGER AND SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. Merge or consolidate with or into any other Person or convey, exchange, transfer or otherwise dispose of all or a substantial part of its assets (i.e., assets which could not otherwise be disposed of pursuant to SECTION 9.7(c)(2) or (3)) to any Person except that (1) any wholly owned Restricted Subsidiary may merge with the Company (PROVIDED that the Company shall be the continuing or surviving corporation) or with any one or more other wholly owned Restricted Subsidiaries; (2) any Restricted Subsidiary may sell, exchange, transfer or otherwise dispose of any of its assets to the Company or to a wholly owned Restricted Subsidiary; -59- (3) any Restricted Subsidiary may sell, exchange, transfer or otherwise dispose of all or substantially all of its assets subject to the conditions and provisions specified in SECTIONS 9.7(c)(2) and (3); (4) any Restricted Subsidiary may merge into or consolidate with any Person which does not thereupon become a Restricted Subsidiary, subject to the conditions and provisions specified in SECTION 9.7(d) with respect to a sale or other disposition of the stock of such Restricted Subsidiary; (5) any Restricted Subsidiary may permit any Person to be merged into such Restricted Subsidiary or may consolidate with or merge into a Person which thereupon becomes a Restricted Subsidiary; PROVIDED that immediately after any such merger or consolidation, no Default shall have occurred and be continuing; (6) the Company may permit any Person to be merged into the Company (such that the Company shall be the continuing or surviving corporation); and (7) the Company may permit any corporation to consolidate with the Company and the Company may merge into or otherwise dispose of its assets as an entirety or substantially as an entirety to any solvent corporation organized under the laws of the United States of America or any state thereof and having at least 80% of its consolidated assets located in the United States of America and Canada which expressly assumes in writing the due and punctual performance of the obligations of the Company under the Credit Documents, to the same extent as if such successor or transferee corporation had originally executed the Credit Documents in the place of the Company (it being agreed that such assumption shall, upon the request of any Bank and at the expense of such successor or transferee corporation, be evidenced by the exchange of each outstanding Application for another Application executed by such successor or transferee corporation, with such changes in phraseology and form as may be appropriate but in substance of like terms as the Application surrendered for such exchange and of like unpaid principal amount, and that each Application executed pursuant to this Agreement after such assumption shall be executed by and in the name of such successor or transferee corporation); PROVIDED that for purposes of SECTIONS 9.7(e)(6) and (7) immediately after such merger, consolidation, sale or other disposition, and after giving effect thereto, (x) such successor or transferee Person could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(3) and (y) no Default shall have occurred and be continuing. As soon as practicable, and in any event at least 75 days prior to the proposed consummation date of any merger, consolidation, sale or other disposition described in SECTION 9.7(e)(7), the Company shall give written notice thereof to each Bank describing in reasonable detail the -60- proposed transaction, the date on which it is proposed to be consummated and the identity, jurisdiction of organization, and geographic composition of assets of the proposed successor or transferee corporation. No disposition by the Company of its assets as an entirety or substantially as an entirety under SECTION 9.7(e)(7) shall release the Company as the applicant under any Application from its liability as obligor thereon. (f) SALE AND LEASEBACK. Enter into any Sale and Leaseback Transaction unless: (1) immediately after giving effect thereto and to the application of any sales proceeds received in connection therewith, Special Debt shall not exceed 10% of the Consolidated Net Tangible Assets; or (2) the net sales proceeds received by the Company or a Restricted Subsidiary in respect of the assets sold pursuant to such Sale and Leaseback Transaction are greater than or equal to the fair market value of the assets sold (which determination shall be based upon a written opinion (the cost of which shall be borne exclusively by the Company) as to valuation from an independent valuation expert selected by the Company) and such proceeds are concurrently applied to (A) the purchase, acquisition, development or construction of assets having a value at least equal to such net proceeds, and to be used in the Company's or such Restricted Subsidiary's business; PROVIDED that no Liens shall at any time exist on such assets which secure any Debt except as permitted by SECTION 9.7(a)(13); (B) the prepayment in accordance with this Agreement of any aggregate principal amount of all the Obligations (plus accrued interest and premium, if any) at least equal to the amount of such net proceeds; or (C) the payment of other Funded Debt (other than Funded Debt subordinate in right of payment to the Obligations) in an aggregate principal amount at least equal to the amount of such net sales proceeds; or (3) the Sale and Leaseback Transaction involves the sale of assets by the Company to a wholly owned Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another wholly owned Restricted Subsidiary; PROVIDED that if the Company is the seller under any such Sale and Leaseback Transaction, its lease obligations thereunder shall be subordinated to the Obligations represented by the Applications upon terms set forth on SCHEDULE V. (g) INVESTMENTS IN THE SPECIAL SUBSIDIARY. Directly or indirectly make an Investment in the Special Subsidiary after March 31, 1990, unless (1) the aggregate amount of all other Investments in the Special Subsidiary made, directly or indirectly, by the Company and the Restricted Subsidiaries after March 31, 1990 shall not exceed the aggregate amount of cash distributions received by the Company and the Restricted Subsidiaries from the Special Subsidiary after March 31, 1990 or (2) in the opinion of -61- the Board of Directors of the Company, the Investment would not impair the ability of the Company to make when due any payment (including any prepayment required by SECTION 3 of principal of or interest on the Reimbursement Obligations. (h) TRANSACTIONS WITH AFFILIATES. Directly or indirectly purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise deal with, in the ordinary course of business or otherwise, (1) any Affiliate (except any employee compensation benefit plan or any Restricted Subsidiary) or (2) any Person (other than a Restricted Subsidiary) in which an Affiliate or the Company (directly or indirectly) owns, beneficially or of record, 5% or more of the outstanding voting stock or similar equity interest, except that (A) any Affiliate may be a director, officer or employee of the Company or any Restricted Subsidiary and may be paid reasonable compensation in connection therewith and (B) subject to applicable fiduciary standards with respect to the Special Subsidiary, acts and transactions that would otherwise be prohibited by this Subsection may be performed or engaged in if upon terms not less favorable to the Company or any Restricted Subsidiary than if no relationship described in CLAUSES (1) and (2) above existed. (i) TAX CONSOLIDATION. Except for the Tax Allocation Agreements, the Company will not, and will not permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person unless such other Person shall have agreed in writing with the Company that the Company's or such Subsidiary's liability with respect to taxes as a result of the filing of any such consolidated income tax return with such Person shall not be materially greater, nor the receipt of any tax benefits materially less, than they would have been had the Company and its Subsidiaries continued to file a consolidated income tax return with the Company as the parent corporation. 9.8 ISSUANCE OF STOCK BY RESTRICTED SUBSIDIARIES. The Company covenants that it will not permit any Restricted Subsidiary (either directly or indirectly, by the issuance of rights or options for, or securities convertible into, such shares) to issue, sell or otherwise dispose of any shares of any authorized but unissued or treasury class of such Restricted Subsidiary's stock (other than directors' qualifying shares) except to the Company or another Restricted Subsidiary. 9.9 COVERAGE RATIOS. As of the end of each fiscal quarter of the Company, and each delivery of a Required Reserve Report or Optional Reserve Report, the Company shall be in compliance with all Required Ratios (except for any noncompliance resulting solely from an Engineering Shortfall, and then only during the cure period permitted by Section 10.1(e)). -62- Section 10. DEFAULTS. 10.1 EVENTS OF DEFAULT. If one or more of the following events (herein called "EVENTS OF DEFAULT") shall occur and be continuing: (a) the Company shall fail to pay any principal of any Reimbursement Obligation or any fee or other principal amount payable hereunder or under any other Credit Document when due, or shall fail to pay any interest on any amount hereunder or under any other Credit Document for more than three days after the date due; or (b) any member of the Combined Group shall default in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafted accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or any member of the Combined Group shall fail to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due prior to any stated maturity, or any member of the Combined Group shall fail to pay any Guaranty relating to Debt for borrowed money in accordance with its terms, PROVIDED that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration shall occur and be continuing shall exceed $10,000,000; or (c) any representation or warranty by the Company or any of its officers in any Credit Document or in any writing furnished to the Agent or the Banks in connection herewith shall prove to have been false or misleading in any material respect as of the date as of which it was made; or (d) the Company shall default in the performance of any of its obligations under SECTIONS 9.6 through 9.8 or under SECTION 9.9 (other than a Default resulting solely from an Engineering Shortfall); or (e) the Company hall deliver any Independent Engineering Report and related Coverage Report to the Banks in accordance with SECTION 9.1 or SECTION 2.2(d) reflecting noncompliance with any Required Ratio and such noncompliance shall result solely from an Engineering Shortfall and shall not be cured (such cure to be -63- evidenced by a new Coverage Report demonstrating compliance with all Required Ratios) on or before the date 180 days after the Company delivers such Independent Engineering Report and related Coverage Report; or (f) the Company shall default in the performance of any of its obligations in any Credit Document other than those specified elsewhere in this SECTION 10.1 and such default shall not be remedied within 30 days after any executive officer of the Company obtains actual knowledge thereof; or (g) any member of the Combined Group shall (1) make An assignment for the benefit of creditors; (2) generally fail to pay its debts as such debts become due, or (3) admit in writing its inability to generally pay its debts as such debts become due; or (h) a Governmental Authority shall enter any decree or order for relief in respect of any member of the Combined Group under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "BANKRUPTCY LAW"), of any jurisdiction; or (i) any member of the Combined Group shall petition or apply to any Governmental Authority for, or consent to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of such member of the Combined Group, or of any substantial part of the assets of such member of the Combined Group, or shall commence a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Restricted Subsidiary) relating to any member of the Combined Group under the Bankruptcy Law of any other jurisdiction; or (j) any such petition or application referred to in SECTION 10.1(i) shall be filed, or any such proceedings referred to in SECTION 10.1(i) shall be commenced, against any member of the Combined Group and such member of the Combined Group by any act shall indicate its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree shall be entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree shall remain unstayed and in effect for more than 60 consecutive days; or (k) any order, judgment or decree shall be entered in any proceedings against any member of the Combined Group decreeing the dissolution of any member of the Combined Group and such order, judgment or decree shall remain unstayed and in effect for more than the appeal time provided by law; or -64- (l) any order, judgment or decree shall be entered in any proceedings against any member of the Combined Group decreeing a split-up of such member of the Combined Group which requires (1) the divestiture of assets which exceed, or the divestiture of partnership interest in the Special Subsidiary or of the stock of a Restricted Subsidiary whose assets exceed, 10% of Consolidated Net Tangible Assets as of the end of the fiscal quarter immediately preceding or coinciding with such divestiture or (2) the divestiture of assets or stock of a Restricted Subsidiary or assets of or partnership interest in the Special Subsidiary, which shall have contributed more than 10% of EBITD for the four most recently completed fiscal quarters, and such order, judgment or decree shall remain unstayed and in effect for more than 60 consecutive days; or (m) any judgment or order, or series of judgments or orders, for the payment of money in an amount in excess of $5,000,000 shall be rendered against any member of the Combined Group and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within the appeal time provided by law from the date of entry thereof, or such member of the Combined Group shall not, within said Appeal time, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (n) the Company or any ERISA Affiliate shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall have become liable to pay with respect to any Plan; or notice of intent to terminate a Plan or Plans (other than a multiemployer plan under Section 4001(a)(3) of ERISA) having aggregate Unfunded Liabilities in excess of $5,000,000 shall be filed under Title IV of ERISA by the Company or any ERISA Affiliate, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Plan or Plans (other than a multiemployer plan under Section 4001(a)(3) of ERISA) having aggregate Unfunded Liabilities in excess of $5,000,000 or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Company or any ERISA Affiliate to enforce Section 515 or 4219(c)(5) of ERISA; or the Company or any ERISA Affiliate shall incur a complete or partial withdrawal liability under Title IV of ERISA in an annual amount in excess of $2,000,000 (and in the aggregate $5,000,000) in connection with any Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan or Plans having aggregate Unfunded Liabilities in excess of $5,000,000 must be terminated; or there shall occur any event or condition that might reasonably constitute grounds for the termination of any Plan or Plans having aggregate Unfunded Liabilities in excess of $5,000,000 or with respect to such Plan or Plans either the imposition of any liability in excess of $5,000,000 (other than contributions in the ordinary course) or any -65- Lien provided under Section 4068 of ERISA securing an amount in excess of $5,000,000 on any property of the Company or any ERISA Affiliate; provided, however, any amounts owing by Santa Fe Pacific Corporation pursuant to the ERISA Indemnification Agreement between Santa Fe Pacific Corporation and the Company shall first be offset against the dollar threshold amounts set forth above before any such condition or event constitutes an event of default under this paragraph; or (o) one or more demands for payment is made upon the Company by Santa Fe Pacific Corporation or any other Person pursuant to the Tax Indemnification Agreement and such demands would exceed $5,000,000 in the aggregate; or (p) any Change of Control shall occur; or (q) any Event of Default shall occur and be continuing under the Revolving and Term Credit Agreement, THEREUPON: (I) the Agent may (and, if directed by the Required Banks, shall) do any or all of the following: (a) terminate any Letter of Credit providing for such termination by sending a notice of termination as provided therein; (b) declare the Commitments terminated (whereupon the Commitments shall be terminated); and (c) declare the principal amount then outstanding of and the accrued interest on all Reimbursement Obligations and all fees and all other amounts payable hereunder and under the Applications to be forthwith due and payable, whereupon such amounts shall be and become immediately due and payable, without notice (including notice of acceleration and notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly WAIVED by the Company; PROVIDED that in the case of the occurrence of an Event of Default with respect to the Company referred to in SECTION 10.1(g) through (l), the Commitments shall be automatically terminated and the principal amount then outstanding of and the accrued interest on the Reimbursement Obligations and fees and all other amounts payable hereunder and under the Applications shall be and become automatically and immediately due and payable, without notice (including notice of intent to accelerate and notice of acceleration) and without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly WAIVED by the Company; (II) each Bank may exercise its rights of offset against each account and all other property of the Company in the possession of such Bank, which right is hereby granted by the Company to the Banks; and (III) the Agent and each Bank may exercise any and all other rights pursuant to the Credit Documents, at law and in equity. -66- Section 11. THE AGENT. 11.1 APPOINTMENT, POWERS AND IMMUNITIES. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its Agent under the Credit Documents and under the Letters of Credit with such powers as are specifically delegated to the Agent by the terms thereof, together with such other powers as are reasonably incidental thereto. The Agent (which term as used in this SECTION 11 shall include reference to its Affiliates and its own and its Affiliates' officers, directors, employees and agents) shall (a) have no duties or responsibilities except those expressly set forth in the Letters of Credit and the Credit Documents, and shall not by reason of any Credit Document be a trustee or fiduciary for any Bank; (b) not be responsible to any Bank for any recitals, statements, representations or warranties contained in any Credit Document, or in any certificate or other document referred to or provided for in, or received by any of them under, any Credit Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any Credit Document or any other document referred to or provided for therein or any property covered thereby or for any failure by the Company or any other Person to perform any of its obligations thereunder; (c) not be required to initiate or conduct any litigation or collection proceedings hereunder or under any Credit Document except to the extent requested by the Required Banks (and SECTION 11.7 shall apply), and (d) not be responsible for any action taken or omitted to be taken by it under any Credit Document or any other document or instrument referred to or provided for therein or in connection therewith, including pursuant to its own negligence, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Without in any way limiting any of the foregoing, each Bank acknowledges that the Agent shall have no greater responsibility in the operation of the Letters of Credit than is specified in the Uniform Customs and Practice of Documentary Credits (1983 Revision, International Chamber of Commerce Publication No. 400). 11.2 RELIANCE BY AGENT. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (which may be counsel for the Company), independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by any Credit Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions of the Required Banks, and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. -67- 11.3 DEFAULTS. The Agent shall not be deemed to have knowledge of the occurrence of a Default (other than the non-payment of principal of or interest on Reimbursement Obligations) unless it has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to SECTIONS 11.7 and 12.5) take such action with respect to such Default as shall be directed by all Banks or the Required Banks, as appropriate, and within its rights under the Credit Documents and at law or in equity; PROVIDED that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, permitted hereby with respect to such Default as it shall deem advisable in the best interests of the Banks and within its rights under the Credit Documents, at law or in equity. 11.4 RIGHTS AS A BANK. With respect to their Commitments, the Letters of Credit and the Reimbursement Obligations, TCB and NationsBank in their capacities as Banks hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though they were not acting as the Agent or the Co-Agents, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent and the Co-Agents in their individual capacity. The Agent and the Co-Agents may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust, letter of credit, agency or other business with the Company (and any of its Affiliates) as if they were not acting as the Agent and the Co-Agents, and the Agent and the Co-Agents may accept fees and other consideration from the Company and its Affiliates (in addition to the fees heretofore agreed to between the Company and the Agent or the Co-Agents) for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 11.5 INDEMNIFICATION. The Banks agree to indemnify the Agent (to the extent not reimbursed under SECTION 12.3 or 12.4, but without limiting the obligations of the Company under said SECTIONS 12.3 and 12.4), ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever (including the consequences of the negligence of the Agent) which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of any Credit Document or any other documents contemplated by or referred to therein or the transactions contemplated thereby (including the costs and expenses which the Company is obligated to pay under SECTIONS 12.3 and 12.4 but excluding, unless a Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of -68- its agency duties hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, including the negligence of the Agent; PROVIDED that no Bank shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the party to be indemnified. The obligations of the Banks under this SECTION 11.5 shall survive the termination of this Agreement. 11.6 NON-RELIANCE ON THE AGENT AND OTHER BANKS. Each Bank agrees that it has received current financial information with respect to the Company and that it has, independently and without reliance on the Co-Agents or any other Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and decision to enter into this Agreement and that it will, independently and without reliance upon the Co-Agents or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under the Credit Documents. The Co-Agents shall not be required to keep themselves informed as to the performance or observance by the Company of any Credit Document or any other document referred to or provided for therein or to inspect the property or books of the Company or any other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Co-Agents under the Credit Documents, the Co-Agents shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company (or any of its Affiliates) which may come into the possession of the Co-Agents. 11.7 FAILURE TO ACT. Except for action expressly required of the Agent under the Credit Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction by the Banks of their indemnification obligations under SECTION 11.5 against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 11.8 RESIGNATION OR REMOVAL OF THE AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Company, and the Agent may be removed at any time with or without cause by the Required Banks. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Required Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which has an office in the United States and a combined -69- capital and surplus of at least $250,000,000 and with its deposits insured by the FDIC. Upon the acceptance of any appointment as the 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 hereunder. Such successor Agent shall promptly specify its Principal Office referred to in SECTIONS 3.1 and 5.1 by notice to the Company. After any retiring Agent's resignation or removal hereunder as the Agent, the provisions of this SECTION 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. Section 12. MISCELLANEOUS. 2.1 WAIVER. No waiver of any Default shall be a waiver of any other Default. No failure on the part of the Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Credit Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided in the Credit Documents are cumulative and not exclusive of any remedies provided by law or in equity. 12.2 NOTICES. All notices and other communications provided for herein (including any modifications of, or waivers or consents under, this Agreement) shall be given or made by telex, telegraph, telecopy (confirmed by mail), cable or other writing and telexed, telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to the Company and the Agent given in accordance with this Section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 12.3 EXPENSES, ETC. Whether or not any Letter of Credit is ever issued, the Company shall pay or reimburse on demand each of the Banks and the Co-Agents for paying: (a) the reasonable fees and expenses of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., special counsel to the Agent, in connection with (1) the preparation, execution and delivery of the Credit Documents (including the exhibits and schedules hereto), the issuance of the Letters of Credit hereunder and (2) any modification, supplement or waiver of any of the terms of any Credit Document; (b) all reasonable out-of-pocket costs and expenses of the Banks and the Co-Agents (including reasonable counsels' fees) in connection with -70- any Event of Default under or the enforcement of any Credit Document; (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of any Credit Document or any other document referred to therein; and (d) reasonable expenses of due diligence and syndication, and mutually agreed advertising and marketing costs. 12.4 INDEMNIFICATION. The Company shall indemnify the Agent (including the Agent when acting as issuer of the Letters of Credit), the Co-Agents, the Banks, and each Affiliate thereof and their respective directors, officers, employees, agents and counsel from, and hold each of them harmless against, any and all losses, liabilities, costs, expenses, claims or damages to which any of them may become subject, regardless of and including losses arising from the negligence of the Agent or the Co-Agents or the Banks or any other indemnitee, (A) in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including, without limitation, any claims, damages, losses, liabilities, costs or expenses which the Agent, such Co-Agent or such Bank, as the case may be, may incur (whether incurred as a result of its own negligence or otherwise) by reason of or in connection with the failure of any other Bank (whether as a result of its own negligence or otherwise) to fulfill or comply with its obligations to the Agent or such Bank, as the case may be, hereunder (but nothing herein contained shall affect the rights the Company may have against such defaulting Bank); and (B) insofar as such losses, liabilities, costs, expenses, claims or damages arise out of or result from any (a) actual or proposed use by the Company of the proceeds of any extension of credit by the Agent or any Bank hereunder; (b) breach by the Company of any Credit Document; (c) violation by the Company or any of its Subsidiaries of any Legal Requirement including Applicable Environmental Laws; (d) any Bank's or the Agent's or any Co-Agent's being deemed an owner or operator of any assets of the Company or its Subsidiaries by a court or other regulatory or administrative agency or tribunal in circumstances in which neither the Agent, either Co-Agent nor any of the Banks is generally operating or generally exercising control over such assets, to the extent such losses, liabilities, claims or damages arise out of or result from any Legal Requirement including Applicable Environmental Laws pertaining to the condition of such assets, (e) Environmental Claim or (f) investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to any of the foregoing, and the Company shall reimburse the Agent, Co-Agent, each Bank, and each Affiliate thereof and their respective directors, officers, employees, agents and counsel, upon demand, for any expenses (including reasonable legal fees) incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages, costs or expenses incurred by a Person or any Affiliate thereof or their respective directors, officers, employees, agents or counsel by reason of the gross negligence or willful misconduct -71- of such Person, Affiliate director, officer, employee, agent or counsel. The obligation of the Company to provide indemnification under this SECTION 12.4 for fees and expenses of counsel shall be limited to the fees and expenses of one counsel in each jurisdiction representing all of the Persons entitled to such indemnification, except to the extent that, in the reasonable judgment of any such indemnified Person, the existence of actual or potential conflicts of interest make representation of all of such indemnified Persons by the same counsel inappropriate; in such a case, the Person exercising such judgment shall be indemnified for the reasonable fees and expenses of its separate counsel to the extent provided in this SECTION 12.4 without giving effect to the first clause of this sentence. Nothing in this SECTION 12.4 is intended to limit the obligations of the Company under any other provision of this Agreement. 12.5 AMENDMENTS, ETC. No amendment or waiver of any provision of any Credit Document, nor any consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Required Banks and the Company, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; PROVIDED that no amendment, waiver or consent shall, unless in writing and signed by each Bank affected thereby, (a) increase the Commitment of any of the Banks or subject the Banks to any additional obligations; (b) reduce the principal of, or interest on, any Reimbursement Obligation, fee or other sum to be paid under any Credit Document; (c) postpone any scheduled date fixed for any payment of principal of, or interest on, any Reimbursement Obligation, fee or other sum to be paid under any Credit Document; (d) change the percentage of any of the Commitments, or of the aggregate unpaid principal amount of the Reimbursement Obligations, or the number of Banks which shall be required for the Banks or any of them to take any action under this Agreement; (e) change any provision contained in SECTIONS 2.3, 5.2, 5.7, 6, 12.3 or 12.4 or this SECTION 12.5, or in the definition of "Required Ratios". Anything in this SECTION 12.5 to the contrary, no amendment, waiver or consent shall be made with respect to SECTION 11 without the consent of the Agent and the Co-Agents. 12.6 SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and inure to the benefit of the Company, the Agent, the Co-Agents and the Banks and their respective successors and assigns. The Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of all of the Banks. (b) Each Bank may sell participations to any Person in all or part of its Reimbursement Obligation, or all or part of its Commitment, in which event, without limiting the foregoing, the provisions of SECTION 6 shall inure to the benefit of each purchaser of a participation and the PRO RATA treatment of -72- payments, as described in SECTION 5 2, shall be determined as if such Bank had not sold such participation. In the event any Bank shall sell any participation, (1) the Company, the Agent, the Co-Agent and the other Banks shall continue to deal solely and directly with such selling Bank in connection with such selling Bank's rights and obligations under the Credit Documents (including the Applications held by such selling Bank); (2) such Bank shall retain the sole right and responsibility to enforce the Reimbursement Obligations, including the right to approve any amendment, modification or waiver of any provision of this Agreement other than amendments, modifications or waivers with respect to (A) any fees payable hereunder to the Banks, and (B) the amount of principal or the rate of interest payable on, or the dates fixed for the scheduled repayment of principal of, the Reimbursement Obligations and other sums to be paid to the Banks hereunder, and (3) the Company agrees, to the fullest extent it may effectively do so under applicable law, that any participant of a Bank may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such participant were a direct holder of Reimbursement Obligations if such Bank has previously given notice of such participation to the Company. (c) Each Bank may assign to one or more Banks or Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the same portion of the related Reimbursement Obligations at the time owing to it); PROVIDED (1) other than in the case of an assignment to a Person at least 50% owned by the assignor Bank, or by a common parent of both, or to another Bank, the Agent and the Company must give their respective prior written consent, which consent will not be unreasonably withheld; (2) the aggregate amount of the Commitment and/or Reimbursement Obligations of the assigning Bank subject to each such assignment (determined as of the date the Assignment Agreement with respect to such assignment is delivered to the Agent) shall in no event be less than $750,000 (or $75,000 in the case of an assignment between Banks) (except for certain exceptions approved by the Company and the Agent) and shall be in an amount that is an integral multiple of $75,000; (3) the assigning Bank shall contemporaneously assign to such assignee Bank or Eligible Assignee an equal percentage of the assigning Bank's Revolving Commitment and Term Loan Commitment and all assigning Bank's other rights and obligations under the Revolving and Term Credit Agreement; and (4) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in its records, an Assignment Agreement with blanks appropriately completed, together with the Applications subject to such assignment and a processing and recordation fee of $2,000 (for which the Company shall have no liability except in the case of assignments required by the Company pursuant to SECTION 6.1 or 6.2, in which case such fee shall be paid by the Company). Upon such execution, delivery, acceptance and recording, from and after the -73- effective date specified in each Assignment Agreement, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment Agreement, have the rights and obligations of a Bank hereunder and (B) the Bank thereunder shall, to the extent provided in such assignment, be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (d) By executing and delivering an Assignment Agreement, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows (1) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby, such assignor Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Credit Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Credit Document; (2) such assignor Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under any Credit Document; (3) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements of the Company previously delivered in accordance herewith and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment Agreement; (4) such assignee will, independently and without reliance upon the Agent, such assignor Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Documents; (5) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Documents as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of the Credit Documents are required to be performed by it as a Bank. (e) The Agent shall maintain at its office a copy of each Assignment Agreement delivered to it and a record of the names and addresses of the Banks and the Commitment of, and principal amount of the Reimbursement Obligations owing to, each Bank from time to time. The entries in such record shall be conclusive, in the absence of manifest error, and the Company, the Agent and the Banks say treat each Person the name of which is recorded therein as a Bank hereunder for all purposes of the Credit Documents. Such records shall be available for inspection by the Company or any -74- Bank at any reasonable time and from time to time upon reasonable prior notice. (f) Upon its receipt of an Assignment Agreement executed by an assigning Bank and the assignee thereunder together with the Application subject to such assignment, the written consent to such assignment and the fee payable in respect thereto, the Agent shall, if such Assignment Agreement has been completed with blanks appropriately filled, (1) accept such Assignment Agreement; (2) record the information contained therein in its records, and (3) give prompt notice thereof to the Company. (g) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company furnished to such Bank by or on behalf of the Company. (h) Any assignment by a Bank pursuant to this SECTION 12.6 shall not result in any single Bank holding in excess of 25% of the aggregate of the Commitments at any one time. (i) Notwithstanding any other provision of this SECTION 12.6, TCB and its Affiliates may not assign their rights hereunder unless, after giving effect to such assignment, TCB and its Affiliates would have an aggregate Commitment Percentage of at least 10%. (j) Notwithstanding anything herein to the contrary, each Bank may pledge and assign all or any portion of its rights and interests under the Credit Documents to any Federal Reserve Bank. 12.7 SURVIVAL; TERM; REINSTATEMENT. In addition to the other provisions of this Agreement expressly stated to survive the termination of this Agreement, the obligations of the Company under SECTIONS 6, 12.3 and 12.4 and the last sentence of this SECTION 12.7 and the obligations of the Banks under SECTION 12.8 shall survive the termination of this Agreement. The term of this Agreement shall be until (a) the full and final payment of all Reimbursement Obligations, (b) the expiry of all Letters of Credit, (c) the termination of all Commitments and (d) the payment of all amounts due under the Credit Documents. The Company agrees that if at any time all or any part of any payment previously applied by any Bank to any Reimbursement Obligation or other sum hereunder is or must be returned by or recovered from such Bank for any reason (including the order of any bankruptcy court), the Credit Documents shall automatically be reinstated to the same effect as if the prior application had not been made, and the Company hereby agrees to indemnify such Bank against, and to save and hold such Bank harmless from, any required return by or recovery from such Bank of any such payment because of its being deemed preferential under applicable Legal Requirements, or for any other reason. -75- 12.8 LIMITATION OF INTEREST. The parties to this Agreement intend to strictly comply with all applicable laws, including applicable usury laws. Accordingly, the provisions of this Section shall govern and control over every other provision of any Credit Document which conflicts or is inconsistent with this Section, even if such provision declares that it controls. As used in this SECTION 12.8, the term "interest" includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law; PROVIDED that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money, and not as interest and (b) all interest at any time contracted for, reserved, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of this Agreement and the Commitments. In no event shall the Company or any other Person be obligated to pay, or the Agent or any Bank have any right or privilege to reserve, receive or retain, (x) any interest in excess of the maximum amount of nonusurious interest permitted under the laws of the State of Texas or the applicable laws (if any) of the United States or of any other state or (y) total interest in excess of the amount which the Agent or such Bank could lawfully have contracted for, reserved, received, retained or charged had the interest been calculated for the full term of this Agreement at the Highest Lawful Rate. On each day, if any, that the interest rate (the "Stated Rate") called for under any Credit Document exceeds the Highest Lawful Rate, the rate at which interest shall accrue shall automatically be fixed by operation of this sentence at the Highest Lawful Rate for that day, and shall remain fixed at the Highest Lawful Rate for each day thereafter until the total amount of interest accrued equals the total amount of interest which would have accrued if there were no such ceiling rate as is imposed by this sentence. Thereafter, interest shall accrue at the Stated Rate unless and until the Stated Rate again exceeds the Highest Lawful Rate when the provisions of the immediately preceding sentence shall again automatically operate to limit the interest accrual rate. The daily interest rates to be used in calculating interest at the Highest Lawful Rate shall be determined by dividing the applicable Highest Lawful Rate per annum by the number of days in the calendar year for which such calculation is being made. None of the terms and provisions contained in any Credit Document which directly or indirectly relate to interest shall ever be construed without reference to this Section, or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the Highest Lawful Rate. If the term of this Agreement is shortened by reason of acceleration of maturity as a result of any Default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason the Agent or any Bank at any time, including the stated maturity, is owed or receives (and/or has received) interest in excess of interest calculated at the Highest Lawful Rate, then and in any such event all of any such excess interest shall be -76- canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to the Agent or such Bank, it shall be credited PRO TANTO against the then-outstanding principal balance of the Company's obligations to the Agent or such Bank, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor. 12.9 CAPTIONS. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 12.10 COUNTERPARTS. Each Credit Document may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement and any of the parties hereto may execute such Credit Document by signing any such counterpart. 12.11 GOVERNING LAW. Except to the extent otherwise specified therein, each Credit Document shall be governed by and construed in accordance with the law of the State of Texas and the United States of America. The Company hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of Texas and of any Texas state court sitting in Harris County, Texas for purposes of all legal proceedings arising out of or relating to the Credit Documents or the transactions contemplated thereby The Company irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. 12.12 SEVERABILITY. Whenever possible, each provision of the Credit Documents shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of any Credit Document shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions of such Credit Document shall not be affected or impaired thereby. 12.13 CHAPTER 15 NOT APPLICABLE. Chapter 15 of the Texas Credit Code shall not apply to any Credit Document or to any Commitment or Letter of Credit or Application or Reimbursement Obligation, nor shall any Credit Document be governed by or be subject to the provisions of such Chapter 15 in any manner whatsoever. -77- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered on May 20, 1992 but effective as of the day and year first above written. SANTA FE ENERGY RESOURCES, INC. a Delaware corporation By: M. J. ROSINSKI Name: M. J. Rosinski Title: Vice President & Chief Financial Officer Address for Notices: Santa Fe Energy Resources, Inc. 1616 South Voss, Suite 100 Houston, Texas 77097 Telecopy: (713) 268-5341 Attention: Vice President-Finance Telex: 794-567 (Answerback: SFEPROD HOU) TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually, as Administrative Agent and as Co-Agent By: JAMES R. MCBRIDE James R. McBride Senior Vice President Address for Notices: Texas Commerce Bank National Lending Offices: Association 712 Main Street Texas Commerce Bank National Houston, Texas 77002 Association Attention: Manager, Energy Group ABA #113000609 Telecopy: (713) 236-4117 For Credit To: Acct. #10967 Telex: 166-053 (Answerback: Attention: Investment TCB HOU) Operations/Norma Benzon with copies to: Reference: Santa Fe Energy Resources, Inc. Texas Commerce Bank National Association P.O. Box 2558 COMMITMENT: $1,817,496.23 Houston, Texas 77252 Attention: Manager, Capital Markets Division and Texas Commerce Bank National Association P.O. Box 2558 Houston, Texas 77252 Attention: Manager, Loan Agreements Division NATIONSBANK OF TEXAS, N.A., individually and as Co-Agent By: H. GENE SHIELS Name: H. Gene Shiels Title: Vice President Address for Notices: Lending Offices: NationsBank of Texas, N.A. NationsBank of Texas, N.A. ABA #111000025 700 Louisiana For Credit to: Acct. P.O. Box 2518 #0180019828 Houston, Texas 77252-2518 Attention: Loan Funds Attention: H. Gene Shiels Transfer Telecopy: (713) 247-6432 Reference: Santa Fe Energy Resources, Inc. COMMITMENT: $1,817,496.23 THE BANK OF NEW YORK By: M. B. DAVIS Name: M. B. Davis Title: Vice President Lending Office: Address for Notices: The Bank of New York ABA #021000018 The Bank of New York For Credit To: Special One Wall Street, 19th Floor Financial Products Dept. New York, New York 10286 Account No. 803-329-7689 Attention: Administration Reference: Santa Fe Energy Telecopy: (212) 635-7923 Resources, Inc. Telex: 420-268 (Answerback:IRV UI) Specify fees, period. COMMITMENT: $1,538,461.54 THE BANK OF NOVA SCOTIA By: A. S. NORSWORTHY Name: A. S. Norsworthy Title: Assistant Agent Address for Notices: Lending Office: Bank of Nova Scotia, New The Bank of Nova Scotia York Agency 55 Park Plaza, Suite 650 ABA #026002532 Atlanta, Georgia 30303 For Credit To: Atlanta Attention: Claude Ashby Agency Telecopy: (404) 525-3833 Reference: Santa Fe Energy Telex: 00542319 Resources, Inc. (Answerback: SCOTIABANK ATL) COMMITMENT: $1,538,461.54 with a copy to: The Bank of Nova Scotia 1100 Louisiana, Suite 3000 Houston, Texas 77002 Attention: Mark Ammerman Telecopy: (713) 752-2425 BANK OF MONTREAL By: MARK GREEN Name: Mark Green Title: Director Address for Notices: Lending Offices: Harris Bank Bank of Montreal ABA #071000288 700 Louisiana, Suite 4400 For Credit To: Bank of Houston, Texas 77002 Montreal, Chicago Branch Attention: Dennis Spencer Attention: E. Rios Telecopy: (713) 223-4007 Reference: Santa Fe Energy Telex: 77-5640 Resources, Inc. (Answerback: BKMONTREAL HOU) COMMITMENT: $1,538,461.54 CIBC, INC. By: BRIAN R. SWINFORD Name: Brian R. Swinford Title: Vice President Address for Notices: Lending Offices: Morgan Guaranty Trust CIBC, Inc. Company of New York 200 Galleria Parkway, NW ABA #021-000-238 Suite 650 For Credit To: CIBC, Atlanta, Georgia 30339 Atlanta Acct. #630-00-480 Attention: Alex Dymanus For Further Credit To: Telecopy: (404) 955-1185 Acct. #0701610 Telex: 790-745 Attention: Loan Operations (Answerback: CANBANK ATL) Reference: Santa Fe Energy Resources, Inc. COMMITMENT: $1,538,461.54 with a copy to: Canadian Imperial Bank of Commerce 2 Houston Center, Suite 1200 Houston, Texas 77010 Attention: Brian R. Swinford Telecopy: (713) 658-9922 BANQUE PARIBAS HOUSTON AGENCY By: BARTON D. SCHOUEST Name: Barton D. Schouest Title: Group Vice President By: MEI WAN TONG Name: Mei Wan Tong Title: Group Vice President Lending Offices: Address for Notices: Bankers Trust Co. ABA #02-100-1033 Banque Paribas Houston Agency 1200 Smith Street, Suite 3100 Houston, Texas 77002 For Credit To: Banque Attention: Brian Malone Paribas New York Telecopy: (713) 659-3832 #04202195 Final Credit 2144-001545 Banque Paribas Houston Agency Reference: Santa Fe Energy Resources, Inc. COMMITMENT: $1,153,846.16 THE FIRST NATIONAL BANK OF BOSTON By: JOHN R. VAUGHAN, JR. Name: John R. Vaughan, Jr. Title: Director Address for Notices: Lending Offices: Bank of Boston The First National Bank of Boston ABA #011000390 100 Federal Street Boston, Massachusetts 02110 For Credit To: Attention: George W. Passela not applicable Telecopy: (617) 434-3652 Reference: Santa Fe Energy Resources, Inc. COMMITMENT: $1,538,461.54 ABN AMRO Bank, N.V.--HOUSTON AGENCY By: CHARLES W. RANDALL Name: Charles W. Randall Title: Assistant Vice President Address for Notices: Lending Offices: ABN AMRO New York ABN AMRO Bank, N.V.--Houston ABA #026009580 Agency Three Riverway, Suite 1600 Houston, Texas 77056 Attention: Mr. Collis Sanders For Credit To: ABN AMRO Telecopy: (713) 629-7533 Houston Agency Acct. #651001071541 Reference: Santa Fe Energy Resources, Inc. COMMITMENT: $2,134,238.30 EXHIBITS: A - Form of Application B - Assignment Agreement SCHEDULES: I - Restricted and Unrestricted Subsidiaries II - Liens and Funded Debt III - Initial Approved Assumptions and Price Protection Agreements IV - Coverage Report V - Subordination Provisions VI - Opinion of Andrews & Kurth, L.L.P. VII - Opinion of David L. Hicks VIII - Jurisdictions for Which Certificates Are to Be Provided IX - Existing Letters of Credit EX-10.E 5 CREDIT AGREEMENT 6/30/87 EXHIBIT 10(e) EXECUTION COPY CREDIT AGREEMENT dated as of June 30, 1987 among Santa Fe Energy Operating Partners, L.P. The Lenders Listed Herein and Morgan Guaranty Trust Company of New York, as Agent TABLE OF CONTENTS* PAGE SECTION 1.01 Definitions................................ 1 1.02 Accounting Terms and Determinations........ 18 ARTICLE II THE CREDITS SECTION 2.01 Commitments to Lend........................ 19 2.02 Method of Borrowing........................ 20 2.03 Notes...................................... 21 2.04 Maturity of Loans.......................... 22 2.05 Interest Rates............................. 23 2.06 Mandatory Termination or Reduction of Tranche A Commitments................ 26 2.07 Prepayments................................ 28 2.08 General Provisions as to Payments.......... 32 2.09 Funding Losses............................. 32 2.10 Computation of Interest and Fees........... 33 2.11 Regulation D Compensation.................. 33 2.12 Increase of Aggregate Loans................ 33 ARTICLE III CONDITIONS TO BORROWINGS SECTION 3.01 First Borrowing............................ 36 3.02 Subsequent Borrowings...................... 37 * The Table of Contents is not a part of this Agreement. -i- PAGE ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01 Existence and Power....................... 38 4.02 Partnership and Governmental Authorization; Contravention............ 38 4.03 Binding Effect............................ 38 4.04 Full Disclosure; Financial Information................... 38 4.05 Litigation................................ 39 4.06 Compliance with ERISA..................... 39 4.07 Taxes..................................... 40 4.08 Title to Assets........................... 40 4.09 Not an Investment Company................. 41 ARTICLE V COVENANTS SECTION 5.01 Information............................... 41 5.02 Payment of Obligations.................... 44 5.03 Maintenance of Property; Insurance........ 44 5.04 Conduct of Business and Maintenance of Existence; Change of Name Fiscal Year.............. 44 5.05 Compliance with Laws...................... 45 5.06 Inspection of Property, Books and Records....................... 45 5.07 Debt...................................... 45 5.08 Coverage Ratios; Security................. 46 5.09 Restricted Payments....................... 48 5.10 Negative Pledge........................... 48 5.11 Provision of Security Upon Triggering Event................................... 49 5.12 Merger; Sale or Abandonment of Assets; Release of Collateral............ 50 5.13 Use of Proceeds........................... 51 ARTICLE VI DEFAULTS SECTION 6.01 Events of Default......................... 52 6.02 Notice of Default......................... 55 6.03 Tranche B Loans Due Upon Failure to Reborrow Tranche A Loans............. 55 6.04 Additional Amount Payable With Respect to Tranche B Loans............... 55 -ii- PAGE ARTICLE VII THE AGENT SECTION 7.01 Appointment and Authorization............. 56 7.02 Agent and Affiliates...................... 56 7.03 Action by Agent........................... 56 7.04 Consultation with Experts................. 56 7.05 Liability of Agent........................ 56 7.06 Indemnification........................... 57 7.07 Credit Decision........................... 57 7.08 Fees...................................... 57 ARTICLE VIII CHANGE IN CIRCUMSTANCES AFFECTING TRANCHE A LENDERS SECTION 8.01 Basis for Determining Interest Rate Inadequate or Unfair............... 58 8.02 Illegality................................ 58 8.03 Increased Cost and Reduced Return......... 59 8.04 Prime Loans Substituted for Affected Fixed Rate Loans........................ 61 8.05 Substitution of Lender.................... 62 ARTICLE IX MISCELLANEOUS SECTION 9.01 Notices................................... 62 9.02 No Waivers................................ 63 9.03 Expenses; Documentary Taxes............... 63 9.04 Sharing of Set-Offs....................... 63 9.05 Amendments and Waivers.................... 64 9.06 Successors and Assigns.................... 64 9.07 Collateral................................ 65 9.08 Representation of Lenders................. 66 9.09 Confidentiality........................... 66 9.10 New York Law.............................. 66 9.11 Counterparts; Effectiveness............... 66 9.12 Non-Recourse to Partners.................. 66 Exhibit A - Form of Domestic Note Exhibit B - Form of Euro-Dollar Note Exhibit C - Form of Tranche B Note -iii- Exhibit D - Form of Opinion of Counsel for the Borrower and its Affiliates Exhibit E - Form of Opinion of Special Counsel for the Lenders and the Agent Exhibit F - Form of SFNR Undertaking Exhibit G - Form of Mortgage Exhibit X - Terms of Subordination -iv- CREDIT AGREEMENT AGREEMENT dated as of June 30, 1987 among SANTA FE ENERGY OPERATING PARTNERS, L.P., the LENDERS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. DEFINITIONS. The following terms, as used herein, have the following meanings: "Adjusted CD Rate" has the meaning set forth in Section 2.05(b). "Affiliate" means (except as provided in the definition of "Triggering Event") the Managing General Partner, the Special General Partner, or any Person directly or indirectly controlling, controlled by or under common control with the Borrower or the Managing General Partner or the Special General Partner. As used in this definition of "Affiliate", the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Lenders hereunder, and its successors in such capacity. "Annual Coverage Ratio" means, as of any date of determination, the lowest of the ratios obtained by, for the remaining portion of the fiscal year in which such date occurs and for each fiscal year thereafter to and including fiscal 1997, dividing (i) the sum of, for all Petroleum Properties owned by the Borrower on such date, Cash Flow Available for Debt Service (calculated on the basis of the Most Recent Engineering Report) for such period, by (ii) Debt Service for such period (calculated on the basis set forth in the most recent Coverage Report delivered to the Lenders pursuant to Section 5.01(i), taking into account any incurrence or prepayment of Debt since the date of such Coverage Report). "Approved Assumptions" means (i) until February 20, 1988, such assumptions regarding interest rates as have been heretofore provided to the Borrower by the Agent, and (ii) thereafter, assumptions as to prices, costs, interest rates and other matters relevant to any Engineering Report or to the calculation of Coverage Ratios, which assumptions shall be determined by the Agent, after consultation with the Managing General Partner, on a semi-annual basis starting in 1988 and set forth in a notice sent to the Lenders on or before January 20 and July 20 of each such year and, if the PROVISO hereto does not apply, in a notice to the Borrower from the Agent on or prior to the next succeeding February 20 or August 20, as the case may be; PROVIDED that if such assumptions are, within 10 days of any such notice to the Lenders, disapproved by the Required Lenders (as indicated in a notice to the Agent within such 10-day period) and alternative assumptions are determined by the Required Lenders and set forth in a notice delivered to the Agent on or prior to the next succeeding February 15 or August 15, as the case may be (such alternative assumptions to be determined by the Required Lenders in good faith in accordance with their customary oil and gas lending practices), such alternative assumptions shall be the Approved Assumptions, and notice thereof shall be sent to the Borrower by the Agent on or prior to the next succeeding February 20 or August 20, as the case may be. Approved Assumptions set forth in a notice to the Borrower shall govern until new Approved Assumptions are set forth in a notice to the Borrower, and shall be used, without limitation, in preparation of the next Engineering Report or supplement thereto required to be delivered pursuant to Section 5.01(i). "Assessment Rate" has the meaning set forth in Section 2.05(b). "Borrower" means Santa Fe Energy Operating Partners, L.P., a Delaware limited partnership. "Borrowing" means the first borrowing hereunder consisting of Loans made to the Borrower at the same time by the Lenders pursuant to Article II and each subsequent borrowing hereunder consisting of Tranche A Loans made to the Borrower at the same time by the Tranche A Lenders pursuant to Article II. A Borrowing is, with respect to the Tranche A Loans, a "Domestic Borrowing" if such Tranche A Loans are Domestic Loans or a "Euro-Dollar Borrowing" if such Tranche A Loans are Euro-Dollar Loans. A Domestic Borrowing is a "CD -2- Borrowing" if such Domestic Loans are CD Loans or a "Prime Borrowing" if such Domestic Loans are Prime Loans. "Cash Flow Available for Debt Service" means, for any fiscal year (or portion thereof), (a) Pre-G&A Cash Flow for such period, LESS (b) an amount (or, with respect to any portion of a fiscal year, a proportional amount corresponding to such portion of such fiscal year) of general and administrative expenses equal to, for any fiscal year, the higher of (i) for each fiscal year ending on or before December 31, 1997, $7,000,000 and for each fiscal year thereafter, $5,000,000, and (ii) the amount equal to (x) Pre-G&A Cash Flow for such fiscal year TIMES (y) the quotient derived by dividing (1) the sum of the prior fiscal year's actual production-related general and administrative expenses plus one-half of the prior fiscal year's actual exploration-related general and administrative expenses, by (2) Pre-G&A Cash Flow for the prior fiscal year. "CD Base Rate" has the meaning set forth in Section 2.05(b). "CD Loan" means a Tranche A Loan to be made as a CD Loan pursuant to the applicable Notice of Borrowing. "CD Reference Banks" means Bank of Montreal and Morgan Guaranty Trust Company of New York and each such other bank as may be appointed pursuant to Section 9.06(d). "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Collateral Threshold" has the meaning set forth in Section 5.08(d). "Commitment" means, with respect to each Lender, the amount set forth opposite the name of such Lender on the signature pages hereof, as such amount may, in the case of Tranche A Lenders, be reduced from time to time pursuant to Section 2.06. "Controlled Groups means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Coverage Ratio" means either the Life-of-Reserves Coverage Ratio or the Annual Coverage Ratio. -3- "Coverage Report" means a report prepared by the Borrower and satisfactory in form and scope to the Required Lenders setting forth the Coverage Ratios as of the date of such report and the calculations necessary to determine such Coverage Ratios. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee under capital leases, (v) all obligations of such Person in respect of production payments, proceeds production payments and similar financing arrangements, (vi) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (vii) all Debt of others Guaranteed by such Person. "Debt Service" means, for any period, the total of principal payments in respect of Debt of the Borrower (other than Subordinated Debt of the Borrower owed to Affiliates) and the total of interest payments (using, with respect to interest to accrue, the interest rates set forth in the most recent Approved Assumptions for Debt not bearing interest at a fixed rate) in respect of Debt of the Borrower, in each case scheduled to be paid during such period; PROVIDED that the principal amount of any loan which by its terms matures on a date within such period but which may reasonably be expected to be reborrowed in a Rollover on such date shall not be deemed, for purposes of this definition, to be scheduled to be paid on such date. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Tranche A Lender, its office located at its address set forth on the signature pages hereof (or identified on the signature pages hereof as its Domestic Lending Office) or such other office as -4- such Tranche A Lender may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent; PROVIDED that any Tranche A Lender may from time to time by notice to the Borrower and the Agent designate separate Domestic Lending Offices for its Prime Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Tranche A Lender shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Prime Loans or both. "Domestic Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Domestic Loans. "Domestic Reserve Percentage" has the meaning set forth in Section 2.05(b). "Energy Partners" means Santa Fe Energy Partners, L.P., a Delaware limited partnership. "Engineering Report" means a report prepared and certified by an Independent Petroleum Engineer which sets forth, with respect to all oil and gas properties of the Borrower, the Recognized Proved Reserves and the gross and net volume of Hydrocarbons projected to be produced from such Recognized Proved Reserves, by fiscal years, for the remaining economic life of such Recognized Proved Reserves. Each Engineering Report shall also contain a list of Petroleum Properties, shall set forth, for each fiscal year, Pre-G&A Cash Flow and shall indicate Pre-G&A Cash Flow for each fiscal year for the various Petroleum Properties. Each such report shall identify which Petroleum Properties are "developed" and which are not "developed" (as defined in the definition of "Recognized Proved Reserves") and shall set forth the Relative Values thereof, on an aggregate basis. Each such report shall be prepared in accordance with established criteria generally accepted in the oil and gas industry and standards customarily used by independent petroleum engineers well regarded in the industry in making reserve determinations or appraisals, and shall be based on Approved Assumptions and such other assumptions, estimates and projections as are fully disclosed in such Engineering Report. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. -5- "ERISA Obligor" means (i) for so long as the Controlled Group includes Santa Fe Southern Pacific and Santa Fe Natural Resources, Santa Fe Southern Pacific and each of its Material Subsidiaries, and (ii) at all other times, each member of the Controlled Group. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Tranche A Lender, its office, branch or affiliate located at its address set forth on the signature pages hereof (or identified on the signature pages hereof) as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Tranche A Lender as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means a Tranche A Loan to be made as a Euro-Dollar Loan pursuant to the applicable Notice of Borrowing. "Euro-Dollar Notes" means promissory notes of the Borrower, substantially in the form of Exhibit B hereto, evidencing the obligation of the Borrower to repay the Euro-Dollar Loans. "Euro-Dollar Reference Banks" means the principal offices of Bank of Montreal and Morgan Guaranty Trust Company of New York and each such other bank as may be appointed pursuant to Section 9.06(d). "Eurodollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Tranche A Lender to United States residents). -6- "Event of Default" has the meaning set forth in Section 6.01. "Excluded Plan" means each employee pension benefit plan. other than a "Plan" as defined in clause (i) of the definition of "Plan", which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code which is either (i) maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement to which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Fixed CD Rate" has the meaning set forth in Section 2.05(b). "Fixed Rate Borrowing" means a CD Borrowing or a Euro-Dollar Borrowing. "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or both. "General Partners" means the Managing General Partner and the Special General Partner of the Borrower or, if so specified, of Energy Partners. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), PROVIDED that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hydrocarbons" means oil, gas and other liquid and gaseous hydrocarbons. -7- "Independent Petroleum Engineer" means Riggs & Associates Inc., or another independent petroleum engineering consulting firm selected by the Borrower and acceptable to the Required Lenders. "Interest Period" means: (1) with respect to each Euro- Dollar Borrowing, the period commencing on the date of a Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro- Dollar business Day; (b) any Interest Period which begins on the last Euro- Dollar 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 clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) if any Interest Period includes a date on which a payment of principal of the Tranche A Loans is required to be made under Section 2.06 but does not end on such date, then (i) the principal amount of each Euro-Dollar Loan required to be repaid on such date shall have an Interest Period ending on such date and (ii) the remainder (if any) of each such Euro-Dollar Loan shall have an Interest Period determined as set forth above. (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing; PROVIDED that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b)(i) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and -8- (b) if any Interest Period includes a date on which a payment of principal of the Tranche A Loans is required to be made under Section 2.06 but does not end on such date, then (i) the principal amount (if any) of each CD Loan required to be repaid on such date shall have an Interest Period ending on such date and (ii) the remainder (if any) of each such CD Loan shall have an Interest Period determined as set forth above. (3) with respect to each Prime Borrowing, the period commencing on the date of such Borrowing and ending 30 days thereafter; PROVIDED that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b)(i) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) if any Interest Period includes a date on which a payment of principal of the Tranche A Loans is required to be made under Section 2.06 but does not end on such date, then (i) the principal amount (if any) of each Prime Loan required to be repaid on such date shall have an Interest Period ending on such date and (ii) the remainder (if any) of each such Prime Loan shall have an Interest Period determined as set forth above. "Lender" means each lender listed on the signature pages hereof as having a Commitment, and its successors and assigns. "Lending Office" means, as to any Tranche A Lender, its Domestic Lending Office or its Euro-Dollar Lending Office, as the context may require. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset (including without limitation any production payment, advance payment or similar arrangement with respect to minerals in place), whether or not filed, recorded or otherwise perfected under applicable law. For the purposes of this Agreement, the Borrower shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. -9- "Life-of-Reserves Coverage Ratio" means, as of any date of determination, the ratio obtained by dividing (i) the sum of, for all Petroleum Properties owned by the Borrower on such date, Cash Flow Available for Debt Service (calculated on the basis of the Most Recent Engineering Report) for the period of twenty years commencing on such date, by (ii) Debt Service for such period (calculated on the basis set forth in the most recent Coverage Report delivered to the Lenders pursuant to Section 5.01(i), taking into account any incurrence or prepayment of Debt since the date of such Coverage Report). "Loan" means a loan made by a Lender to the Borrowerhereunder. "London Interbank Offered Rate" has the meaning set forth in Section 2.05(c). "Managing General Partner" means the managing general partner of the Borrower or, if so specified, of Energy Partners. "Material Subsidiary" means any Subsidiary of Santa Fe Southern Pacific (other than Bankers Leasing and Financial Corporation, a Delaware corporation, and its subsidiaries and Constellation Reinsurance Company) the consolidated assets of which, as shown by its most recent year-end consolidated balance sheet, are in excess of $75,000,000. "Mortgage" means a mortgage or deed of trust, substantially in the form of Exhibit G hereto or in such other form as has been approved by the Required Lenders, if and as required to be executed and recorded by the Borrower pursuant to Section 5.08 or 5.11. "Most Recent Engineering Report" means as of any date of determination, until the first Engineering Report is delivered pursuant to Section 5.01(i), the Engineering Report dated December 31, 1986, as supplemented by a report heretofore delivered to the Lenders under a cover letter dated June 12, 1987 prepared by the Managing General Partner to take account of the Petro-Lewis Acquisition, and, thereafter, the most recent Engineering Report delivered pursuant to Section 5.01(i), in each case as subsequently updated pursuant to Section 5.01(i) or supplemented pursuant to Section 5.08 on or prior to such date of determination; PROVIDED that if the Borrower at any time acquires any additional Recognized Proved Reserves, it may cause a further supplement, prepared by an 10 Independent Petroleum Engineer, to the most recent Engineering Report delivered pursuant to Section 5.01(i) to be delivered to the Lenders, whereupon the "Most Recent Engineering Report" shall incorporate such supplement. "Note" means a Domestic Note or a Euro-Dollar Note or a Tranche B Note, and "Notes" means the Domestic Notes or the Euro- Dollar Notes or the Tranche B Notes or all of them. "Notice of Borrowing" has the meaning set forth in Section 2.02. "Notice of Prepayment" and "Notice of Prospective Prepayment" have the meanings set forth in Section 2.07(c). "Partnership Agreements" means the Agreement of Limited Partnership of Energy Partners dated as of January 14, 1986 among Santa Fe Pacific Exploration, as Managing General Partner, Santa Fe Energy, as Special General Partner, and Santa Fe Energy, as the organizational limited partner, and the Agreement of Limited Partnership of the Borrower dated as of January 14, 1986 among Santa Fe Pacific Exploration, as Managing General Partner, Santa Fe Energy, as Special General Partner and Energy Partners, as the Limited Partner, as such agreements may be amended from time to time in accordance with the provisions hereof. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Liens" means, with respect to any assets, Liens thereon consisting of: (i) lessor's royalties, overriding royalties, and division orders and sales contracts covering Hydrocarbons, reversionary interests and similar burdens, if the net cumulative effect of such burdens does not operate to reduce the net revenue interest of the Borrower in any Petroleum Property to less than such net revenue interest set forth in the Most Recent Engineering Report; (ii) any operator's liens or similar Liens arising in the ordinary course of the Borrower's oil and gas operations and securing obligations of the Borrower that are not past due; -11- (iii) inchoate liens arising by operation of statutory law and liens for taxes or assessments not yet due or not yet delinquent, or, if delinquent, that are being contested in good faith in the normal course of business; (iv) easements, rights of way, servitudes, permits, surface leases and other rights in respect of surface operations, pipelines, grazing, logging, canals, ditches, reservoirs or the like; conditions, covenants or other restrictions; and easements for streets, alleys, highways, pipelines, telephone lines, power lines, railways and other easements and rights-of-way, on, over or in respect of such Petroleum Properties; (v) rights reserved to or vested in any municipality or governmental, tribal, statutory or public authority to control or regulate any of the Petroleum Properties in any manner, and all applicable laws, rules, and orders of governmental or tribal authority; and (vi) all other Liens arising in the ordinary course of the Borrower's business or incidental to the ownership of its properties; PROVIDED that such Liens (x) do not secure Debt, (y) do not in the aggregate materially detract from the value of the properties of the Borrower or materially impair the use thereof in the operation of the business of the Borrower and (z) in the aggregate are not disadvantageous in any material respect to the Lenders. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Petroleum Properties" means, at any time, all Recognized Proved Reserves which are (i) owned by the Borrower at such time free and clear of any Lien (other than Liens permitted by Section 5.10) and (ii) covered in the Most Recent Engineering Report. "Petro-Lewis Acquisition" means the acquisition of Petroleum Properties by the Borrower from Petro-Lewis Corporation and its affiliates in April 1987. -12- "Plan" means (i) for so long as the Controlled Group includes Santa Fe Southern Pacific and Santa Fe Natural Resources, an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is maintained by Santa Fe Southern Pacific or any of its Material Subsidiaries for salaried employees of Santa Fe Southern Pacific or any of its Material Subsidiaries, and (ii) at any other time, an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (X) maintained by a member of the Controlled Group for employees of a member of the Controlled Group or (y) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Pre-G&A Cash Flow" means, for any fiscal year (or portion thereof), (a) an amount (or, with respect to any portion of a fiscal year, a proportional amount corresponding to such portion of such fiscal year) of projected gross revenues from the sale of Hydrocarbons produced from Recognized Proved Reserves to be received, subject to no entitlement of any other Person but including appropriate adjustments for over- and under-produced status, by the Borrower during such fiscal year as set forth in the Most Recent Engineering Report, LESS (b) an amount (or, with respect to any portion of a fiscal year, a proportional amount corresponding to such portion of such fiscal year) of projected royalties and wind-fall profit, production, ad valorem, severance, income and all other taxes, operating and capital expenditures required to be incurred during such fiscal year in order to generate such gross revenues (but not including general and administrative expenses or principal and interest payable with respect to Debt) as set forth in the Most Recent Engineering Report. "Prepayment" has the meaning set forth in Section 2.07(c). "Prime Loan" means a Tranche A Loan to be made as a Prime Loan pursuant to the applicable Notice of Borrowing or Article VIII. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. -13- "Pro Rata Share" has the meaning set forth in Section 5.08(d). "Prospective Prepayment" has the meaning set forth in Section 2.07(c). "Recognized Proved Reserves" means reserves of Hydrocarbons which are estimated to be recoverable with reasonable certainty and are consistent with the "Definitions for Oil and Gas Reserves" as published by the Society of Petroleum Engineers of AIME, PROVIDED that (i) the estimates are made by an Independent Petroleum Engineer, (ii) the estimates are made on the basis of (a) the Approved Assumptions and (b) actual production or an actual flow test, (iii) the reserves are located onshore or offshore the United States or Canada and shall otherwise be acceptable to the Required Lenders, and (iv) no more than 10% (in Relative Value) of Recognized Proved Reserves included at any time in the Most Recent Engineering Report shall consist of proved reserves which are not developed. Reserves in reservoirs penetrated by wells but currently not being produced are classified as "developed" only if (X) the Independent Petroleum Engineer has determined that such reserves can be recovered through the existing wells requiring no more than simple workover operation and (y) an actual flow test of the formation in an offset well or a conclusive flow test of the same well shall have been conducted and, using the Approved Assumptions, shall support the economic producibility of such reserves. "Reduction Date" means each March 31, June 30, September 30 and December 31, from and including March 31, 1990 to and including December 31, 1997. "Reference Banks" means the CD Reference Banks or the Euro- Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Refunding Borrowing" means a Borrowing which, after application of the proceeds thereof, results in no net increase in the outstanding principal amount of Loans made by any Lender. "Regulation G" means Regulation G of the Board of Governors of the Federal Reserve System, as in effect from time to time. -14- "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Relative Value" of any selected Petroleum Properties (or Recognized Proved Reserves) in relation to a group of Petroleum Properties (or Recognized Proved Reserves) means as of any date of determination the number, stated as a percentage, obtained by dividing (i) the net present value (using the discount rate used in valuing reserves for purposes of Energy Partners' most recent annual report on Form 10-K filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934) of Pre-G&A Cash Flow attributable to such selected Petroleum Properties (or Recognized Proved Reserves) by (ii) the net present value (using the same discount rate) of Pre-G&A Cash Flow attributable to such group of Petroleum Properties (or Recognized Proved Reserves), in each case based on the Most Recent Engineering Report for the period of twenty fiscal years commencing with the fiscal year in which the date of determination occurs. "Required Lenders" means at any time prior to the first Borrowing, Lenders having at least 66 2/3% of the aggregate amount of the Commitments and thereafter, Lenders holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "Restricted Payment" means (i) any distribution on account of any partnership interest in the Borrower (whether in the form of cash, securities or other property and whether on account of income, capital or otherwise), (ii) any payment by the Borrower on account of the purchase, redemption, retirement or acquisition of any partnership interest (or any right to acquire any partnership interest) in the Borrower or (iii) any payment which represents an Investment in any Affiliate; PROVIDED that any payments by the Borrower, in accordance with its normal practice as of the date of this Agreement, of windfall profit taxes on behalf of Persons holding partnership interests in the Borrower or Energy Partners shall not be considered Restricted Payments; and PROVIDED FURTHER that balances that may be outstanding and payable by Energy Partners or by either of the General Partners to the Borrower arising in the course of the Borrower's normal cash management operations which provide for settlement on a monthly basis shall not constitute Restricted Payments. For purposes hereof "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan or otherwise. -15- "Rollover" means (i) any Refunding Borrowing and (ii) any similar reborrowing from a lender of a loan which is prepaid, or by its terms is due, to such lender on the date of such reborrowing if the instrument or agreement governing such Debt specifically contemplates the periodic prepayment or repayment and simultaneous reborrowing of such loan. "Santa Fe Energy" means Santa Fe Energy Company, a Texas corporation. "Santa Fe Pacific Exploration" means Santa Fe Pacific Exploration Company, a Delaware corporation. "Santa Fe Natural Resources" means Santa Fe Natural Resources, Inc., a Delaware corporation, and its successors. "Santa Fe Southern Pacific" means Santa Fe Southern Pacific Corporation, a Delaware corporation, and its successors. "SFNR Undertaking" means a letter of Santa Fe Natural Resources to the Lenders substantially in the form of Exhibit F hereto. "Special General Partner" means the special general partner of the Borrower or, if so specified, of Energy Partners. "Subordinated Debt" means Debt of the Borrower no principal of which is payable on a mandatory or optional basis so long as any of the Loans remain outstanding and which is evidenced by an instrument containing subordination provisions substantially in the form of Exhibit H hereto. "Subsidiary" of any Person means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; PROVIDED that "Subsidiary", with respect to the Borrower, shall not refer to any joint venture to which the Borrower is a party entered into in the ordinary course of the Borrower's investment in oil and gas interests, properties or prospects, even if such joint venture constitutes a partnership for tax purposes. "Tranche A" means, (i) with respect to a Lender, a Lender whose Commitment is indicated on the signature pages hereof to be a Tranche A Commitment, (ii) with respect to a -16- Commitment, means the Commitment of a Tranche A Lender, and (iii) with respect to a Loan, a Loan made by a Tranche A Lender. "Tranche B" means, (i) with respect to a Lender, a Lender whose Commitment is indicated on the signature pages hereof to be a Tranche B Commitment, (ii) with respect to a Commitment, means the Commitment of a Tranche B Lender, (iii) with respect to a Loan, a Loan made by a Tranche B Lender and (iv) with respect to a Note, a promissory note of the Borrower, substantially in the form of Exhibit C hereto, evidencing the obligation of the Borrower to repay a Tranche B Loan. "Triggering Event" means the first to occur of: (i) that point in time when Santa Fe Energy and its Affiliates first beneficially own, directly or indirectly, less than an aggregate of 50% of all limited partnership units of Energy Partners (the "Units") then outstanding, excluding any outstanding Units which Energy Partners may have issued (other than to Santa Fe Energy or any of its Affiliates) to acquire oil and gas properties, oil or gas exploration, development, production, treatment, processing, transportation or marketing assets, or corporations, partnerships or other business entities engaged predominantly in the oil and gas business; or (ii) the execution and delivery by Santa Fe Energy or an Affiliate of Santa Fe Energy of a definitive agreement to sell, or a determination by Santa Fe Energy or an Affiliate of Santa Fe Energy to distribute, Units which, if sold or distributed, would result in, or the occurrence of any other event that within 90 days after the occurrence thereof would result in, Santa Fe Energy and its Affiliates beneficially owning, directly or indirectly, less than an aggregate of 50% of all units then outstanding, excluding any outstanding Units which Energy Partners may have issued (other than to Santa Fe Energy or any of its Affiliates) to acquire oil and gas properties, oil or gas exploration, development, production, treatment, processing, transportation or marketing assets, or corporations, partnerships or other business engaged predominantly in the oil and gas business; or -17- (iii) the distribution by Santa Fe Energy or an Affiliate of Santa Fe Energy of securities convertible into, or rights or warrants to acquire Units which, if fully converted or exercised, would reduce the interest of Santa Fe Energy and its Affiliates to less than an aggregate of 50% of all Units then outstanding, excluding any outstanding units which Energy Partners may have issued (other than to Santa Fe Energy or any of its Affiliates) to acquire oil and gas properties, oil or gas exploration, development, production, treatment, processing, transportation or marketing assets, or corporations, partnerships or other business entities engaged predominantly in the oil and gas business; PROVIDED that if such securities, rights or warrants are redeemable by Santa Fe Energy or an Affiliate of Santa Fe Energy immediately following their distribution, a "Triggering Event" shall not be deemed to have occurred unless and until such securities, rights or warrants are no longer so redeemable. For purposes of this definition, "Affiliate" of Santa Fe Energy means any person, entity or group (x) owning 10% or more of the securities of Santa Fe Energy entitled to vote for the election of directors, or (y) controlling, controlled by or under common control with Santa Fe Energy. "Unfunded Vested Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all vested nonforfeitable benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the Controlled Group to the PBGC or the Plan under Title IV of ERISA. "Wholly-Owned Subsidiary" of any Person means any Subsidiary of such Person all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person. SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from -18- time to time, applied on a basis consistent (except for changes concurred in by the independent public accountants for Energy Partners) with the most recent audited financial statements of Energy Partners delivered to the Lenders. ARTICLE II CREDITS SECTION 2.01. COMMITMENTS TO LEND. (a) THE FIRST BORROWING. Each Lender severally agrees to lend to the Borrower at one time on or prior to August 31, 1987, on the terms and conditions set forth in this Agreement, an amount equal to such Lender's Commitment. Such Loan by each Lender shall be made as part of the first Borrowing hereunder, which shall be made from the several Lenders ratably in proportion to their respective Commitments. (b) SUBSEQUENT BORROWINGS. Each Tranche A Lender severally agrees on the terms and conditions set forth in this Agreement, to make one or more new Tranche A Loans to the Borrower upon any repayment of outstanding Tranche A Loans pursuant to Section 2.04; PROVIDED that the principal amount of such Lender's new Loans shall not exceed the principal amount of its outstanding Loans being repaid; and PROVIDED FURTHER that the principal amount of such Lender's outstanding Loans shall at no time exceed its Commitment. The Borrower agrees that it shall, unless it has theretofore given a Notice of Prepayment in accordance with Section 2.07(c), give a Notice of Borrowing providing for a Borrowing of Tranche A Loans to occur on the last day of each Interest Period so that, after giving effect thereto, the aggregate amount of Tranche A Loans outstanding on such day equals the aggregate Tranche A Commitments on such day, after giving effect to any reduction of Tranche A Commitments on such day pursuant to Section 2.06(c). Each Borrowing under this subsection (b) shall be in an amount equal to $5,000,000 or any larger multiple of $1,000,000 (or if less, the aggregate amount of the Tranche A Commitments) and shall be made from the several Tranche A Lenders ratably in proportion to their respective Tranche A Commitments. There shall not at any time be more than four Tranche A Loans outstanding from each Tranche A Lender, in addition to any Loan made by such Lender under Section 2.12. Amounts required to be repaid pursuant to Section 2.06(d) shall not be reborrowed, and amounts repaid pursuant to Section 8.02 shall be reborrowed only as provided -19- therein; the making by any Lender of a Loan pursuant to Section 2.12 and the making by any such Lender of subsequent Tranche A Loans pursuant to its new or increased Commitment shall not be deemed a reborrowing of amounts repaid hereunder. SECTION 2.02. METHOD OF BORROWING. (a) The Borrower shall give the Agent notice (a "Notice of Borrowing") at least three Euro-Dollar Business Days before the first Borrowing and, thereafter, not later than 10:00 A.M. (New York City time) on the date of each Prime Borrowing, at least two Domestic Business Days before each CD Borrowing and at least three Euro-Dollar Business Days before each Euro-Dollar Borrowing, specifying: (i) the date of such Borrowing, which shall be a Euro-Dollar Business Day in the case of the first Borrowing, and, thereafter, shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (ii) the aggregate amount of such Borrowing, (iii) whether the Tranche A Loans included in such Borrowing are to be CD Loans, Prime Loans or Euro- Dollar Loans, and (iv) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. (b) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Tranche A Lender (and, in the case of the first Borrowing only, each Tranche B Lender) of the contents thereof and of such Lender's ratable share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (c) Not later than 11:00 A.M. (New York City time) on the date of each Borrowing, each Tranche A Lender (and, in the case of the first Borrowing only, each Tranche B Lender) shall (except as provided in subsection (d) of this Section) make available its ratable share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Lenders available to the Borrower at the Agent's aforesaid address. -20- (d) If any Tranche A Lender makes one or more new Loans hereunder on a day on which the Borrower is to repay all or any part of any outstanding Loans from such Tranche A Lender, such Tranche A Lender shall apply the proceeds of its new Loans to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the Agent as provided in subsection (c) of this Section, or remitted by the Borrower to the Agent as provided in Section 2.08, as the case may be. SECTION 2.03. NOTES. (a) The Domestic Loans of each Tranche A Lender shall be evidenced by a single Domestic Note payable to the order of such Lender for the account of its Domestic Lending Office in an amount equal to the aggregate unpaid principal amount of such Lender's Domestic Loans. (b) The Euro-Dollar Loans of each Tranche A Lender shall be evidenced by a single Euro-Dollar Note payable to the order of such Lender for the account of its Euro-Dollar Lending Office in an amount equal to the aggregate unpaid principal amount of such Lender's Euro-Dollar Loans. (c) Each Tranche A Lender may, by notice to the Borrower and the Agent (to be given not later than two Domestic Business Days prior to the first Borrowing) request that its Prime Loans and CD Loans be evidenced by separate Domestic Notes payable to the order of such Lender for the account of its Domestic Lending Office in an amount equal to the aggregate unpaid principal amount of such Lender's Prime Loans and CD Loans, respectively. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely. Prime Loans or CD Loans, as the case may be. Each reference in this Agreement to the "Notes" or "Domestic Note" of such Lender shall be deemed to refer to and include either or both of such Notes, as the context may require. (d) The Loan of each Tranche B Lender shall be evidenced by a single Tranche B Note payable to such Tranche B Lender in an amount equal to the aggregate unpaid principal amount of such Lender's Loan. (e) Upon receipt of each Lender's Notes pursuant to Section 3.01(d) or 2.12, the Agent shall mail such Notes to such Lender. Each Tranche A Lender shall record, and prior to any transfer of its Notes shall endorse on the schedules -21- forming a part thereof appropriate notations to evidence, the date, amount and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto; PROVIDED that the failure of any Tranche A Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Tranche A Lender is hereby irrevocably authorized by the Borrower so to endorse its Notes and to attach to and make a part of any Note a continuation of any such schedule as and when required. SECTION 2.04. MATURITY OF LOANS. (a) Each Tranche A Loan included in any Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Tranche A Loan. (b) The principal amount of each Tranche B Loan shall be due in installments on the Reduction Dates to and including December 31, 1997 in the following amounts: (i) on each Reduction Date from and including March 31, 1990 to and including December 31, 1991, an amount equal to 4.44% of the original amount of such Tranche B Loan shall be due, (ii) on each Reduction Date from and including March 31, 1992 to and including December 31, 1992, an amount equal to 3.89% of the original amount of such Tranche B Loan shall be due, (iii) on each Reduction Date from and including March 31, 1993 to and including December 31, 1993, an amount equal to 3.33% of the original amount of such Tranche B Loan shall be due, (iv) on each Reduction Date from and including March 31, 1994 to and including September 30, 1997, an amount equal to 2.22% of the original amount of such Tranche B Loan shall be due and (v) on December 31, 1997, an amount equal to 2.3% of the original amount of such Tranche B Loan shall be due; PROVIDED that (x) the principal amount of any Tranche B Loan made pursuant to Section 2.12 shall be due in installments on the remaining Reduction Dates and the amount of such installments with respect to such Loan shall be the same, as a percentage of the then outstanding amount of such Loan, as the amount of the installments due on such Reduction Dates with respect to the original Tranche B Loans, as a percentage of the then outstanding amount of such original Loans, (y) in the case of any prepayment of a Tranche B Loan pursuant to Section 2.07(c)(ii)(x) or (c)(iii)(x), the remaining installments payable with respect to such Tranche B Loan shall be reduced as the Borrower shall direct by notice in writing to the Agent (which notice shall be irrevocable once given) on or prior to the date of such prepayment and (z) the amounts of the remaining installments may be adjusted from time to time as contemplated by Section 5.08(a). -22- SECTION 2.05. INTEREST RATES. (a) Each Prime Loan shall, subject to the provisions of subsection (h) below, bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Prime Rate for such day. Any overdue principal of and, to the extent permitted by law, overdue interest on any Prime Loan shall, subject to the provisions of subsection (h) below, bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Prime Rate for such day. (b) Each CD Loan shall, subject to the provisions of subsection (h) below, bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the applicable Fixed CD Rate; PROVIDED that if any CD Loan or any portion thereof shall, as a result of clause (2)(b)(i) of the definition of Interest Period, have an Interest Period of less than 30 days, such portion shall bear interest during such Interest Period at the rate applicable to Prime Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of and, to the extent permitted by law, overdue interest on any CD Loan shall, subject to the provisions of subsection (h) below, bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the higher of (i) the Fixed CD Rate applicable to such Loan and (ii) the Prime Rate for such day. The "Fixed CD Rate" applicable to any CD Loan for any Interest Period means a rate per annum equal to the sum of 5/8 of 1% plus the applicable Adjusted CD Rate. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: -23- { CDBR } * ACDR = { ---------- } + AR { 1.00 - DRP } ACDR = Adjusted CD Rate CDBR = CD Base Rate 1931 DRP = Domestic Reserve Percentage AR = Assessment Rate ______________ * The amount in brackets being rounded upwards, if necessary, to the next higher of 1/100 of 1%. The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the arithmetic average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the unpaid principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Fixed CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any Interest Period the net annual assessment rate (rounded upwards, if necessary, to the next higher 1/100 of 1%) actually incurred by Morgan Guaranty Trust Company of New York to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of Morgan Guaranty Trust Company of New York in the United States during the most recent period for which such -24- rate has been determined prior to the commencement of such Interest Period. (c) Each Euro-Dollar Loan shall, subject to the provisions of subsection (h) below, bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of 1/2 of 1% plus the applicable London Interbank Offered Rate. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London inter-bank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply (or, if applicable, the principal amount of the Loan to be made pursuant to Section 2.12) and for a period of time comparable to such Interest Period. (d) Any overdue principal of and, to the extent permitted by law, overdue interest on any Euro-Dollar Loan shall, subject to the provisions of subsection (h) below, bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 1 1/2% plus the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro- Dollar Business Days, then for such other period of time not longer than six months as the Agent may elect) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 1% plus the rate applicable to Prime Loans for such day). (e) Each Tranche B Loan shall, subject to the provisions of subsection (h) below, bear interest on the -25- outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at 9.63% per annum, except that any Tranche B Loan made pursuant to Section 2.12 shall bear interest on the outstanding principal amount thereof at the rate set forth on the addendum hereto and in the Note relating to such Loan. Any overdue principal of, premium (if any) under Section 2.07 or 6.04, and, to the extent permitted by law, overdue interest on any Tranche B Loan shall, subject to the provisions of subsection (h) below, bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the rate specified in the previous sentence. Such interest shall be payable in arrears on each March 31, June 30, September 30 and December 31, commencing September 30, 1987. (f) The Agent shall determine each interest rate applicable to the Tranche A Loans hereunder. The Agent shall give prompt notice to the Borrower and the Tranche A Lenders by telex or telecopy of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated hereby. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. (h) Notwithstanding the foregoing provisions, the APPLICABLE RATE OF INTEREST per annum on each Loan outstanding shall be, for each day, if the aggregate ownership by Santa Fe Southern Pacific AND its WHOLLY-OWNED Subsidiaries of limited partnership interests in Energy Partners, as a percentage of the total outstanding limited partnership interests in Energy Partners, on such day is (i) less than 50% but greater than or equal to 25%, increased by 1/8 of 1% per annum, (ii) less than 25% but greater than or equal to 10%, increased by 1/4 of 1% per annum, or (iii) LESS THAN 10%, INCREASED BY 1/2 OF 1% PER ANNUM. SECTION 2.06. MANDATORY TERMINATION OR REDUCTION OF TRANCHE A COMMITMENTS. (a) The Tranche A Commitments shall terminate on December 31, 1997, and any Tranche A Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. -26- (b) On any date after the date of the first Borrowing on which the Commitment of any Tranche A Lender shall be greater than the principal amount of the Loan of such Tranche A Lender outstanding on such date (after giving effect to any repayment, prepayment and borrowing on such date), the Commitment of such Lender shall be automatically reduced to an amount equal to such outstanding principal amount. (c) The aggregate Tranche A Commitments shall be further reduced (and the Commitment of each Tranche A Lender shall be correspondingly reduced on a pro rata basis), on each Reduction Date in each year as follows: REDUCTION ON EACH YEAR REDUCTION DATE 1990 $1,377,777.78 1991 $1,377,777.78 1992 $1,205,555.56 1993 $1,033,333.33 1994 $ 688,888.89 1995 $ 688,888.89 1996 $ 688,888.89 1997 $ 688,888.88 PROVIDED that (i) any reduction of the Commitments pursuant to subsection (b) shall reduce the amount of subsequent mandatory reductions of Commitments pursuant to this subsection (c) as directed by the Borrower in a notice (which shall be irrevocable once given) to the Agent on or prior to the date of such reduction of the Commitments pursuant to subsection (b); (ii) if any Tranche A Loan is made pursuant to Section 2.12, the amount of each of the remaining reductions of Commitments pursuant to this subsection (c) shall be ratably increased in proportion to the increase in the aggregate Tranche A Commitments hereunder; and (iii) the schedule of mandatory reductions of Commitments pursuant to this subsection (c) may be adjusted from time to time as contemplated by Section 5.08(a) (d) On each Reduction Date, the Borrower shall repay such principal amount (together with accrued interest thereon) of each Tranche A Lender's outstanding Loan, if any, as may be necessary so that after such repayment, the unpaid principal amount of such Lender's Loan does not exceed the amount of such Lender's Commitment as then reduced. -27- SECTION 2.07. PREPAYMENTS. (a) The Borrower may, subject to the provisions of subsection (c) below, prepay any Prime Borrowing in whole at any time, or from time to time in part. (b) Except as provided in Section 8.02 the Borrower may not prepay all or any portion of the principal amount of any Fixed Rate Loan prior to the maturity thereof. (c) (i) If (x) the Borrower determines to reduce the aggregate principal amount of Loans outstanding hereunder and such reduction is not called for by the provisions of Section 2.04(b) and Section 2.06(c) and (d) (any such reduction herein referred to as a "Prepayment"), or (y) the Borrower determines to increase, on a prospective basis pursuant to Section 5.08(a), the amount of scheduled reductions on a Reduction Date of the aggregate principal amount of Loans outstanding hereunder called for by the provisions of Section 2.04(b) and Section 2.06(c) and (d) (any such increase in such scheduled reduction for such Reduction Date herein referred to as a "Prospective Prepayment"), then, it shall give the Agent notice (a "Notice of Prepayment" or "Notice of Prospective Prepayment") of such determination not less than 15 days prior to the date on which it wishes to (i) make such Prepayment or (ii) adjust the amounts of the installments to be due under Section 2.04(b) and the amounts of the reductions in Commitments under Section 2.06(c) to give effect to such Prospective Prepayment. Such date shall, in the case of a Prepayment, be a Domestic Business Day, and, if the Tranche A Loans then outstanding are Fixed Rate Loans, the last day of the then current Interest Period (other than an Interest Period provided for in clause (l)(c)(i) or (2)(b)(i) of the definition of "Interest Period"). Each Prepayment shall be of an amount equal to (x) $5,000,000 or a larger multiple of $1,000,000, (y) such amount as will effect the restoration of the Coverage Ratios to their required levels under Section 5.08, or (z) the aggregate principal amount of Loans outstanding. Each Prospective Prepayment under this Section shall be in such amount as will, when taken together with other related adjustments being made to the scheduled reductions of Loans outstanding hereunder, restore the Annual Coverage Ratio to its required level under Section 5.08(a). Each Notice of Prepayment and Notice of Prospective Prepayment shall specify how the amount of such Prepayment or Prospective Prepayment is to be allocated, on an aggregate basis for both Tranche A and Tranche B Loans, to the remaining scheduled reductions in the Loans under Section 2.04(b) and Section 2.06(c) and (d). -28- (ii) Unless the aggregate amount of all prior Prepayments and Prospective Prepayments as to which notice has been given under this Section exceeds $20,000,000, each Tranche B Lender shall, not less than 7 days after the date of a Notice of Prepayment or Notice of Prospective Prepayment, as relevant, advise the Agent whether it wishes to be included in the portion of such Prepayment or Prospective Prepayment which, together with all such prior Prepayments and Prospective Prepayments, does not exceed $20,000,000. Based on such notices given to the Agent, which the Agent shall forward to the Borrower, the Borrower shall: (x) in the case of a Prepayment, prepay on the date specified in the Notice of Prepayment the Tranche B Loans of the Tranche B Lenders, if any, participating in such Prepayment and prepay the Prime Loans on such date or give a Notice of Borrowing with respect to a reborrowing of the Tranche A Loans due on such date such that the portion of such Prepayment which, together with all such prior Prepayments and Prospective Prepayments, does not exceed $20,000,000 shall, after giving effect to any repayment, prepayment and reborrowing of Loans on such day, assuming the conditions precedent set forth in Section 3.02 are met on such day, have been applied pro rata (based on the then outstanding amounts of the Loans) to the Loans of the Tranche B Lenders, if any, participating in such Prepayment and the Tranche A Lenders; or (y) in the case of a Prospective Prepayment, the Agent shall make such changes in the amounts of the scheduled installments due on the Tranche B Loans under Section 2.04(b) and the reductions of the Commitments under Section 2.06(c) scheduled to occur on the relevant Reduction Date, such that, after giving effect to any repayment, prepayment and reborrowing of Loans on such day, assuming the conditions precedent set forth in Section 3.02 are met on such day, the portion of such Prospective Prepayment which, together with all such prior Prepayments and Prospective Prepayments, does not exceed $20,000,000, shall have been applied pro rata (based on the then outstanding amounts of the Loans) to the Loans of the Tranche B Lenders, if any, participating in such Prospective Prepayment and the Tranche A Lenders. -29- (iii) In the case of any Prepayment or Prospective Prepayment, or a portion thereof, which, together with all prior Prepayments and Prospective Prepayments as to which notice has been given under this Section, exceeds $20,000,000, the Borrower shall: (x) in the case of a Prepayment, prepay on the date specified in the Notice of Prepayment the Tranche B Loans of the Tranche B Lenders and prepay the Prime Loans on such date or give a Notice of Borrowing with respect to a reborrowing of the Tranche A Loans due on such date such that the portion of such Prepayment which, together with all such prior Prepayments and Prospective Prepayments, exceeds $20,000,000 shall, after giving effect to any repayment, prepayment and reborrowing of Loans on such day, assuming the conditions precedent set forth in Section 3.02 are met on such day, have been applied pro rata (based on the then outstanding amounts of the Loans) to all of the Loans of the Lenders; or (y) in the case of a Prospective Prepayment, the Agent shall make such changes in the amounts of the scheduled installments due on the Tranche B Loans under Section 2.04(b) and the reductions of the Commitments under Section 2.06(c) scheduled to occur on the relevant Reduction Date, such that, after giving effect to any repayment, prepayment and reborrowing of Loans on such day, assuming the conditions precedent set forth in Section 3.02 are met on such day, the portion of such Prospective Prepayment which, together with all such prior Prepayments and Prospective Prepayments, exceeds $20,000,000, shall have been applied pro rata (based on the then outstanding amounts of the Loans) to all of the Loans of the Lenders. (d) Upon receipt of a Notice of Prepayment or Notice of Prospective Prepayment pursuant to this Section, the Agent shall promptly notify each Lender of the contents thereof, and such notice shall not thereafter be revocable by the Borrower. The Agent shall promptly advise each Lender of the portion of any Prepayment or Prospective Prepayment which is applicable to its Loan determined in accordance with subsection (c) above and shall also advise such Lender of the corresponding adjustments in the remaining scheduled reductions of such Loan under Section 2.04(b) or Section 2.06(c) and (d) as relevant. With respect to any prepayment of a -30- Tranche B Loan made as part of a Prepayment or as to the portion of any installment of a Tranche B Loan which is attributable to a Prospective Prepayment, the amount of each scheduled installment of such Loan which would have been required to be paid on a subsequent Reduction Date but for such Prepayment or Prospective Prepayment shall be for purposes of this Section 2.07 referred to as an "Eliminated Payment"; PROVIDED that the "Eliminated Payments" associated with any prepayment of a Tranche B Loan shall also include the reductions (if any) in Eliminated Payments occurring under subsection (e)(iii) below as a consequence of such prepayment. (e) (i) Any prepayment of Prime Loans or Tranche B Loans under subsection (c)(ii)(x) or subsection (c)(iii)(x) above shall be effected by payment by the Borrower to the Agent for the accounts of the relevant Lenders of the principal amount to be prepaid together with accrued interest thereon to the date of prepayment and, in the case of the portion of any Tranche B Loans prepaid pursuant to subsection (c)(iii)(x) above, an amount equal to the excess, if any, of (x) the net present value, at the time of such prepayment, of all future scheduled payments of principal and interest with respect to the corresponding Eliminated Payments, calculated as if such prepayment were not being made and using a discount rate equal to the yield, which shall be imputed by linear interpolation from the yields (as most recently published in Federal Reserve Statistical Release H.15 (519) or any successor publication thereto) of those United States Treasury notes which have maturities as close as practicable to the remaining weighted average life of such Eliminated Payments; OVER (y) the amount of such prepayment. (ii) If any portion of an installment of any Tranche B Loan due on a Reduction Date pursuant to Section 2.04(b) is payable due to a Prospective Prepayment (or portion thereof) described in subsection (c)(iii)(y) above, the Borrower shall also pay to the Agent for the account of the relevant Tranche B Lender an amount equal to the excess, if any, of (x) the net present value, at the time of such payment, of all future scheduled payments of principal and interest with respect to the corresponding Eliminated Payments, calculated as if such Prospective Prepayment (or portion thereof) had not occurred and using a discount rate equal to the yield, which shall be imputed by linear interpolation from the yields (as most recently published in Federal Reserve Statistical Release H.15 (519) or any successor publication thereto) of those United States Treasury notes which have maturities as close as practicable to the remaining weighted average life of such -31- Eliminated Payments; OVER (y) such portion of such installment. (iii) For purposes hereof, any reduction of a scheduled installment of a Tranche B Loan under Section 2.04 attributable to a prepayment of such Tranche B Loan under subsection (c)(iii)(x) shall be applied at the time of such prepayment first to reduce the portion, if any, of such installment which is then attributable to Prospective Prepayments described in subsection (c)(iii)(y) above and shall also reduce (on a pro rata basis, if there is more than one such Eliminated Payment) the corresponding Eliminated Payments associated with such portion of such installment. SECTION 2.08. GENERAL PROVISIONS AS TO PAYMENTS. The Borrower shall make each payment of principal of, and interest on, the Loans hereunder not later than 11:00 A.M. (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. The Agent will wire transfer to each Lender, in accordance with the most recent wire transfer instructions previously delivered by such Lender to the Agent, the amount of each such payment received by the Agent for the account of such Lender. If such payment is received by the Agent at or before 11:00 A.M. (New York City time) on any date, such wire transfer shall be made by the Agent on such date. If such payment is received after 11:00 A.M. (New York City time), such wire transfer shall be made by the Agent on the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Domestic Loans or the Tranche B Loans shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. SECTION 2.09. FUNDING LOSSES. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan (pursuant to Article VI or VIII or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the end of an applicable period fixed pursuant to -32- Section 2.05(d), or if the Borrower fails to borrow any Fixed Rate Loans after notice has been given to any Lender in accordance with Section 2.02(b) or fails to borrow Loans to be advanced under Section 2.12, the Borrower shall reimburse each Lender on demand for any resulting loss or expense incurred by it (or by any existing or prospective participant in the related Loan), including (without limitation) any loss incurred in liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow, PROVIDED that such Lender shall have delivered to the Borrower a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. SECTION 2.10. COMPUTATION OF INTEREST AND FEES. Interest on Domestic Loans based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). Interest on Domestic Loans based on the Adjusted CD Rate and interest on Euro-Dollar Loans shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed, calculated as to each Interest Period or period fixed pursuant to Section 2.05(d) from and including the first day thereof to but excluding the last day thereof. Interest on Tranche B Loans shall be computed on the basis of a year of 360 days, consisting of 12 months of 30 days each. SECTION 2.11. REGULATION D COMPENSATION. Each Tranche A Lender may require the Borrower to pay, contemporaneously with each payment of interest on the Tranche A Loans, additional interest on the Euro-Dollar Loans of such Tranche A Lender at a rate per annum equal to the excess of (i)(A) the applicable London Interbank Offered Rate divided by (B) one MINUS the Euro-Dollar Reserve Percentage over (ii) the rate specified in clause (i)(A). Any Tranche A Lender wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Tranche A Lender shall be payable to such Tranche A Lender at the place indicated in such notice with respect to each Interest Period commencing at least five Domestic Business Days after the giving of such notice and (y) shall notify the Borrower at least five Domestic Business Days prior to each date on which interest is payable on the Tranche A Loans of the amount then due it under this Section. SECTION 2.12. INCREASE OF AGGREGATE LOANS. (a) The aggregate Commitments and Loans hereunder may from time to -33- time after the first Borrowing be increased by the addition of a new Lender and its commitment to this facility or by increasing the Commitment of any existing Lender under this facility, in the manner described in this Section. (b) At any time that the Borrower desires to increase the aggregate Commitments and Loans hereunder, it shall give notice thereof to the Agent, and shall specify whether it wishes such Commitments and Loans to be Tranche A Commitments and Loans or Tranche B Commitments and Loans or some combination thereof. In the case of any proposed increase in Tranche B Commitments and Loans hereunder, the Borrower shall, in such notice, state the interest rate per annum at which such Loans shall be made. The Agent shall promptly advise the Lenders of any such notice it receives from the Borrower. With respect to any proposed increase in Tranche A Commitments and Loans hereunder, each existing Tranche A Lender shall, within ten Domestic Business Days, advise the Agent as to whether it is willing to provide its share of such increase pro rata in proportion to the existing Commitments of the Tranche A Lenders. With respect to any proposed increase in Tranche B Commitments and Loans hereunder, each existing Tranche B Lender shall, within ten Domestic Business Days, advise the Agent as to whether it is willing to provide its share of such increase pro rata in proportion to the existing Commitments of the Tranche B Lenders. If any existing Tranche A or Tranche B Lenders hereunder are not willing to provide the full amounts of their shares of any such increase in the Commitments and Loans hereunder, the resulting shortfall shall be allocated among the remaining Tranche A or Tranche B Lenders, as relevant, as determined by the Borrower and the Agent, or the Borrower may designate one or more new Lenders, satisfactory to the Agent, to provide one or more new Commitments and Loans hereunder in the amount of such shortfall, and, in the case of Tranche B Loans, at the rate of interest per annum specified in the notice of the Borrower to the Agent described above. (e) The increase in existing Commitments or the addition of Commitments of new Lenders hereunder shall be effected by execution of an addendum to this Agreement as provided in Section 9.05. Simultaneously with the execution of such an addendum, the Borrower shall execute and deliver to the Agent a Euro-Dollar Note and a Domestic Note for each Lender that is a new Tranche A Lender, or a Tranche B Note for each Lender that is a Tranche B Lender making a new Loan under this Section, in each case dated the date of such addendum, and shall, in any case, execute and deliver such documents as the Agent may reasonably request relating to the authorization -34- for and validity of such addendum and, if relevant, such new Note or Notes. If the Borrower shall have provided security under Section 5.08 or 5.11, the documents relating to such security shall be amended as necessary or advisable to take account of the increased Commitments and Loans hereunder. (d) The Lender executing such addendum shall, not later than 11:00 A.M. (New York City time) on the date specified in such addendum, advance a Loan to the Borrower in an amount equal to, in the case of a new Lender, its Commitment, or, in the case of an existing Lender, the increase in its Commitment by making such amount available, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. If such Loan is a Tranche A Loan, it shall be of the same type (Prime, CD or Euro-Dollar) as the then-outstanding Tranche A Loans and the Interest Period for such Tranche A Loan shall commence on such date and end on the last day of the then current Interest Period for the then-outstanding Tranche A Loans. Such Tranche A Loan shall mature, and the principal amount thereof be due and payable, on the last day of the Interest Period applicable thereto. If such Loan is a Tranche B Loan, the principal thereof shall be payable and interest thereon shall accrue and be payable as provided in Sections 2.04(b) and 2.05(e). (e) The borrowing of any Loan by the Borrower under this Section shall constitute a representation and warranty by the Borrower to all of the Lenders that: (i) immediately after such borrowing, no Default shall have occurred and be continuing; and (ii) the fact that the representations and warranties of the Borrower contained in this Agreement (except the representation and warranty set forth in Section 4.04(d) as to any material adverse change which has theretofore been disclosed in writing by the Borrower to the Lenders) are true on and as of the date of such borrowing. -35- ARTICLE III CONDITIONS TO BORROWINGS SECTION 3.01. FIRST BORROWING. The obligation of each Lender to make a Loan on the occasion of the first Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of notice of such Borrowing as required by Section 2.02; (b) the fact that, immediately after such Borrowing, no Default shall have occurred and be continuing; (c) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true on and as of the date of such Borrowing; (d) receipt by the Agent for the account of each Lender of a duly executed Note or Notes, each dated on or before the date of such Borrowing, complying with the provisions of Section 2.03; (e) receipt by the Agent of opinions of counsel acceptable to it or policies of title insurance acceptable to it covering not less than 85% (in Relative Value) of the Petroleum Properties acquired by the Borrower pursuant to the Petro-Lewis Acquisition; (f) receipt by the Agent of the duly executed SFNR Undertaking dated the date of the first Borrowing; (g) receipt by the Agent of an opinion of Jeffrey R. Moreland, associate general counsel of Santa Fe Southern Pacific and counsel for the Borrower and its affiliates in connection herewith, substantially in the form of Exhibit D hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Lenders may reasonably request; (h) receipt by the Agent of an opinion of Davis Polk & Wardwell, special counsel for the -36- Lenders and the Agent, substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Lenders may reasonably request; (i) receipt by the Agent of a certificate signed by the president or chief financial officer of the Managing General Partner of the Borrower, to the effect set forth in clauses (b) and (c) above and certifying as to the correctness of the Coverage Report delivered in connection with the first Borrowing pursuant to Section 5.01(i); and (j) receipt by the Agent of all documents it may reasonably request relating to the existence of the Borrower and the Managing General Partner, the authority for and the validity of this Agreement, the Notes, the Mortgages and the SFNR Undertaking and any other matters relevant hereto, all in form and substance satisfactory to the Agent. The certificate and opinions referred to in clauses (g), (h) and (i) above shall be dated the date of the first Borrowing. SECTION 3.02. SUBSEQUENT BORROWINGS. The obligation of each Tranche A Lender to make a Loan on the occasion of each Borrowing subsequent to the first Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of notice of such Borrowing as required by Section 2.02; (b) the fact that, immediately after such Borrowing, no Default shall have occurred and be continuing; and (c) the fact that the representations and warranties of the Borrower contained in this Agreement (except the representation and warranty set forth in Section 4.04(d) as to any material adverse change which has theretofore been disclosed in writing by the Borrower to the Lenders) shall be true on and as of the date of such Borrowing. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b) and (c) of this Section. -37- ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.01. EXISTENCE AND POWER. The Borrower is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware, including the Delaware Revised Uniform Limited Partnership Act, and in each other jurisdiction where the ownership of its properties or the conduct of its business requires it so to be, and has authority under said laws and its Partnership Agreement and all powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.02. PARTNERSHIP AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The execution, delivery and performance by the Borrower of this Agreement, the Notes and the Mortgages are within the Borrower's legal powers, have been duly authorized by all necessary legal action, require no action by or in respect of, or filing with, any governmental body, agency or official (except for the recordation of the Mortgages and the filing of the related financing statements) and do not contravene, or constitute a default under, any provision of applicable law or regulation or of either Partnership Agreement or of any other agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or Energy Partners or result in the creation or imposition of any Lien on any asset of the Borrower or Energy Partners (except as contemplated by Sections 5.08 and 5.11). SECTION 4.03. BINDING EFFECT. This Agreement constitutes a valid and binding agreement of the Borrower; the Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower; and the Mortgages, when executed in accordance with this Agreement, will constitute valid and binding agreements of the Borrower. SECTION 4.04. FULL DISCLOSURE; FINANCIAL INFORMATION. (a) The information and other documents furnished by or on behalf of the Borrower or any of its Affiliates to the Lenders in connection with the transactions contemplated hereby do not and will not, as of the date thereof, contain -38- any untrue statement of material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading. (b) The balance sheet of Energy Partners as of December 31, 1986 and the related statements of income, changes in financial position and changes in partners' capital for the fiscal year then ended, reported on by Price Waterhouse and set forth in the 1986 annual report on Form 10-K for Energy Partners, as filed with the Securities and Exchange Commission, a copy of which has been delivered to each of the Lenders, fairly present, in conformity with generally accepted accounting principles, the financial position of Energy Partners as of such date and its results of operations and changes in financial position for such fiscal year. (c) The unaudited balance sheet of Energy Partners as of March 31, 1987 and the related unaudited statements of income, changes in financial position and changes in partners' capital for the three months then ended, set forth in the quarterly report of Energy Partners for the fiscal quarter ended March 31, 1987 as filed with the Securities and Exchange Commission on Form 10-Q, a copy of which has been delivered to each of the Lenders, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in paragraph (b) of this Section, the financial position of Energy Partners as of such date and its results of operations and changes in financial position for such three month period (subject to normal year-end adjustments). (d) Since December 31, 1986 there has been no material adverse change in the business, properties, financial position, results of operations or current operating environment of Energy Partners or of the Borrower. SECTION 4.05. LITIGATION. There is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Affiliates before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the Borrower's ability to perform its obligations under this Agreement or which in any manner draws into question the validity of this Agreement, the Notes or the Mortgages. SECTION 4.06. COMPLIANCE WITH ERISA. (a) Each ERISA Obligor has fulfilled in all material respects its -39- obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and with respect to each Plan there is not outstanding any material liability currently payable (other than premium payments outstanding for 60 days or less) to the PBGC or a Plan under Title IV of ERISA. (b) As of the date of this Agreement, the sum, for all Excluded Plans, of (i) the present value of all benefits accrued under each Excluded Plan determined on a termination basis using the assumptions established by the PBGC as in effect on such date minus (ii) the assets of such Excluded Plan (excluding for these purposes any accrued but unpaid contributions) does not exceed $22,000,000. SECTION 4.07. TAXES. (a) From and including the date of this Agreement to and including the date of the first Borrowing, the Borrower represents that neither the Borrower nor Energy Partners is an association taxable as a corporation within the meaning of the Code, and neither the income of the Borrower nor the income of Energy Partners is subject to Federal income tax at the partnership level under the Code. (b) The Borrower and Energy Partners have filed all United States Federal income tax information returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by either of them (other than such taxes as are being contested in good faith in appropriate proceedings). The charges, accruals and reserves on the books of the Borrower and on the books of Energy Partners in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. SECTION 4.08. TITLE TO ASSETS. The Borrower has, to the best of its knowledge, valid and defensible title to the Petroleum Properties, subject to no Liens other than Liens permitted under Section 5.10, and the Borrower's net revenue interests in the various Petroleum Properties are as shown in the Most Recent Engineering Report. Except for instances which do not in the aggregate materially detract from the value of such leases or materially impair the use thereof in the operation of its business, the Borrower enjoys peaceful, lawful and undisturbed possession under all leases included in the Petroleum Properties and such leases are valid, subsisting, in full force and effect, and are not subject to any -40- terms which are not usual and customary in similar transactions negotiated on an arms-length basis. SECTION 4.09. NOT AN INVESTMENT COMPANY. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. ARTICLE V COVENANTS The Borrower agrees that, so long as any Lender has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. INFORMATION. The Borrower will deliver to each of the Lenders: (a) as soon as available and in any event within 120 days after the end of each fiscal year of Energy Partners, a balance sheet of Energy Partners as of the end of such fiscal year and the related statements of income, changes in financial position and changes in partners' capital for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by Price Waterhouse or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a balance sheet of Energy Partners as of the end of such quarter and the related statements of income, changes in financial position and changes in partners' capital for such quarter and for the portion of the fiscal year of Energy Partners 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 previous fiscal year of Energy Partners, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief -41- financial officer or chief accounting officer of the Managing General Partner; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or chief accounting officer of the Managing General Partner (i) setting forth (x) the Coverage Ratios as of the date of such financial statements, and (y) if the Life-of-Reserves Coverage Ratio does not exceed 2.05, in reasonable detail the calculations required to establish the Coverage Ratios and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Managing General Partner and the Borrower are taking or propose to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements; (e) forthwith upon the occurrence of any Default, a certificate of the chief financial officer or chief accounting officer of the Managing General Partner setting forth the details thereof and the action which the Managing General Partner and the Borrower are taking or propose to take with respect thereto; (f) promptly upon the mailing thereof to the limited partners of Energy Partners generally, copies of all financial statements, reports (other than reports on Form K-1 under the Code and related schedules thereto) and proxy statements so mailed other than those provided or to be provided under subsection (a) or (b) above; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Energy Partners shall have filed with the Securities -42- and Exchange Commission other than those provided or to be provided under Subsection (a) or (b) above; (h) if and when any ERISA Obligor (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA, a copy of such notice; or (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate or appoint a trustee to administer any Plan, a copy of such notice; (i)(x) on or prior to April 1 of each year, an Engineering Report as of January 1 of such year; (y) unless the Required Lenders waive such requirement (consent to any request for such waiver not to be unreasonably denied), on or prior to September 15 of each year, an update of such Engineering Report as of July 1 of such year, prepared by the Borrower or an Independent Petroleum Engineer, which shall reflect (1) the acquisition of Recognized Proved Reserves covered in supplements, prepared by an Independent Petroleum Engineer, delivered to the Lenders since delivery of such Engineering Report, (2) six months' reduction in Recognized Proved Reserves (equal to one-half of such year's production as shown in the Engineering Report as of January 1 of such year), (3) any significant adverse developments in production or reserves since January 1 of such year, (4) changes in Approved Assumptions and (5) any disposition of Recognized Proved Reserves; but shall not otherwise, unless prepared by an Independent Petroleum Engineer, reflect any acquisition of Recognized Proved Reserves or any reassessment of the matters covered in such Engineering Report; and (z) on the date of, and giving effect to, the first Borrowing, and on or prior to May 1 and October 15 of each year, a Coverage Report as of the date of such Coverage Report; -43- (j) forthwith upon the occurrence of any Triggering Event or of an event described in clause II of Section 5.11(a), or any change in the ownership of Energy Partners which results in a change in the applicable interest rates hereunder, a certificate of the Managing General Partner setting forth the details thereof; and (k) from time to time such additional information regarding the financial position or business of the Borrower or Energy Partners or the General Partners of the Borrower as the Agent, at the request of any Lender, may reasonably request. SECTION 5.02. PAYMENT OF OBLIGATIONS. The Borrower will pay and discharge at or before maturity, all its material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.03. MAINTENANCE OF PROPERTY; INSURANCE. (a) The Borrower will keep all property useful and necessary in its business in good working order and condition. (b) The Borrower will maintain or cause to be maintained for its benefit, with financially sound and reputable insurance companies, property, casualty and liability insurance with respect to all its properties and operations whether owned or leased in at least such amounts and against at least such risks as is customary for Persons engaged in the same or a similar business in similar locations. The Borrower will furnish to the Agent from time to time, if so requested, full information as to the insurance carried. SECTION 5.04. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE: CHANGE OF NAME; FISCAL YEAR. The Borrower will preserve, renew and keep in full force and effect its existence and its rights, privileges and franchises necessary or desirable in the normal conduct of business. Without limiting the generality of the foregoing, it shall be the case that Energy Partners will have no assets, operations or business activities except for its ownership of 99% of the partnership interests in the Borrower (and except for such ownership of assets, operations and business activities as are incidental thereto) and will continue to operate, and to own its oil and gas properties, through the Borrower and that the Borrower -44- shall continue to be engaged primarily in the exploration for, and acquisition, production and marketing of, Hydrocarbons on behalf of Energy Partners. The Borrower will cause any Petroleum Properties operated by it or by an Affiliate, and will use its best efforts to cause any Petroleum Properties operated by any other Person, to be operated prudently in accordance with good oil field practice. The Borrower will cause Hydrocarbons produced from the Petroleum Properties to be marketed in a commercially reasonable manner at commercially reasonable prices. The Borrower will have no Subsidiaries (i) except with the prior written consent of the Required Lenders, such consent not to be unreasonably withheld provided that the provisions of this Agreement are amended to take account thereof as deemed appropriate by the Required Lenders and (ii) except for Subsidiaries which may exist on a transitory basis not to exceed 90 days in the course of an acquisition by the Borrower of oil and gas properties by way of a purchase of stock or partnership interests. The Borrower shall not change its name without 30 days' prior written notice to the Agent, and the Agent shall promptly notify each Lender thereof. The fiscal year of the Borrower and Energy Partners shall at all times be the calendar year. SECTION 5.05. COMPLIANCE WITH LAWS. The Borrower will comply in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. SECTION 5.06. INSPECTION OF PROPERTY, BOOKS AND RECORDS. The Borrower will keep proper books of record and account of all dealings and transactions in relation to its business and activities; and will permit representatives of any Lender to visit and inspect any of its properties, to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers and independent public accountants, all at such reasonable times and as often as may reasonably be desired, it being understood that the foregoing shall be at the expense of such Lender and, in the case of visits and inspections of oil and gas properties, at such Lender's risk. SECTION 5.07. DEBT. The Borrower shall not incur any Debt on or after the date of this Agreement unless, immediately after such incurrence of Debt, (i) no Default shall have occurred and be continuing and (ii) the Life-of Reserves Coverage Ratio is equal to or greater than 1.75 and the Annual Coverage Ratio is equal to or greater than 1.20. -45- Furthermore, the Borrower shall not incur any Debt after a Triggering Event, or an event described in clause (II) or (III) of Section 5.11(a), has occurred until it has complied with Section 5.11(a) or such compliance is, pursuant to a waiver granted under Section 5.11(b) or pursuant to the provisions of Section 5.11(c), no longer required. For purposes of this Section, a Rollover shall not be deemed an incurrence of Debt. SECTION 5.08. COVERAGE RATIOS; SECURITY (a) If the Life-of-Reserves Coverage Ratio set forth in any certificate delivered pursuant to Section 5.01(c) or Coverage Report delivered pursuant to Section 5.01(i)(z) is less than 1.75, or if the Annual Coverage Ratio set forth in such certificate or Coverage Report is less than 1.20, then, within 60 days of the date of such report, the Borrower shall (i) reduce Debt, (ii) in accordance with Section 2.07(c), adjust the amounts of installments of Tranche B Loans under Section 2.04(b) and the amounts of mandatory reductions of Commitments under Section 2.06(c) so that amounts scheduled to be paid under such Sections are reduced for later Reduction Dates and increased (by an equal amount in aggregate) for earlier Reduction Dates or (iii) acquire additional Recognized Proved Reserves (acceptable to the Required Lenders and included in a supplement, prepared by an Independent Petroleum Engineer and delivered to the Lenders within such 60-day period, to the Most Recent Engineering Report) such that, based on a new Coverage Report delivered to the Lenders within such 60-day period, the Life-of-Reserves Coverage Ratio is equal to or greater than 1.75 and the Annual Coverage Ratio is equal to or greater than 1.20; PROVIDED that, if a Triggering Event, or an event described in clause (II) or (III) of Section 5.11(a), has occurred, the Life-of-Reserves Coverage Ratio shall not on any day be less than 1.90 unless the Borrower has complied with Section 5.11(a) or such compliance is, pursuant to a waiver granted under Section 5.11(b) or pursuant to the provisions of Section 5.11(c), no longer required. (b) If, on any day, the Life-of-Reserves Coverage Ratio is less than the Collateral Threshold on such day, the Borrower shall, not later than 60 days thereafter, either (i) have delivered to the Agent evidence satisfactory to the Agent (which shall include opinions of counsel) that Mortgages have been executed and recorded as necessary to perfect for the benefit of the Lenders liens having first priority (except for Permitted Liens), securing payment of principal of and interest on the Notes and all other amounts payable by the Borrower under this Agreement and covering the lesser of (x) the Lenders' Pro Rata Share of 80% (in Relative Value) of -46- the Petroleum Properties not subject to Liens described in Section 5.10(a) and (y) such Petroleum Properties (l) the Cash Flow Available for Debt Service from which for the period of twenty fiscal years commencing with the fiscal year in which the date of determination occurs equals or exceeds (2) 190% of the sum of the aggregate outstanding principal amount of the Loans and interest scheduled to accrue on the Loans (using the interest rates for the Loans as set forth in the most recent Approved Assumptions) or (ii) reduce Debt or acquire additional Recognized Proved Reserves (acceptable to the Required Lenders and included in a supplement, prepared by an Independent Petroleum Engineer and delivered to the Lenders within such 60-day period, to the then Most Recent Engineering Report) such that, based on a new Coverage Report delivered to the Lenders within such 60-day period, the Life-of-Reserves Coverage Ratio is equal to or greater than the Collateral Threshold; PROVIDED that if the Life-of-Reserves Coverage Ratio, after giving effect to any incurrence of Debt, Restricted Payment or sale or other disposition of assets (including any exchange of Petroleum Properties for other oil and gas properties) by the Borrower, would be less than the Collateral Threshold, the Borrower shall, as a precondition to such incurrence of Debt, Restricted Payment or sale (or exchange) or other disposition of assets, comply with clause (b)(i) above. (c) If the Borrower provides security pursuant to clause (b)(i) above, it shall at all times thereafter maintain a perfected first priority (except as aforesaid) lien for the benefit of the Lenders covering the lesser of (l) the Lenders' Pro Rata Share (as calculated from time to time) of 80% (in Relative Value) of the Petroleum Properties not subject to Liens described in Section 5.10(a) and (2) such Petroleum Properties (x) the Cash Flow Available for Debt Service from which for the period of twenty fiscal years commencing with the fiscal year in which the date of determination occurs equals or exceeds (y) 190% of the sum of the aggregate outstanding principal amount of the Loans and interest scheduled to accrue on the Loans (using the interest rates for the Loans as set forth in the most recent Approved Assumptions). (d) The "Pro Rata Share" of any holder of any Debt of the Borrower (other than Debt of the Borrower Guaranteed by another Person, Subordinated Debt, Debt secured by any Lien on any asset of the Borrower pursuant to Section 5.10(a) or (e), or Debt incurred in violation of this Agreement) at any time is the then outstanding principal amount of such Debt as a percentage of the then outstanding total principal amount of the Borrower's Debt other than (w) Debt of the Borrower -47- Guaranteed by another Person, (x) Subordinated Debt, (y) Debt secured by a Lien on any asset of the Borrower pursuant to Section 5.10(a) or (e) and (z) Debt incurred in violation of this Agreement; and the "Collateral Threshold" is, if Santa Fe Southern Pacific and its Wholly-Owned Subsidiaries' aggregate ownership of limited partnership units of Energy Partners is, as a percentage of total outstanding limited partnership units of Energy Partners, (i) greater than or equal to 50%, 1.90, (ii) less than 50% but greater than or equal to 25%, 2.15, or (iii) less than 25%, 2.65. SECTION 5.09. RESTRICTED PAYMENTS. The Borrower will not declare or make any Restricted Payments if (a) after giving effect to such Restricted Payment, a Default shall have occurred and be continuing, or (b) Santa Fe Southern Pacific and its Wholly-Owned Subsidiaries own in aggregate, less than 50% of the outstanding limited partnership units of Energy Partners and the Life-of-Reserves Ratio is, after giving effect to such Restricted Payment, less than 2.05. Furthermore, the Borrower shall not, after a Triggering Event, or an event described in clause (II) or (III) of Section 5.11(a), has occurred, make any Restricted Payment until it has complied with Section 5.11(a) or such compliance is, pursuant to a waiver granted under Section 5.11(b) or pursuant to Section 5.11(c), no longer required. SECTION 5.10. NEGATIVE PLEDGE. The Borrower will not create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) any Lien existing on any oil and gas interest, property or prospect acquired by the Borrower which Lien was in existence prior to such acquisition and was not created in contemplation of such acquisition; PROVIDED that no more than one-third (in Relative Value) of the Petroleum Properties shall at any time be subject to such Liens; (b) Permitted Liens; (c) (i) Liens securing the Loans and any other obligations of the Borrower under this Agreement and (ii) so long as such Liens described in clause (i) exist, Liens on Petroleum Properties securing other Debt of the Borrower (other than Debt of the Borrower Guaranteed by another Person, Subordinated Debt, Debt secured by any Lien on any asset of the Borrower pursuant to Section 5.10(a) or (e), or Debt incurred in violation of this Agreement); PROVIDED -48- that the Relative Value of such Petroleum Properties, in relation to all Petroleum Properties subject to Liens described in this clause (c), does not exceed the Pro Rata Share of the holders of such other Debt; (d) any Lien arising pursuant to any order of attachment, distraint or similar legal process arising in connection with court proceedings so long as the execution or other enforcement thereof is effectively stayed and the claims secured thereby are being contested in good faith by appropriate proceedings; and (e) Liens on assets which do not (directly or indirectly) constitute oil and gas interests, properties or prospects, PROVIDED that aggregate principal amount of Debt secured thereby does not at any time exceed $10,000,000. SECTION 5.11. PROVISION OF SECURITY UPON TRIGGERING EVENT. (a) Subject to the provisions of subsection (c) below, if (I) a Triggering Event shall have occurred or (II) there shall be any change in the identity of the Managing General Partner or of the Special General Partner of either of the Borrower or Energy Partners or (III) an event described in the definition of "Triggering Event" (for these purposes replacing "Santa Fe Energy" whenever it occurs with "Santa Fe Natural Resources") shall have occurred, the Borrower shall, not later than 60 days after such event, (if it has not theretofore provided security pursuant to Section 5.08(a) or is not at such time maintaining such security in accordance with Section 5.08(c)) have delivered to the Agent evidence satisfactory to the Agent (which shall include opinions of counsel) that Mortgages have been executed and recorded as necessary to perfect for the benefit of the Lenders liens having first priority (except for Permitted Liens), securing payment of principal of and interest on the Notes and all other amounts payable by the Borrower under this Agreement and covering the lesser of (l) the Lenders' Pro Rata Share of 80% (in Relative Value) of the Petroleum Properties not subject to Liens described in Section 5.lO(a) and (2) such Petroleum Properties (x) the Cash Flow Available for Debt Service from which for the period of twenty fiscal years commencing with the fiscal year in which the date of determination occurs equals or exceeds (y) 190% of the aggregate outstanding principal amount of the Loans. -49- (b) The Borrower shall, if required to provide security pursuant to subsection (a) above, at all times there after (unless the Required Lenders waive such requirement, the consent of the Lenders to a request for such waiver not to be unreasonably withheld in light of, among other things, the considerations identified in clause (ii) of subsection (c) below) maintain a perfected first priority (except as aforesaid) lien for the benefit of the Lenders covering the lesser of (1) the Lenders' Pro Rata Share (as calculated from time to time) of 80% (in Relative Value) of the Petroleum Properties not subject to Liens described in Section 5.10(a) and (2) such Petroleum Properties (x) the Cash Flow Available for Debt Service from which for the period of twenty fiscal years commencing with the fiscal year in which the date of determination occurs equals or exceeds (y) 190% of the aggregate outstanding principal amount of the Loans. (c) The Borrower need not comply with the provisions of subsection (a) above, if, within the 60-day period referred to therein, (i) in the case of a Triggering Event occurring while Santa Fe Pacific Exploration is the Managing General Partner, a new board of directors of Santa Fe Pacific Exploration is elected which is comprised entirely of persons who are not employees, officers, directors or affiliates of Santa Fe Natural Resources or of any affiliate of Santa Fe Natural Resources (other than Santa Fe Pacific Exploration) and (ii) in any case, the Required Lenders have not determined, taking into account the composition of the board of directors of the Managing General Partner, that such event may result in a change of management policy that may adversely affect the interests of the Lenders. Each Lender agrees to respond to the Agent with respect to any request for a determination under clause (ii) above within five Domestic Business Days of such Lender's receipt of such request. SECTION 5.12. MERGER; SALE OR ABANDONMENT OF ASSETS: RELEASE OF COLLATERAL. (a) The Borrower will not merge or consolidate with any other Person unless the surviving Person is the Borrower or is a Person directly or indirectly controlling, controlled by or under common control with Santa Fe Southern Pacific (the word "control" having for purposes hereof the meaning assigned thereto in the definition of Affiliate) and unless, after giving effect thereto, no Default shall have occurred and be continuing. The Borrower will not sell, assign, lease or otherwise transfer or abandon any Petroleum Properties or any proceeds thereof or rights with respect thereto without the prior written consent of the Required Lenders except that (i) the Borrower may sell Hydrocarbons after severance in the ordinary course of its -50- business; (ii) the Borrower may sell, in any period of twelve months, Petroleum Properties having an aggregate fair market value not in excess of $25,000,000, PROVIDED that (A) the aggregate fair market value of all Petroleum Properties sold pursuant to this clause (ii) during the term of this Agreement shall not exceed $50,000,000 and (B) no sale of Petroleum Properties may be made under this clause (ii) if, after giving effect to such sale and the use of proceeds thereof, (1) a Default would exist, or (2) the Life-of-Reserves Coverage Ratio would be less than 1.75 or the Annual Coverage Ratio would be less than 1.20; (iii) the Borrower may exchange any Petroleum Properties for any other oil and gas properties having an equivalent fair market value provided such exchange is otherwise permitted by this Agreement and PROVIDED that, after giving effect thereto, (x) no Default would exist, and (y) the Life-of-Reserves Coverage Ratio would equal or exceed 1.75 and the Annual Coverage Ratio would equal or exceed 1.20; (iv) the Borrower may sell, lease or otherwise transfer (through farm-out or otherwise) any oil and gas property (or any indirect investment in oil and gas property) if such property contains no Recognized Proved Reserves; and (v) the Borrower may abandon any oil and gas property which the Managing General Partner has determined in good faith (and, if such property consists of one or more line items in the Most Recent Engineering Report, so certified to the Agent) is incapable of producing Hydrocarbons at a level sufficient to produce gross revenues in excess of the sum of associated royalties, operating costs and windfall profits, production, ad valorem, severance and income taxes. (b) If, at any time, the Borrower is required at such time pursuant to Sections 5.08(c) and/or 5.11(b) to maintain security theretofore provided under Sections 5.08(b) and/or 5.11(a), the Agent shall, nevertheless, upon the request of the Borrower, release any Mortgage as to any Petroleum Properties, if after giving effect to such release, (x) no Default shall have occurred and be continuing, (y) the Life-of-Reserves Coverage Ratio equals or exceeds 1.75 and the Annual Coverage Ratio equals or exceeds 1.20, and (z) the Borrower continues to be in compliance with Sections 5.08(c) and/or 5.11(b), as relevant. SECTION 5.13. USE OF PROCEEDS. The proceeds of the Loans made under this Agreement will be used by the Borrower to refinance short-term debt and for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" within the meaning of Regulation G or Regulation U. -51- ARTICLE VI DEFAULTS SECTION 6.01. EVENTS OF DEFAULT. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Loan or shall fail to pay within 10 Domestic Business Days of the due date thereof any interest on any Loan, any fees or any other amount payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.07 through 5.13 inclusive (other than Section 5.08(c) or Section 5.11(b)); (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) or in any Mortgage for 30 days after written notice thereof has been given to the Borrower by the Agent at the request of any Lender; (d) any representation, warranty, certification or statement made by the Borrower or the Managing General Partner in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Borrower shall fail to make any payment in respect of any Debt (other than the Notes) when due or within any applicable grace period if the aggregate principal amount of such Debt exceeds $5,000,000; (f) any event or condition shall occur which results in the acceleration of the maturity of any Debt of the Borrower (other than the Notes) or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to -52- accelerate the maturity thereof if the aggregate principal amount of such Debt exceeds $5,000,000; (g) the Borrower shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower seeking liquidation, reorganization or other relief with respect to it or its debt under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstated for a period of 60 days; or an order for relief shall be entered against the Borrower under the federal bankruptcy laws as now or hereafter in effect; (i) any ERISA Obligor shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans having aggregate Unfunded Vested Liabilities in excess of $10,000,000 (collectively, a "Material Plan") shall be filed under Title IV of ERISA by any ERISA Obligor, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Material Plan or a proceeding shall be instituted by a fiduciary of any Material Plan against any ERISA Obligor to enforce Section 515 of ERISA and such proceeding shall not have been dismissed within 30 -53- days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; (j) judgments or orders for the payment of money in excess of $10,000,000 in the aggregate shall be rendered against the Borrower and such judgments or orders shall continue unsatisfied and unstayed for a period of 30 days; (k) Energy Partners shall fail to directly own at least 99% of the partnership interests in the Borrower or shall cease to be the sole limited partner of the Borrower; or the Borrower or Energy Partners shall be dissolved; or either Partnership Agreement shall be amended in any material respect without the prior written consent of the Required Lenders or shall be breached in any material respect; or any other agreement to which the Borrower or Energy Partners is a party is breached and such breach may reasonably be expected to have a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement; or (1) (i) any lien granted pursuant to Section 5.08 or 5.11 shall thereafter be determined to be invalid or unenforceable, or not to constitute a first priority lien (subject only to Permitted Liens) on the properties purported to be covered thereby, and such event or condition shall continue, not cured or waived, for seven days; provided that any such event or condition affecting any lien shall not be an Event of Default if the Borrower is in compliance with Section 5.08(c) and Section 5.11(b) without giving effect to such lien; or (ii) the Borrower contests in writing the validity, enforceability or priority of any lien granted and required to be maintained pursuant to Section 5.08 or Section 5.11; then, and in every such event, the Agent shall, if requested by the Required Lenders, by notice to the Borrower terminate the Tranche A Commitments and they shall thereupon terminate, and by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are -54- hereby waived by the Borrower; PROVIDED that in the case of any of the Events or Default specified in clause (g) or (h) above, without any notice to the Borrower or any other act by the Agent or the Lenders, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.02. NOTICE OF DEFAULT. The Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Lender and shall thereupon notify all the Lenders thereof. SECTION 6.03. TRANCHE B LOANS DUE UPON FAILURE TO REBORROW TRANCHE A LOANS. If, on the last day of any Interest Period, the Borrower fails to borrow Tranche A Loans in accordance with the Notice of Borrowing required to be given with respect to a Borrowing on such day (due to a failure by the Borrower to deliver a Notice of Borrowing, a failure to meet conditions precedent or otherwise), the Tranche B Loans shall be due and payable on such day, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.04. ADDITIONAL AMOUNT PAYABLE WITH RESPECT TO TRANCHE B LOANS. Together with any payment of any Tranche B Loan pursuant to Section 6.01 or 6.03 above, the Borrower shall pay to the relevant Tranche B Lender an amount equal to the excess, if any, of (x) all future scheduled payments of principal and interest with respect to the corresponding Eliminated Payments, calculated as if such payment were not being made and using a discount rate equal to the yield, which shall be imputed by linear interpolation from the yields (as most recently published in Federal Reserve Statistical Release H.15 (519) or any successor publication thereto) of those United States Treasury notes which have maturities as close as practicable to the remaining weighted average life of such Eliminated Payments; over (y) the amount of such payment. With respect to any such payment pursuant to Section 6.01 or 6.03 above of a Tranche B Loan, the corresponding "Eliminated Payments" shall mean all scheduled installments of such Loan which would have been required to be paid on subsequent Reduction Dates but for such payment pursuant to Section 6.01 or 6.03 above; PROVIDED that the "Eliminated Payments" associated with any such payments shall also include the Eliminated Payments (as defined in Section 2.07(d) associated with any portion of any such scheduled installment which is then -55- attributable to Prospective Prepayments described in Section 2.07(c)(iii)(y). ARTICLE VII THE AGENT SECTION 7.01. APPOINTMENT AND AUTHORIZATION. Each Lender irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes and the Mortgages as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. Each Lender, in particular, authorizes the Agent to act as mortgagee or beneficiary and security agent under each Mortgage for the benefit of the Lenders, subject to the provisions of this Article VII. SECTION 7.02. AGENT AND AFFILIATES. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Lender and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Affiliate of the Borrower as if it were not the Agent hereunder. SECTION 7.03. ACTION BY AGENT. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. SECTION 7.04. CONSULTATION WITH EXPERTS. The Agent may consult with legal counsel (who may, with the consent of the Required Lenders, be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. LIABILITY OF AGENT. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or not taken by it in connection herewith or under any Mortgage (i) with the consent or at the request of the Required Lenders or (ii) in the -56- absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any Mortgage or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article III or Section 2.12, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes, any Mortgage or any other instrument or writing furnished in connection herewith or therewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. INDEMNIFICATION. Each Lender shall, ratably in accordance with its outstanding Loans, indemnify the Agent (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Agent hereunder. SECTION 7.07. CREDIT DECISION. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other sender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. FEES. The Borrower shall pay to the Agent the arrangement and commitment fee set forth in the letter from the Agent to the Borrower dated June 8, 1987, and shall pay to the Agent on the date of the first Borrowing and on each anniversary thereof, so long as any Loan remains outstanding, an agency and engineering fee of $30,000. -57- ARTICLE VIII CHANGE IN CIRCUMSTANCES AFFECTING TRANCHE A LENDERS SECTION 8.01. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR. If on or prior to the first day of any Interest Period: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) Tranche A Lenders having 66 2/3% or more of the aggregate amount of the Tranche A Commitments advise the Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Agent will not adequately and fairly reflect the cost to such Tranche A Lenders of funding their Fixed Rate Loans for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Tranche A Lenders, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Tranche A Lenders to make CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Prime Borrowing. SECTION 8.02. ILLEGALITY. If, after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Tranche A Lender (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Tranche A Lender (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Tranche A Lender shall so notify the Agent, the Agent shall forthwith give notice thereof to -58- the other Tranche A Lenders and the Borrower, whereupon until such Tranche A Lender notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Tranche A Lender to make Euro-Dollar Loans shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Tranche A Lender shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Tranche A Lender, be otherwise materially disadvantageous to such Tranche A Lender. If such Tranche A Lender shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Prime Loan in an equal principal amount from such Tranche A Lender (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Tranche A Lenders), and such Tranche A Lender shall make such a Prime Loan. SECTION 8.03. INCREASED COST AND REDUCED RETURN. (a) If after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Tranche A Lender (or its Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Tranche A Lender (or its Lending Office) to any tax, duty or other charge with respect to its Fixed Rate Loans, its Notes or its obligation to make Fixed Rate Loans, or shall change the basis of taxation of payments to any Tranche A Lender (or its Lending Office) of the principal of or interest on its Fixed Rate Loans or any other amounts due under this Agreement in respect of its Fixed Rate Loans or its obligation to make Fixed Rate Loans (except for changes with respect to tax on net income or any tax computed by reference to net income of such Tranche A Lender or its applicable Lending Office imposed by the jurisdiction in which such Tranche A Lender's principal executive office or applicable Lending Office is located); or -59- (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (A) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (B) with respect to any Euro-Dollar Loan any such requirement for which such Tranche A Lender is entitled to compensation during the relevant Interest Period pursuant to Section 2.11) against assets of, deposits with or for the account of, or credit extended by, any Tranche A Lender (or its Lending Office) or shall impose on any Tranche A Lender (or its Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Notes or its obligation to make Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Tranche A Lender (or its Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Tranche A Lender (or its Lending Office) under this Agreement or under its Notes with respect thereto, by an amount deemed by such Tranche A Lender to be material, such Tranche A Lender shall promptly after its determination of such occurrence give notice thereof to the Agent (which shall promptly give notice to the Borrower), and the Borrower shall pay to such Tranche A Lender from time to time, within 30 days of demand, such amount as such Tranche A Lender certifies to be the amount that will compensate it for such increased costs, provided that the Borrower's obligation to pay such Tranche A Lender shall be limited to the increased costs that are attributable to the period of time commencing with the date 30 days prior to the date on which such Tranche A Lender's notice is received by the Borrower. (b) If after the date hereof, any Tranche A Lender shall have determined that the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Tranche A Lender (or its Lending Office) with any request or directive regarding capital adequacy (whether or not having the force of law) -60- of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Tranche A Lender's capital as a consequence of its obligations hereunder to a level below that which such Tranche A Lender could have achieved but for such adoption, change or compliance (taking into consideration such Tranche A Lender's policies with respect to capital adequacy) by an amount deemed by such Tranche A Lender to be material, such Tranche A Lender shall promptly after its determination of such occurrence give notice thereof to the Agent (which will promptly give notice to the Borrower), and the Borrower shall pay to such Tranche A Lender from time to time, within 30 days of demand, such amount as such Tranche A Lender certifies to be the amount that will compensate it for such reduction provided that the Borrower's obligation to pay such Tranche A Lender shall be limited to the reduction that is attributable to the period of time commencing with the date 30 days prior to the date on which such Tranche A Lender's notice is received by the Borrower. (c) Each Tranche A Lender will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Tranche A Lender to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Tranche A Lender, be otherwise materially disadvantageous to such Tranche A Lender. A certificate of any Tranche A Lender claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Tranche A Lender may use any reasonable averaging and attribution methods. SECTION 8.04. PRIME LOANS SUBSTITUTED FOR AFFECTED FIXED RATE LOANS. If (i) the obligation of any Tranche A Lender to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Tranche A Lender has demanded compensation under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Tranche A Lender through the Agent, have elected that the provisions of this Section shall apply to such Tranche A Lender, then, unless and until such Tranche A Lender notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Tranche A Lender as CD Loans or Euro-Dollar -61- Loans, as the case may be, shall be made instead as Prime Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Tranche A Lenders), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid, all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Prime Loans instead. SECTION 8.05. SUBSTITUTION OF LENDER. If (i) the obligation of any Tranche A Lender to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Tranche A Lender has demanded compensation under Section 8.03, the Borrower shall have the right, with the assistance of the Agent, to seek a mutually satisfactory (to the Borrower and the Agent) substitute lender or lenders (which may be one or more of the Lenders) to purchase the Notes and assume the Tranche A Commitment of such Tranche A Lender. ARTICLE IX MISCELLANEOUS SECTION 9.01. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, telecopy or similar writing) and shall be given to such party at its address or telex or telecopy number set forth on the signature pages hereof or such other address or telex or telecopy number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the telex or telecopy number specified in this Section and, in the case of a telex, the appropriate answerback is received, (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, when delivered at the address specified in this Section; PROVIDED that notices to the Agent under Article II and requests to the Lenders under Section 5.11(c)(ii) shall not be effective until received. -62- SECTION 9.02. NO WAIVERS. No failure or delay by the Agent or any Lender in exercising any right, power or privilege hereunder or under any Note or any Mortgage shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. EXPENSES; DOCUMENTARY TAXES. The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Lenders and the Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder, (ii) all out-of-pocket expenses of the Agent, including fees and disbursements of counsel for the Lenders and the Agent, in connection with the preparation, execution, recordation, or administration of any Mortgage and (iii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent or any Lender, including fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom. The Borrower shall indemnify each Lender against any transfer taxes, recording taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement or the Notes or of the execution and recordation of any Mortgage. SECTION 9.04. SHARING OF SET-OFFS. Each Lender agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Lender in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Lender, the Lender receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Lenders, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Lenders shall be shared by the Lenders pro rata; PROVIDED that nothing in this Section shall impair the right of any Lender to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under the Notes. The Borrower -63- agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. SECTION 9.05. AMENDMENTS AND WAIVERS. Any provision of this Agreement or the Notes or the Mortgage may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Lenders (and, if the rights or duties of the Agent are affected thereby, by the Agent); PROVIDED that no such amendment or waiver shall, unless signed by all the Lenders, (i) increase the Commitment of any Lender or subject any Lender to any additional obligation, except as contemplated by Section 2.12 and the further PROVISO below, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) effect any amendment in the provisions of Section 2.07, 6.03, 6.04 or 9.04, (iv) effect any amendment in Section 5.08 or 5.11 or permit the release of any Mortgage except pursuant to a waiver granted under Section 5.11(b) or pursuant to the provisions of Section 5.12(b), (v) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or (vi) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes which shall be required for the Lenders or any of them to take any action under this Section or any other provision of this Agreement; PROVIDED FURTHER that the signature pages hereof may be amended to include a new Lender and to set forth its Commitment or to increase the Commitment of an existing Lender (as contemplated by Section 2.12) and to reflect the resulting increase in the aggregate Commitments by execution of an addendum hereto by the Borrower, the Agent and such Lender, and all references herein, or in any other document, to this Agreement shall thereafter be deemed to refer to this Agreement as amended by such addendum. The Agent shall promptly give notice to the Borrower and all Lenders of any amendment or waiver of this Agreement or the Notes or any Mortgage. SECTION 9.06. SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that (i) the Borrower may not assign or otherwise transfer any of its rights under this Agreement and (ii) no Tranche A Lender may, without the prior written consent of the Borrower, assign any Tranche A Loan -64- hereunder; PROVIDED that nothing herein shall be deemed to prohibit the granting by any Tranche A Lender of participation in any Tranche A Loan hereunder or the sale, assignment, pledge or other transfer by any Tranche A Lender of its Notes and its rights thereunder to any Federal Reserve Bank. (b) The Agent and the Borrower may, for all purposes of this Agreement, treat any Lender as the holder of any Note drawn to it or its order (and owner of the Loans evidenced thereby) until written notice of assignment, participation or other transfer shall have been received by them and reflected on the Borrower's books; PROVIDED that no Tranche A Lender or participant shall give any such written notice with respect to any participation referred to in the PROVISO contained in subsection (a) prior to the occurrence of an Event of Default. The Borrower shall promptly record on its books all notices it receives under this subsection (b). In the case of any transfer of a Tranche B Note, the Borrower shall execute and deliver a new Tranche B Note payable to the transferee upon surrender of the old Tranche B Note duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of the old Tranche B Note. Such new Tranche B Note shall be dated and bear interest from the date to which interest has been paid on the surrendered Tranche B Note or from the date of the surrendered Note if no interest has been paid thereon. (c) No assignee, participant or other transferee of any Tranche A Lender's rights shall be entitled to receive any greater payment under Section 8.03 than such Lender would have been entitled to receive with respect to the rights transferred, except in the case of an assignment made with the Borrower's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Lender to designate a different Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (d) If any Reference Bank assigns its Notes to an unaffiliated institution, the Agent shall, in consultation with the Borrower and with the consent of the Tranche A Lenders, appoint another bank to act as a Reference Bank hereunder. SECTION 9.07. COLLATERAL. Each of the Lenders represents to the Agent and each of the other Lenders that it in good faith is not relying upon any "margin stock" (as defined in Regulation G and Regulation U) as collateral in the -65- extension or maintenance of the credit provided for in this Agreement. SECTION 9.08. REPRESENTATIONS OF LENDERS. Each Tranche A Lender represents that it is making its Loan in the ordinary course of its commercial banking business and not with a view toward distribution thereof, and each Tranche B Lender represents that it is acquiring its Tranche B Note for investment for its own account and not with a view toward distribution thereof, subject, nevertheless, to any requirement of law that the disposition of its property shall at all times be within its control. SECTION 9.09. CONFIDENTIALITY. Any information which any of the Lenders receives from the Borrower which is designated proprietary or confidential at the time of receipt thereof by such Lender shall not be disclosed by such Lender to any other Person, if such information is not otherwise in the public domain, other than (i) to its independent accountants and legal counsel, (ii) pursuant to statutory and regulatory requirements, (iii) pursuant to any mandatory court order, or (iv) to any other Lender or, subject to an agreement containing provisions substantially the same as those of this Section, to any participant in or assignee of, or prospective participant in or assignee of, any Loan. SECTION 9.10. NEW YORK LAW. This Agreement and each Note shall be construed in accordance with and governed by the law of the State of New York. SECTION 9.11. COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when the Agent shall have received counterparts hereof signed by all of the parties hereto. SECTION 9.12. NON-RECOURSE TO PARTNERS. No recourse shall be had for the payment of the principal of or interest on any Loan, or for any claim based thereon, or otherwise in respect thereof, or with respect to any other obligation hereunder, against any past, present or future partner of the Borrower or any partner thereof (including, without limitation, Santa Fe Pacific Exploration and Santa Fe Energy), and in no event shall any such Person be held liable, personally or otherwise with respect to the indebtedness evidenced by the Notes or for any obligations under this Agreement, whether by virtue of any statute or rule of law, or -66- by the enforcement of any assessment or penalty or otherwise, all such liability being expressly waived and released by the Agent and each Lender. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. SANTA FE ENERGY OPERATING PARTNERS, L.P. By: SANTA FE PACIFIC EXPLORATION COMPANY, as Managing General Partner By: Title: 1616 South Voss Road, Suite 1000 Houston, Texas 77057 Telecopy number: (713) 975-4871 COMMITMENTS $13,000,000 MORGAN GUARANTY TRUST COMPANY (Tranche A) OF NEW YORK By: Title: DOMESTIC LENDING OFFICE Morgan Guaranty Trust Company of New York 23 Wall Street New York, New York 10015 Telex number: 420230 -67- COMMITMENTS MORGAN GUARANTY TRUST COMPANY OF NEW YORK, CHANNEL ISLAND BRANCH By: Title: LENDING OFFICE Morgan Guaranty Trust Company of New York, Channel Islands Branch c/o MORGAN CHRISTIANA CORP. Servicing Unit 902 Market Street Wilmington, Delaware 19801 Telex number: 835383 $10,000,000 EQUITABLE VARIABLE LIFE INSURANCE (Tranche B) COMPANY By: Title: c/o Equitable Capital Management Corporation 1285 Avenue of the Americas New York, New York 10019 Attention: Corporate Finance Department Telex number: (212) 554-1032 $11,000,000 THE NORTHWESTERN MUTUAL LIFE (Tranche B) INSURANCE COMPANY By: Title: 720 East Wisconsin Avenue Milwaukee, WI 53202 Telecopy number: (414) 226-7001 -68- COMMITMENTS $9,000,000 BANK OF MONTREAL (Tranche A) By: Title: 115 South La Salle Street Chicago, IL 60603 Telex number: 190289 TRT Telecopy number: (312) 750-4368 $9,000,000 TEXAS COMMERCE BANK, (Tranche A) NATIONAL ASSOCIATION By: Title: Texas Commerce Plaza 712 Main Street Houston, TX 77002 Telex number: 775418 TEXCOMBK $7,000,000 AMERICAN GENERAL LIFE INSURANCE (Tranche B) COMPANY OF NEW YORK By: Title: 2929 Allen Parkway A37-01 Houston, TX 77019 Attention: Private Placement Department Telecopy number: (713) 831-1979 $6,500,000 MUTUAL BENEFIT LIFE INSURANCE (Tranche B) COMPANY By: Title: 520 Broad Street Newark, NJ 07101 Telecopy number: (201) 482-5865 -69- COMMITMENTS $6,500,000 NEW ENGLAND MUTUAL LIFE (Tranche B) INSURANCE COMPANY By: Title: 501 Boylston Street Boston, MA 04126 Telecopy number: (617) 578-4827 $6,500,000 PRINCIPAL MUTUAL LIFE INSURANCE (Tranche B) COMPANY By: Title: By: Title: 711 High Street Des Moines, Iowa 50309 Attention: Investment Department- Securities Telecopy number: (515) 247-5930 $6,500,000 UNUM LIFE INSURANCE COMPANY (Tranche B) OF AMERICA By: Title: 2211 Congress Street Portland, ME 04122 Attention: Bond Investment Division Telecopy number: (207) 780-6937 -70- COMMITMENTS $5,000,000 THE EQUITABLE LIFE ASSURANCE (Tranche B) SOCIETY OF THE UNITED STATES By: Title: c/o Equitable Management Corporation 1285 Avenue of the Americas New York, New York 10019 Attention: Corporate Finance Department Telecopy number: (212) 554-1032 Total Commitments $90,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By: Title: 23 Wall Street New York, New York 10015 Attention: Kevin McCann Telex number; 420230 -71- EX-10.P 6 DEFERRED COMPENSATION PLAN EXHIBIT 10(p) SANTA FE ENERGY RESOURCES, INC. DEFERRED COMPENSATION PLAN (As Amended) I. NAME AND PURPOSE The name of this plan is the Santa Fe Energy Resources, Inc. Deferred Compensation Plan (the "Plan"). The purpose of the Plan is to provide certain highly compensated employees of Santa Fe Energy Resources, Inc. (the "Company") and its Subsidiaries and the members of the Board of Directors of the Company with the opportunity to defer compensation earned as an Eligible Employee or as a Director on an elective basis and, to also provide Highly Paid Employees the opportunity to receive a Company matching contribution with respect to their base compensation in excess of that which is covered under the Company's Savings Plan. II. EFFECTIVE DATE Except as provided in Section XIV, the Plan became effective as of January 1, 1991. This First Amendment and restatement of the Plan shall be effective as of February 1, 1994. III. DEFINITIONS When used in this Plan, the following terms shall have the meanings set forth below unless a different meaning is plainly required by the context: A. "Account" shall mean a Deferral Account, Excess Account and/or Company Account, as the context requires. B. "Board of Directors" shall mean the Board of Directors of the Company. C. "Code" shall mean the Internal Revenue Code of 1986, as amended. D. "Committee" shall mean the Employee Benefits Committee of the Company. E. "Company Account" shall mean a bookkeeping account established by the Company to credit Company Matching Contributions on behalf of a Highly Paid Employee pursuant to Section VI(C). F. "Company Matching Contribution" shall mean an amount equal to the product of (i) a Highly Paid Employee's Excess Contributions for the first year and (ii) the Company's actual regular matching contribution rate for such year under the Savings Plan plus, if the Participant is entitled to receive an Employer Bonus Contribution under the Savings Plan, the Bonus Percentage thereunder. G. "Compensation" shall mean (1) all directors' retainers and fees paid by the Company to a member of the Board of Directors and (2) the rate of annual base salary payable to an Eligible Employee by the Company or a Subsidiary. H. "Deferral Account" shall mean a bookkeeping account established by the Company to credit elective deferrals on behalf of a Participant pursuant to Section VI(A). I. "Eligible Employee" shall mean an employee of the Company or a Subsidiary whose Compensation on a specified Entry Date exceeds ten times the amount specified in Section 402(g)(1) of the Code as in effect on such Entry Date; such term shall also include an employee who is a Highly Paid Employee. J. "Entry Date" shall mean the first day of each calendar year; however, with respect to a Director, the first day of the month following his initial election as a member of the Board of Directors and the first day of the month in which the Annual Meeting of Shareholders is conducted shall also be an Entry Date and, with respect to a Highly Paid Employee for purposes of making Excess Contributions, February 1, 1994 shall also be an Entry Date. K. "Excess Account" shall mean a bookkeeping account established by the Company to credit Excess Contributions on behalf of a Highly Paid Employee pursuant to Section VI(B). L. "Excess Compensation" shall mean Compensation, after reduction for any elective deferrals under this Plan that are credited to a Participant's Deferral Account, in excess of the amount specified in Section 401(a)(17) of the Code as in effect on such Entry Date. In no event shall compensation that is covered by the Savings Plan be Excess Compensation under this Plan. M. "Excess Contributions" shall mean the amount of Excess Compensation deferred by a Highly Paid Employee for a year pursuant to Section V. N. "Highly Paid Employee" shall mean an Eligible Employee who has Excess Compensation. O. "Participant" shall mean a member of the Board of Directors, an Eligible Employee or Highly Paid Employee who makes an election to participate in the Plan. P. "Payment Date" shall mean the date elected by a Participant on which to receive distribution of his Account(s) established with respect to a specified year. Q. "Savings Plan" shall mean the Santa Fe Energy Resources, Inc. Savings Investment Plan. R. "Subsidiary" shall mean any corporation in which the Company owns directly or indirectly at least 50% of the voting stock. Throughout this Plan, words in the masculine gender shall include the feminine and neuter genders, the plural shall include the singular and the singular shall include the plural. IV. PARTICIPANTS Each member of the Board of Directors and each Eligible Employee, including each Highly Paid Employee, shall be eligible to participate in the Plan. A Highly Paid Employee shall be eligible to make an election with respect to his Compensation or his Excess Compensation or both. In the event that an employee makes an election to participate in the Plan for a particular year believing such employee is an Eligible Employee (or Highly Paid Employee, as the case may be), and it is subsequently determined that such employee's Compensation at the Entry Date does not exceed ten times the amount specified in Section 402(g)(1) (or, with respect to a Highly Paid Employee, Section 401(a)(17)) of the Code as adjusted for that year, any amounts deferred by such employee under the Plan (or, if applicable, Excess Contributions made) for such year shall be returned to the employee as soon as practicable and no further deferrals (or Excess Contributions, as the case may be) shall be made for such employee with respect to such year. V. MANNER OF ELECTING DEFERRALS An Eligible Employee may elect to defer all or a part of his or her Compensation for a specified year by giving written notice to the Company setting forth the Participant's election as to: (a) the percentage (in multiples of 5% of Compensation, up to 100% thereof) of the Participant's Compensation to be deferred for such year; and (b) the Payment Date, as described in Section VII(A), for distribution of that year's Deferral Account. In addition, a Highly Paid Employee, who has made an election under the Savings Plan to contribute the maximum amount permitted under Section 402(g)(1) of the Code for that year, may elect, either in lieu of or in addition to an election made with respect to his Compensation, to defer part of his Excess Compensation for such year (an "Excess Contribution") by giving written notice to the Company setting forth the Participant's election as to: (x) the percentage (either 1%, 2%, 3% or 4%) of the Participant's Excess Compensation to be deferred for such year; and (y) the Payment Date, as described in Section VII(A), for distribution of that year's Matching Account and Excess Account. If, however, during a year a Highly Paid Employee reduces his election under the Savings Plan to less than the maximum amount permitted by Section 402(g)(1) of the Code, the Participant shall automatically cease making Excess Contributions thereunder. In order to participate in the Plan for a specified year, a Participant must deliver an executed deferred compensation election to the Company, on the form prescribed by the Company for that purpose, prior to the Entry Date for such year. The elections described in this Section shall pertain only to the year for which they are made and shall apply to all Compensation and/or Excess Compensation, if applicable, payable for such year. If no election is made for a year, no elective deferral of Compensation or Excess Compensation will be made for such year. All elections shall be irrevocable except to the extent the Committee, in its sole discretion, permits a Participant to terminate or change a deferral election. Such termination or change shall be effective only with respect to Compensation or Excess Compensation earned after the date such termination or change of election is approved by the Committee. VI. ACCOUNTS A. DEFERRAL ACCOUNTS. A separate Deferral Account shall be established and maintained for each Eligible Employee who elects to be a Participant for a year reflecting the amount of Compensation electively deferred for that year by the Participant and the interest credited thereon as provided in D. below. In the event two or more Deferral Accounts of a Participant are to be paid on the same Payment Date, all such Deferral Accounts shall be aggregated into a single Deferral Account for such Participant. At the end of each month, an amount shall be credited to the appropriate Deferral Account of each Participant to reflect the Compensation otherwise payable during said month but deferred pursuant to the Plan by the Participant. B. EXCESS ACCOUNTS. A separate Excess Account shall be established and maintained for each Highly Paid Employee who elects to be a Participant for a year reflecting the amount of Excess Compensation electively deferred for that year by the Participant and the interest credited thereon as provided in D. below. In the event two or more Excess Accounts of a Participant are to be paid on the same Payment Date, all such Excess Accounts shall be aggregated into a single Excess Account for such Participant. At the end of each month, an amount shall be credited to the appropriate Excess Account of each Participant to reflect the Excess Compensation otherwise payable during said month but deferred pursuant to the Plan by the Participant. C. COMPANY ACCOUNTS. A separate Company Account shall be established and maintained each year for each Highly Paid Employee who makes an Excess Contribution such year reflecting the amount of Company Matching Contributions credited on his behalf that year, if any, and the interest credited thereon as provided in D. below. In the event two or more Company Accounts of a Participant are to be paid on the same Payment Date, all such Company Accounts shall be aggregated into a single Company Account for such Participant. At the end of each month, an amount shall be credited to the appropriate Company Account of each Participant who is a Highly Paid Employee to reflect the Company Matching Contribution, if any, credited for said month on behalf of the Participant. D. INTEREST. Each Account shall be credited with interest as of the last day of each month based upon the balance in such Account on such date after first reducing the Account balance to reflect any distributions made during such month from such Account and before crediting to the Account any new deferrals made or Company Matching Contributions credited, as the case may be, for such month. Interest for each month shall be computed by using the interest rate earned for such month by the Fixed Interest Fund of the Savings Plan. E. VESTING. A Participant shall at all times be 100% vested (possess a nonforfeitable interest) in his Participant and Excess Accounts and shall be vested in his Company Accounts, if any, on any date to the same extent that he is vested in his Employers Contributions Account under the Savings Plan on such date. VII. DISTRIBUTION OF ACCOUNTS A. ELECTED DISTRIBUTION DATE. Except as provided below, a Participant's Accounts shall be valued as of the end of the month coinciding with or immediately preceding the Payment Date elected by the Participant with respect to such Account and shall be paid in a single, lump-sum distribution (by Company check) to the Participant as soon as is reasonably practicable after such Payment Date. Each year a Participant elects to defer Compensation and/or Excess Compensation, the Participant shall elect (at the time of the deferral and prior to the Entry Date) from among the following alternatives (to the extent applicable) the Payment Date applicable with respect to his deferrals for such year: OPTION 1: January 1 of any specified year, but not later than the January 1 on or next following (i) with respect to an Eligible Employee, the later of the Participant's (a) 70th birthday or (b) termination of his employment with the Company and its Subsidiaries or (ii) the Participant's ceasing to be a director, as the case may be; OPTION 2: If an Eligible Employee, as soon as practicable after the Participant's "Retirement Date" under the Santa Fe Energy Resources Retirement Income Plan (the "Pension Plan"); OPTION 3: If an Eligible Employee, January 1 after the year in which the Participant's "Retirement Date" under the Pension Plan occurs; or OPTION 4: If an Eligible Employee, one month prior to the Participant's "Retirement Date" under the Pension Plan. B. DISTRIBUTION UPON DEATH OR DISABILITY OF PARTICIPANT. If a Participant dies or becomes disabled (I.E., is receiving benefits under the Company's long-term disability plan or Social Security), the Participant's Accounts shall be valued as of the end of the month in which the Participant dies or becomes disabled, as the case may be, and shall be paid to the Participant's estate, in the event of death, or to the Participant, in the event of his disability, as the case may be, in a single lump-sum (by Company check) as soon as is reasonably practicable after such date of death or disability. C. EARLY TERMINATION OF EMPLOYMENT. If a Participant terminates employment (for reasons other than death or Disability) with the Company and its Subsidiaries prior to attaining his early retirement date under the Pension Plan, then notwithstanding his election of a later Payment Date to the contrary, his Accounts shall be valued as of the end of the month coinciding with or immediately preceding the date of such termination of employment and, to the extent vested, shall be paid to the Participant in a single lump-sum (by Company check) as soon as is reasonably practicable thereafter. Any nonvested Company Account balances shall be immediately forfeited on his termination of employment. D. HARDSHIP DISTRIBUTIONS. In the event of an unforeseen and immediate financial emergency of a Participant which is beyond his control, the Committee may, in its sole discretion, upon a written request of a participant, direct the acceleration of such vested portion of the Participant's Accounts as may be necessary to meet such emergency. The Committee shall require the Participant to furnish the Committee with proof of such emergency and the Participant's other financial resources as the Committee may deem necessary to evaluate a Participant's written request for accelerated payment. VIII. PARTICIPANTS' RIGHT Establishment of the Plan shall not be construed to give any Eligible Employee the right to be retained in the service of the Company or a Subsidiary. A Participant shall not have any interest in the amounts credited to his Accounts until such Accounts are distributed in accordance with the Plan. With respect to amounts deferred or otherwise held in an Account for a Participant, the Participant shall be an unsecured general creditor of the Company. IX. NON-ALIENABILITY AND NON-TRANSFERABILITY No Participant may borrow against his Accounts; no Account shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, whether voluntary or involuntary. However, if a former spouse of a Participant is awarded an interest in a Participant's Accounts through a judgment or order of a court, the Committee may, in its sole discretion, direct that the payment of such interest awarded to the former spouse be paid (valued as of the end of the month that the Company received written notice of such award) to the former spouse in a lump sum; thereafter, the Participant's Accounts shall be reduced for all Plan purposes by the amount of any such payment. X. STATEMENT OF ACCOUNT Statements will be sent to Participants as soon as practicable after the end of each year as to the balance in their Accounts as of the end of such year. XI. ADMINISTRATION The Committee shall have the authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions thereof. Any decision or interpretation of any provision of the Plan adopted by the Committee shall be final and conclusive. The individuals serving as the Committee shall be fully indemnified (to the extent permitted by law) by the Company for all claims, losses, damages or expenses incurred by them for any act, omission or construction made in connection with the Plan. The Committee is expressly authorized to direct at any time that the Accounts of a Participant that are fully vested and payable at the same Payment Date be aggregated for recordkeeping purposes. XII. AMENDMENT AND TERMINATION The Plan may, at any time, be amended, modified or terminated by the Board of Directors. In addition, the Committee may amend or modify the Plan provided that no such amendment or modification made by the Committee can materially increase the obligations of the Company under the Plan. Any such amendment, modification or termination requires the affirmative approval of a majority of the members constituting a quorum and shall be evidenced by a written resolution or other document signed by the Board of Directors or the Committee, as the case may be. No amendment, modification or termination of the Plan shall, without the consent of a Participant, adversely affect such Participant's rights with respect to amounts accrued in his Accounts. Notwithstanding anything in the Plan to the contrary, all Accounts shall become immediately payable in full upon the termination of the Plan. XIII. UNFUNDED STATUS OF THE PLAN Except as provided below, any and all payments made to the Participant pursuant to the Plan shall be made only from the general assets of the Company. All Accounts under the Plan shall be for bookkeeping purposes only and shall not represent a claim against specific assets of the Company. Nothing contained in this Plan shall be deemed to create a trust of any kind or create any fiduciary relationship between the Company and the Participant. The Company, in its sole discretion, may establish a grantor trust to provide for all or part of such Accounts, provided that the assets of such grantor trust at all times remain subject to the claims of the general creditors of the Company. XIV. SFP PLAN TRANSFERRED ACCOUNTS Effective with the corporate spinoff of the Company by Santa Fe Pacific Corporation ("SFP") the deferred accounts of any Eligible Employee under a similar SFP deferred compensation plan were transferred from such SFP plan to this Plan and such transferred accounts shall continue to be held hereunder pursuant to the elections made by the Participants under the SFP plan and shall be invested as provided in this Plan and paid pursuant to the Participant's distribution election(s) made under the SFP plan. Further, any deferral election made under such SFP plan with respect to compensation otherwise to be earned by the Eligible Employee after the date of the corporate spinoff shall be deemed to be a continuing election, without interruption or change, under this Plan for the remainder of the year in which such corporate spinoff occurs. XV. GENERAL PROVISIONS A. NOTICES. All notices to the Company hereunder shall be delivered to the attention of the Secretary of the Company. Any notice or filing required or permitted to be given to the Committee or the Company under this Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, to the Company or the Committee, as appropriate, at the principal office of the Company. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification. B. CONTROLLING LAW. Except to the extent superseded by applicable federal law, the laws of the State of Texas shall be controlling in all matters relating to the Plan. C. CAPTIONS. The captions of Sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. D. ACTION BY THE COMPANY. Any action required or permitted by the Company under the Plan shall be by resolution of its Board of Directors or any person or persons authorized by its Board of Directors with respect to such matters. E. FACILITY OF PAYMENT. Any amounts payable hereunder to any person under legal disability or who, in the judgment of the Committee, is unable to properly manage his financial affairs may be paid to the legal representative of such person or may be applied for the benefit of such person in any manner which the Committee may select. F. WITHHOLDING OF TAXES. The Company shall withhold from such Compensation and Excess Compensation when deferred, or from deferred compensation payments when made hereunder, as the case may be, any taxes required to be withheld therefrom for federal, state or local government purposes. G. SEVERABILITY. Whenever possible, each provision of the Plan shall be interpreted in such manner as to be effective and valid under applicable law (including the Code), but if any provision of the Plan shall be held to be prohibited by or invalid under applicable law, then (i) such provision shall be deemed amended to, and to have contained from the outset such language as shall be necessary to, accomplish the objectives of the provision and (ii) all other provisions of the Plan shall remain in full force and effect. H. NO STRICT CONSTRUCTION. No rule of strict construction shall be applied against the Company, the Committee, the Board of Directors, or any other person in the interpretation of any of the terms of the Plan or any rule or procedure established by the Committee. I. SUCCESSORS. The provisions of the Plan shall bind and inure to the benefit of the Company and its successors and assigns. The term "successors" as used herein shall include any corporation or other business entity which shall by merger, consolidation, purchase or otherwise, acquire all or substantially all of the business and assets of the Company and successors of any such corporation or other business entity. IN WITNESS WHEREOF, Santa Fe Energy Resources, Inc. has caused this amendment to be executed by its duly authorized officer this _____ , 1994, effective for all purpose as of February 1, 1994. SANTA FE ENERGY RESOURCES, INC. By: __________________________ EX-10.T 7 GAS MARKETING AGREEMENT EXHIBIT 10(t) MASTER GAS PURCHASE AGREEMENT THIS MASTER GAS PURCHASE AGREEMENT (this "Agreement"), dated this 14th day of December, 1993, is by and among SANTA FE ENERGY RESOURCES, INC., a Delaware corporation, and SANTA FE ENERGY OPERATING PARTNERS, L.P., a Delaware limited partnership (hereinafter jointly referred to as "Seller"), and ADOBE GAS PIPELINE COMPANY, a Delaware corporation (hereinafter referred to as "Buyer"). Seller and Buyer may hereinafter be referred to collectively as "Parties" or singularly as a "Party." W I T N E S S E T H: WHEREAS, Seller has available for sale certain quantities of gas not committed to any other purchaser; and WHEREAS, Buyer desires to purchase and receive, and Seller desires to sell and deliver, such gas upon the terms and conditions hereinafter set forth. NOW, THEREFORE, Seller and Buyer agree as follows: ARTICLE 1 DEFINITIONS The following definitions when used in this Agreement shall have the following meanings (other terms are defined elsewhere in this Agreement): 1.1 "Btu" shall mean British Thermal Unit. 1.2 "Buyer's Transporter" means, for each Delivery Point, the pipeline company or companies with whom Buyer contracts to transport Seller's Gas from each such Delivery Point to the corresponding Pricing Point for such Delivery Point. 1.3 "Cashout Costs" means, for Seller's Gas delivered to each Delivery Point, (i) the difference between the Index Price for such Delivery Point and the price paid to or received from a transporter to purchase or sell gas to eliminate any imbalance on such transporter's pipeline attributable to Seller's Gas from such Delivery Point, in accordance with such transporter's Tariff, and (ii) all costs assumed or incurred by Seller or its operator to buy gas under any operational balancing agreement with a transporter to eliminate any imbalance on such transporter's pipeline. 1.4 "Contract Year" shall mean a period of twelve (12) consecutive Months beginning on April 1 and ending on March 31 of the following calender year, except the first Contract Year which shall begin on the Effective Date and end on March 31, 1994. 1.5 "Day" or "day" shall mean a period of twenty-four (24) consecutive hours concurrent with the respective operating day of Buyer's Transporter as set forth in Buyer's Transporter's Tariff. 1.6 "Delivery Points" means, for each Seller's Well, the measuring station or other measurement facilities at the point of interconnection between Seller's delivery facilities for each such Seller's Well and the facilities of Buyer's Transporter accepting and transporting Seller's Gas from each such Seller's Well, which as of the Effective Date are the points of interconnection described in Exhibit A. 1.7 "Development Lands" means the lands covered by the oil, gas, and mineral leases described in Exhibit B and any lands pooled or unitized therewith, limited, in each case, as to depth, from the surface of the earth to one hundred feet (100') below the depth of the deepest interval first completed and producing gas in the first well drilled on such lands. 1.8 "Development Well" means the wellbore of any well drilled and completed after the Effective Date (i) on the Development Lands or (ii) from an existing production platform in the Gulf of Mexico from which one or more Existing Wells are producing as of the Effective Date, limited, as to depth, from the surface of the earth -2- to one hundred feet (100') below the depth of the deepest interval completed and producing gas in commercial quantities in such Existing Wells. 1.9 "Effective Date" shall mean the date first written above. 1.10 "Existing Wells" means the wellbores of the wells described in Exhibit A, limited, in each case, as to depth, from the surface of the earth to one hundred feet (100') below the depth of the bottom of the deepest interval producing or completed to produce gas on the Effective Date. 1.11 "Exploration Lands" means all lands in the continental United States or the Gulf of Mexico in which Seller owns or hereafter acquires a working interest or other rights to produce and sell gas, other than (i) Development Lands and (ii) lands covered by oil, gas and/or mineral leases or similar rights and interests acquired by Seller after the Effective Date in connection with or as part of the acquisition or purchase of producing oil and gas properties. 1.12 "Exploration Well" means the wellbore of any well drilled and completed after the Effective Date on the Exploration Lands and for which Seller has elected to accept Buyer's Gathering Proposal under Section 5.1 which requires Seller to sell and deliver gas produced from such well to Buyer under this Agreement. 1.13 "FERC" means the Federal Energy Regulatory Commission or any successor thereto having jurisdiction. 1.14 "Gas" or "gas" shall mean natural gas produced from gas wells, casinghead gas produced from oil wells, and residue gas resulting from the processing of such gas well gas or casinghead gas. 1.15 "Imbalance Penalties" means, for Seller's Gas delivered to each Delivery Point, any imbalance penalty charges and Cashout Costs assessed by a transporter pursuant to such transporter's Tariff for Buyer's failure to take or Seller's failure to deliver Seller's Estimate for such Delivery Point or Buyer's failure to submit a timely and accurate nomination based on any timely given Seller's Estimate to such -3- transporter, including, without limitation, penalty charges and Cashout Costs incurred by Seller or its operator under operational balancing agreements with a transporter. 1.16 "Index Price" means, for Seller's Gas delivered to each Delivery Point, the price that best represents the fair market price for similar quantities and quality of gas delivered at or near the Pricing Point for each such Delivery Point, which as of the Effective Date the Parties have agreed is the price reported in the table "Price of Spot Gas Delivered to Pipeline," for the Pricing Point for such Delivery Point, under the heading "Index," in the first issue of INSIDE FERC published in each Month in which Seller's Gas is delivered to each such Delivery Point. 1.17 "INSIDE FERC" means the publication INSIDE F.E.R.C.'S GAS MARKET REPORT, as published by McGraw Hill, Inc. 1.18 "MMBtu" shall mean one million (1,000,000) British Thermal Units. 1.19 "Month" shall mean the period beginning on the first Day of each calendar month and ending at the beginning of the first Day of the next succeeding calendar month. 1.20 "Llano System" means the Llano gas pipeline system located in Eddy and Lea Counties, New Mexico. 1.21 "Preexisting Contracts" means the gas sales and purchase contracts, processing agreements, and other contracts described in Exhibit C. 1.22 "Pricing Point" means, for Seller's Gas delivered to each Delivery Point, the point downstream of each such Delivery Point at which the Index Price for each such Delivery Point is determined by Buyer each Month, consistent with Section 8.2. 1.23 "Seller's Estimate" means, with respect to each Delivery Point, Seller's estimate under Section 4.1 of the quantity of Seller's Gas that Seller expects to deliver in each Month to each such Delivery Point. -4- 1.24 "Seller's Gas" means, for each Seller's Well, (i) Seller's net revenue interest share of gas produced and delivered from each such Seller's Well and (ii) any Third Party Gas produced and delivered by Seller hereunder from each such Seller's Well. 1.25 "Seller's Wells" means the Existing Wells, the Development Wells, and the Exploration Wells. 1.26 "Tariff" means the currently effective tariff of a transporter filed with FERC, or if a transporter does not have a tariff on file with FERC, such transporter's current operating policies and procedures. 1.27 "Third Party Gas" means all gas produced and delivered from each Seller's Well (i) that is attributable to the interests of parties other than Seller (including royalty owners and overriding royalty owners) in such Seller's Well and (ii) that Seller has the right and authority to deliver and sell to Buyer under this Agreement. 1.28 "Transportation Expenses" means, for Seller's Gas delivered to each Delivery Point, the actual and reasonable transportation rates paid by Buyer to gather and transport Seller's Gas from each such Delivery Point to the corresponding Pricing Point for each such Delivery Point. 1.29 "Working Day" means a calendar day Monday through Friday and excludes Saturday, Sunday, and nationally recognized holidays. ARTICLE 2 DEDICATION OF GAS 2.1 SELLER'S COMMITMENT. Except as otherwise provided in this Agreement, Seller commits and dedicates all of Seller's Gas to the performance of this Agreement that is not dedicated or committed to a Preexisting Contract. 2.2 ADDITIONAL GAS FROM NONOPERATED WELLS. Buyer may, by giving Seller sixty (60) days' prior written notice, elect to purchase under this Agreement any gas -5- that is produced from the nonoperated wells described in Exhibit D if (i) in Seller's reasonable business judgment the sale of such gas to Buyer under this Agreement would not result in a lower gas price or higher transportation or other costs and expenses than Seller would receive or pay if such gas is sold through the operator of such wells and (ii) Seller has the right to sell such gas to Buyer under this Agreement. Exhibit A shall be amended from time to time to incorporate any such wells which become subject to this Agreement pursuant to the foregoing sentence. Buyer shall be fully responsible for all Imbalance Penalties paid by or assessed against Buyer or Seller for wells added to Exhibit A under this Section 2.2. 2.3 RELEASE OF THIRD PARTY GAS. Upon written request by Seller, Buyer shall release from this Agreement any Third Party Gas that Seller reasonably believes should be released from this Agreement and sold to third parties under other agreements to avoid incurring penalties or other costs and expenses if Seller continues to deliver and sell such Third Party Gas to Buyer under this Agreement. 2.4 RIGHT TO CONTROL AND CURTAIL PRODUCTION. Seller reserves the right, in its sole discretion, to limit, curtail, or shut-in any or all of the production of Seller's Gas from any Seller's Well or Wells for any reason, including, without limitation, inadequate price, unacceptable market conditions, or any mechanical, engineering, legal, title, or other field or well condition. Seller shall use all reasonable efforts to give notice to Buyer at least thirty (30) Days' prior to the first Day of any Month in which Seller intends to curtail or shut-in any quantities of Seller's Gas solely as a result of Seller's belief that the price received hereunder for such Seller's Gas is inadequate. For any other curtailment or shut-in of any quantities of Seller's Gas, Seller shall give Buyer notice as soon as reasonably practicable under the circumstances. Each curtailment notice shall be in writing and shall identify the quantities of Seller's Gas that Seller intends to curtail or shut-in and the expected duration of such curtailment or shut-in period. Seller shall not, however, shut in or -6- curtail any quantities of Seller's Gas solely for inadequate price during any Month in which such quantities of Seller's Gas have been represented as being available for sale to Buyer in Seller's Estimate given three (3) Days prior to Buyer's Transporter's nomination deadline for such Month. If Seller returns to production during the middle of any Month any quantities of Seller's Gas shut-in or curtailed due to inadequate price, Seller shall give prior written notice to Buyer and Buyer shall have the right, but not the obligation, to purchase such Seller's Gas for the balance of such Month at the gas price determined under Section 8.4. If Buyer elects to not purchase such Seller's Gas for the balance of such Month, Seller may sell such Seller's Gas not purchased by Buyer to any third party. At the end of such Month, Buyer shall resume purchasing under the terms of this Agreement all such Seller's Gas nominated under Section 4.1. 2.5 PROCESSING OF GAS. Seller reserves the right to process Seller's Gas either prior to the Delivery Points or after delivery to Buyer at the Delivery Points. Seller's Gas may be processed to extract liquid and liquefiable hydrocarbons, together with any methane unavoidably contained in the ethane or heavier hydrocarbons. Such processing will not render the total heating value to be less than the requirements of the transporter or otherwise cause Seller's Gas to not meet the quality specifications of the transporter. All liquid and liquefiable hydrocarbons so recovered shall belong to Seller. If Seller's Gas is processed by Seller after delivery to the Delivery Points, Seller shall be paid by Buyer for the volumes of residue gas remaining after processing and Seller shall be responsible for charges of Buyer's Transporter for the transportation to the processing plant of fuel and plant volume reduction resulting from such processing. If Seller's Gas is processed under percentage of proceeds-type contracts or other agreements that do not provide for the residue gas attributable to Seller's Gas to be returned in kind at the tailgate of the processing plant, Buyer shall -7- release such Seller's Gas from this Agreement in writing upon written request by Seller. 2.6 RELEASE OF CERTAIN PROPERTIES. Buyer shall, if requested by Seller, promptly release from commitment and dedication hereunder all Seller's Gas produced from any Seller's Wells if (i) Seller commits to sell or exchange such Seller's Wells under a written agreement with a third party which is not an affiliate of Seller and (ii) under such agreement the average amount of the consideration to be received by Seller for the gas reserves attributable to Seller's interests in each such Seller's Well is less than $250,000 per Seller's Well. If Seller desires to sell to a third party and have released from this Agreement any Seller's Wells that do not meet the requirements of the preceding sentence, Seller may substitute for such Seller's Wells like quantities of gas delivered to delivery points reasonably acceptable to Buyer and with daily deliverabilities during the term of this Agreement similar to the Seller's Wells which Seller proposes to sell. Buyer shall release from commitment under this Agreement such Seller's Wells effective as of the date such substitute wells become subject to this Agreement. 2.7 RELEASE OF CERTAIN NONOPERATED WELLS. If the Imbalance Penalties paid or incurred by Seller under this Agreement for any Seller's Gas produced from any nonoperated Seller's Well become excessive in Seller's reasonable opinion, Buyer shall, upon written request by Seller, release such Seller's Gas from commitment under this Agreement unless Buyer agrees to be responsible for and bear such Imbalance Penalties for such Seller's Well. 2.8 OPERATIONAL RESERVATIONS. Seller hereby reserves and excepts the following rights and quantities of Seller's Gas from the provisions of this Agreement: (i) The right to use Seller's Gas produced from any lease or field for Seller's requirements in the development and operation of such leases and fields including, but not limited to, use of Seller's Gas for drilling, enhanced recovery -8- operations, workover operations, treating, gas lifting oil wells for repressuring, recycling, or pressure maintenance purposes, and compressor fuel, and to otherwise operate such leases and fields free from any control by Buyer. Subject to Section 2.9, Seller will not, however, use any Seller's Gas for enhanced oil recovery operations in California other than Seller's Gas that is produced in California. (ii) Seller's Gas which is delivered to others under Seller's leases, Seller's agreements for easements, unit agreements, unit operating agreements, operating agreements, or other similar agreements affecting Seller's Wells. (iii) All liquids, liquid hydrocarbons, oil, and condensate removed from Seller's Gas prior to the Delivery Points. (iv) The right to pool or unitize Seller's leases with other leases of Seller or others located in the field in which Seller's Wells are located. (v) The right to operate Seller's leases and Seller's Wells in such manner as Seller, in Seller's discretion, deems advisable, including the right to drill new wells, to rework Seller's Wells, to renew in whole or in part any leases, and to abandon any Seller's Well or surrender, release, or terminate any lease, in Seller's discretion. (vi) Seller's Gas delivered to others under gas balancing agreements or similar arrangements affecting any of Seller's Wells. 2.9 EOR OPERATIONS. At any time after twenty-four (24) Months after the Effective Date and upon forty-five (45) Days' prior written notice from Seller, Buyer shall release from commitment under this Agreement up to 30,000 MMBtu's per Day of Seller's Gas for use by Seller in Seller's enhanced oil recovery operations in California or in exchange for other gas to be used in such operations ("EOR Gas"). Buyer shall, at the request of Seller, arrange for the transportation of EOR Gas from the Delivery Points to Seller's enhanced oil recovery operations in California using -9- either Seller's transportation rights or Buyer's transportation rights, as directed by Seller. Seller shall be responsible for transportation charges to transport EOR Gas to its enhanced oil recovery operations in California. In consideration of Buyer releasing and arranging such transportation for EOR Gas, Seller shall pay Buyer each Month a handling fee of five cents (5 cents) for each MMBtu released under this Section 2.9. EOR Gas shall become recommitted to this Agreement on the first day of the Month following the date Seller permanently ceases to use EOR Gas in its California enhanced oil recovery operations. Seller shall give Buyer at least fifteen (15) Days' notice prior to the first day of the Month in which EOR Gas will become recommitted to this Agreement. 2.10 ACQUISITION PROPERTIES. Buyer recognizes that all gas produced from wells or properties acquired by Seller after the Effective Date in connection with or as part of the acquisition or purchase of producing oil and gas properties shall not be subject to or committed to this Agreement. 2.11 PREEXISTING CONTRACTS. Upon the expiration of or termination of any Preexisting Contract, any Seller's Gas subject to or covered by such Preexisting Contract shall become committed to this Agreement without further action of the Parties. Buyer shall notify Seller in writing no less than thirty (30) Days before the date each Preexisting Contract expires or terminates based on the information in Exhibit C. If Buyer timely gives Seller such notice, Seller will exercise its rights to terminate each Preexisting Contract at the end of its primary term unless the failure to extend the term of any such Preexisting Contract would cause Seller to pay penalties or to otherwise incur any costs or expenses for failing to extend the term of such Preexisting Contract. Seller shall not, however, have any obligation to Buyer, and this provision does not create any obligation upon Seller, to cause the early termination or expiration of any Preexisting Contract. -10- 2.12 POWER TEX CONTRACT. Buyer shall, for a period ending not later than twenty-four (24) Months after the Effective Date and upon not less than ten (10) days' prior written notice by Seller, release from commitment under this Agreement up to 4,500 MMBtu's per Day of Seller's Gas to allow Seller to supply gas under that certain Gas Sales Agreement between Adobe Gas Marketing Co. and the City of Lubbock, dated May 9, 1991 (the "Power Tex Contract"). Any such released Seller's Gas shall become recommitted to this Agreement at the beginning of the first Month following the end such twenty-four (24) Month period. ARTICLE 3 QUANTITY 3.1 PURCHASE AND SALE OBLIGATION. Commencing on the Effective Date and continuing through the term hereof, Seller agrees, subject to the other provisions hereof, to sell and deliver, or cause to be delivered and sold, to Buyer at the Delivery Points the quantity of Seller's Gas nominated each Month by Seller under Article 4. Seller shall use its reasonable efforts to deliver the gas at uniform hourly and daily rates of flow. Buyer agrees to take and purchase all of Seller's Gas delivered each Month at the Delivery Points. 3.2 FAILURE TO DELIVER OR TAKE. If for any reason other than Force Majeure either Party fails in any Month to perform its obligation to deliver or take Seller's Gas under this Agreement, the other Party shall use its reasonable efforts to mitigate the effect of such failure to perform, which includes attempting to secure an alternate interruptible supply or interruptible market, as the case may be, at reasonable prices. 3.3 PARTIAL MONTHLY PRODUCTION. If Seller delivers to any Delivery Point after the first day of any Month any quantity of Seller's Gas that was not previously delivered at any time in such Month due to Force Majeure affecting Seller or that is -11- attributable to the recompletion of an Existing Well or the completion or recompletion of any Development Well or Exploration Well, Buyer shall have the obligation to take and purchase such Seller's Gas during such Month, but only to the extent Buyer is able to arrange transportation for such Seller's Gas in such Month. If Buyer is unable to arrange transportation for such Seller's Gas in such Month, Seller may sell such Seller's Gas to any third parties during such Month. ARTICLE 4 SCHEDULING AND TRANSPORTATION OF DAILY VOLUMES 4.1 GAS SCHEDULING. At least three (3) Days prior to Buyer's Transporter's nomination deadline for the first Day of the following Month, Seller shall provide Buyer a written report by telecopy showing Seller's Estimate for each Delivery Point for the following Month. Seller shall use its reasonable efforts to provide along with Seller's Estimate for each Month a description of any planned or foreseeable events which will materially affect deliveries during the following Month, including workovers and new Seller's Wells beginning production. If the quantity of Seller's Gas delivered to one or more Delivery Points differs from Seller's Estimate by more than the transporter's tolerance level for such Delivery Points for any Day or Days, Seller shall so notify Buyer immediately after becoming aware of such change by telephone, and shall provide Buyer with a revised written Seller's Estimate for such Delivery Points for the remainder of the Month by telecopy as soon as reasonably practicable. As of the Effective Date, Buyer shall notify Seller in writing of the Daily and Monthly tolerance levels for Imbalance Penalties for each transporter for each Delivery Point. Such tolerance levels shall remain in effect until Seller is otherwise notified by Buyer. -12- 4.2 TRANSPORTATION CAPACITY. Buyer shall arrange for and maintain all necessary transportation downstream of the Delivery Points to ensure that Seller's Gas flows without interruption, except in the case of Force Majeure. 4.3 TRANSPORTATION IMBALANCES. (a) AVOIDANCE. Buyer and Seller shall use all reasonable efforts to avoid the imposition of Daily or Monthly Imbalance Penalties by any transporter and each Party agrees to cooperate with the other Party to resolve and eliminate, to the extent reasonably practicable, any Imbalance Penalties. (b) RESPONSIBILITY. If any Imbalance Penalties are incurred or payable to a transporter with respect to Seller's Gas delivered to any Delivery Point as a result of Seller's actions, including Seller's failure to give Buyer timely notice of any increase or decrease in Daily quantities to be delivered at such Delivery Point from Seller's Estimate for such Delivery Point, Seller shall be responsible for such Imbalance Penalties. If any Imbalance Penalties are incurred or payable to a transporter with respect to Seller's Gas delivered to any Delivery Point as a result of Buyer's actions, including Buyer's failure to give timely notice to such transporter of any change in Seller's Estimate for such Delivery Point after receiving timely notice from Seller of such change, Buyer shall be responsible for such Imbalance Penalties. (c) TIMELY NOTICE. For the purpose of this Section 4.3, Seller's notice will be deemed timely if, under the circumstances, it gives Buyer reasonably sufficient time to notify the transporter of such changes to Seller's Estimate by the time required under the terms of such transporter's Tariff to avoid the imposition of such Imbalance Penalties. (d) SELLER'S CREDIT. In determining the amount of any Imbalance Penalties due by Seller hereunder in any Month, Buyer shall aggregate the Cashout Costs for which Seller is responsible and which were incurred by Buyer -13- for all transporters for such Month. Buyer shall, for each such Month, credit all such Cashout Costs that resulted in Buyer selling gas at a price higher than the applicable Index Price or that resulted in Buyer buying gas at a price lower than the applicable Index Price ("Buyer's Monthly Gain") against all such Cashout Costs that resulted in Buyer buying gas at a price higher than the applicable Index Price or that resulted in Buyer selling gas at a price lower than the applicable Index Price ("Buyer's Monthly Loss") to arrive at an aggregate net Imbalance Penalty for such Month. If, for any Month, Buyer's Monthly Gain for such Month exceeds Buyer's Monthly Loss for such Month, Buyer shall have no obligation to refund the difference to Seller. (e) BUYER'S CREDIT. In determining the amount of any Imbalance Penalties due by Buyer hereunder, Seller shall aggregate all Cashout Costs for which Buyer is responsible and which were incurred by Seller in any Month under operational balancing agreements, operating agreements, or other agreements covering any Seller's Well. Seller shall, for each such Month, credit all such Cashout Costs that resulted in Seller selling gas at a price higher than the applicable Index Price ("Seller's Monthly Gain") against all such Cashout Costs that resulted in Seller selling gas at a price lower than the applicable Index Price or that resulted from Seller buying gas ("Seller's Monthly Loss") to arrive at an aggregate net Imbalance Penalty for such Month. If, for any Month, Seller's Monthly Gain exceeds Seller's Monthly Loss, Seller shall have no obligation to refund the difference to Buyer. (f) LLANO SYSTEM. Seller shall not be responsible for any Imbalance Penalties for Seller's Gas gathered on the Llano System. (g) NO LIMIT. The provisions of this Section 4.3 do not in any way waive, limit, or alter either Party's obligation under Section 3.1. -14- 4.4 ASSIGNMENT OF GATHERING CONTRACTS. As of the Effective Date, Seller shall assign to Buyer, to the extent Seller has the contractual right to do so, any agreements entered into prior to the Effective Date with third parties for the gathering of Seller's Gas. If Seller is required to obtain the consent or approval of any third party to assign any or all of such agreements to Buyer, Seller shall use its reasonable efforts to obtain any and all third-party consents and approvals as quickly as reasonably practicable. If Seller does not have the legal right to assign any such agreement, then Seller shall authorize Buyer to act as Seller's agent under such agreements. Buyer shall administer all such agreements so that they remain valid and enforceable in accordance with their terms. Buyer shall obtain the consent of Seller prior to releasing, amending, or otherwise modifying such agreements. Upon termination or expiration of this Agreement, Buyer shall reassign to Seller or its designee all such agreements that remain in effect. 4.5 DELIVERY POINTS. As of the Effective Date, Buyer and Seller have agreed that Seller's Gas will be delivered and accepted at the Delivery Points described in Exhibit A. The parties shall mutually agree to the Delivery Point for each Development Well or Exploration Well which subsequently produces Seller's Gas subject to this Agreement and the Parties may at any time otherwise agree to change, add to, or delete from the Delivery Points shown in Exhibit A. Any supplement or amendment to Exhibit A shall be in writing and executed by both Parties. 4.6 DELIVERY DIFFERENCES. If at the end of the first six (6) Months of this Agreement, the aggregate quantity of Seller's Gas delivered by Buyer for each Month to any interstate pipeline has been materially different from Seller's Estimate for such Seller's Gas made by Seller three (3) Days prior to the nomination deadline of the applicable Buyer's Transporter for each such Month, except as allowed under the provisions of this Agreement, Seller shall, upon Buyer's written request, use all reasonable efforts to promptly correct such differences in the following two (2) -15- Months. If Seller fails to correct such differences in the following two (2) Months, Buyer may request the renegotiation of Buyer's payment hereunder of the Index Price for such differences and allocation among the Parties of any benefits or costs to Buyer arising out of such differences for the remaining term of this Agreement. If Buyer and Seller are unable to mutually agree on the price to be paid for such differences and such allocation, such matter may be submitted by either Party to Arbitration as a Dispute under Article 9. ARTICLE 5 BUYER'S SERVICES 5.1 CONNECTION OF GATHERING SYSTEMS - EXPLORATION WELLS. Within thirty (30) Days of the drilling and completion of any well producing commercial quantities of gas on the Exploration Lands, Seller shall notify Buyer of the completion of such well and provide Buyer with all available well test data including, without limitation, all well logs, drill stem tests, well potential tests, and Seller's estimate of well deliverability and ultimate recoverable reserves. Within twenty (20) Days after receipt of Seller's notice, Buyer shall submit to Seller, in writing, for Seller's review, Buyer's recommendation of the most economical and efficient method of gathering and transporting the gas produced from such well, whether by Buyer, Seller, or third parties ("Buyer's Gathering Proposal"). Seller may, in its discretion, either accept or reject Buyer's Gathering Proposal by giving written notice to Buyer. If Seller accepts Buyer's Gathering Proposal, Buyer shall promptly commence and diligently complete the work necessary to implement Buyer's Gathering Proposal, and, upon completion of such gathering system, Seller will sell the gas produced from such well to either Buyer or a third party, as provided in Buyer's Gathering Proposal. If the gas produced from such well is sold to Buyer under this Agreement, such well shall become committed to this Agreement as an Exploration Well. If Seller rejects -16- Buyer's Gathering Proposal, Seller may contract with any third parties to gather and purchase the gas produced from such well without any obligation to Buyer under this Agreement. 5.2 DEVELOPMENT WELLS. Upon completion of each Development Well, Buyer shall, if requested by Seller, recommend the most economical method of gathering the gas produced from such Development Well. 5.3 MARKETING UPDATES. Buyer shall, upon request, provide Seller written updates and verbal briefings on gas market trends including, but not limited to, the development of new natural gas markets or expansion of existing markets, changes in the relative wellhead values of gas in different regions of the country due to the construction of new pipelines or other developments, and supply and demand forecasts. In addition, Buyer shall periodically provide written updates on regulatory trends and developments in both the domestic and international gas market that could impact Seller. 5.4 SUPPLY OF GAS UNDER POWER TEX CONTRACT. Upon request by Seller, during the first twenty-four (24) Months of this Agreement, Buyer will, as agent for Seller, purchase and deliver the gas required to be delivered under the Power Tex Contract upon terms mutually acceptable to Buyer and Seller. ARTICLE 6 QUALITY AND MEASUREMENT 6.1 BUYER'S TRANSPORTER. The rules, guidelines, and policies of Buyer's Transporter, as may be changed from time to time, shall govern the units of measurement, measurement specifications, quality, heating value, and testing specifications of Seller's Gas delivered to each Delivery Point. 6.2 QUALITY. Seller's Gas shall meet the quality specifications of Buyer's Transporter at each Delivery Point. If all or any portion of the Seller's Gas does not -17- meet the quality specifications of Buyer's Transporter, Buyer at its option may at any time refuse to accept any or all such Seller's Gas ("Subquality Gas"). Acceptance of any or all Subquality Gas that fails to conform to the quality specifications of this Agreement shall not be deemed a waiver of Seller's obligations hereunder with respect to such Subquality Gas or with respect to any future deliveries of Subquality Gas. All Subquality Gas which Buyer fails to take under this Section 6.2 may be sold to any third parties free from any obligation under this Agreement during the period Buyer refuses to accept such Subquality Gas. SELLER MAKES NO OTHER WARRANTIES, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ABOUT SELLER'S GAS. ARTICLE 7 OWNERSHIP AND CONTROL 7.1 DELIVERY. Gas sold and delivered hereunder shall be delivered by Seller to Buyer at the Delivery Points. Title and risk of loss to all Seller's Gas shall pass from Seller to Buyer at the Delivery Points. If Seller elects under Section 2.5 to process any quantities of Seller's Gas after the Delivery Points, the risk of loss for such Seller's Gas shall pass from Buyer to Seller where such Seller's Gas enters the facilities of the party processing such Seller's Gas. The risk of loss to the residue gas resulting from processing such Seller's Gas shall pass to Buyer where it enters the facilities of Buyer's transporter at or near the tailgate of such processing facilities. 7.2 CONTROL. As between the Parties hereto, Seller shall be deemed to be in control and possession of Seller's Gas and shall be fully responsible for and shall defend and indemnify Buyer, its successors and assigns, against any damages or injury resulting from the operation of facilities used to deliver gas at the Delivery Points, or the possession and handling of such Seller's Gas, until delivered to Buyer or -18- Buyer's Transporter at the Delivery Points and during the period such Seller's Gas, if processed, is in the facilities of the processor. Except as provided in the preceding sentence, Buyer shall be deemed to be in control of Seller's Gas and shall be responsible for and shall defend and indemnify Seller, its successors and assigns, against any and all damages or injury resulting from the transportation, handling, or use of Seller's Gas after it is delivered to Buyer, or Buyer's Transporter, at the Delivery Points. ARTICLE 8 PRICE 8.1 MONTHLY GAS PRICES. Except as otherwise provided in this Article 8, for all Seller's Gas delivered to each Delivery Point each Month, Buyer shall pay Seller a gas price per MMBtu equal to the Index Price for each such Delivery Point for such Month less Transportation Expenses, if any, for such Seller's Gas for such Month. 8.2 PRICING COMBINATION. Buyer shall, for each Month, use its best efforts to obtain for Seller at each Delivery Point the Index Price, Pricing Point, and Transportation Expenses for Seller's Gas delivered to each such Delivery Point in such Month that result in the highest net back price to Seller under Section 8.1 for such Delivery Point, giving consideration to and consistent with Buyer's obligation under Section 3.1 to purchase and take all of Seller's Gas delivered to each such Delivery Point in such Month. 8.3 DELIVERY. Subject to the other provisions of this Agreement, Seller shall be responsible for, and shall pay all costs and expenses of, all arrangements necessary to deliver Seller's Gas to the Delivery Points and Buyer shall be responsible for, and shall pay all costs and expenses of, all arrangements necessary to receive Seller's Gas delivered hereunder at the Delivery Points. -19- 8.4 PARTIAL MONTHLY PRODUCTION. For all Seller's Gas taken by Buyer at any Delivery Point under Section 3.3 and for all Seller's Gas returned to production in the middle of a Month under Section 2.4 after being shut-in or curtailed due to inadequate price, the average of the high and low prices per MMBtu published in the table "Daily Price Survey" in GAS DAILY for the first Day of deliveries for the region of production for such Delivery Point shall be substituted for the Index Price in determining the price to be paid by Buyer to Seller for such Seller's Gas under Section 8.1. 8.5 LLANO SYSTEM TRANSPORTATION RATE. The Transportation Expenses for Seller's Gas gathered on the Llano System shall never exceed in any Month the lowest transportation rate charged by Buyer to other shippers on the Llano System in the prior six (6)-Month period, except for any such rate which may be agreed to by Llano Inc., in its discretion, as part of the settlement of any claim made against Llano Inc. or its affiliates. 8.6 TRANSPORTATION EXPENSES. Buyer shall, for each Delivery Point, use its best efforts each Month to obtain for Seller the lowest reasonably available transportation rates on Buyer's Transporter for Seller's Gas, consistent with reliability and giving consideration to Buyer's obligation to purchase and take all of Seller's Gas at such Delivery Point and to Seller's right to shut-in or curtail production of Seller's Gas hereunder. 8.7 PUBLICATION OF INDEX PRICE. If INSIDE FERC or any replacement publication or other information source then in effect to determine the Index Price ceases to be available, substantially alters the method by which the referenced prices are calculated, or otherwise substantially alters the referenced prices, the Parties shall mutually agree in writing on a replacement publication or information source. If the Parties are unable to mutually agree on a replacement publication or information source, the matter may be submitted by either Party to Arbitration under Article 9. -20- ARTICLE 9 ARBITRATION 9.1 RESOLUTION OF DISPUTES. Except as provided in the following sentence, any action, dispute, claim, or controversy arising between the Parties under this Agreement (each a "Dispute") shall be resolved by arbitration ("Arbitration") in accordance with the procedures set forth below. Any dispute, claim, or controversy arising under Article 12 shall not be a subject to arbitration under this Article 9. If a Dispute is not resolved by the Parties after negotiation among themselves, either Party may invoke Arbitration by providing written notice to the other Party of its intent to submit the Dispute to Arbitration hereunder. Either Party may bring an action to compel the Arbitration of any Dispute. 9.2 SELECTION OF THE ARBITRATOR. Not later than ten (10) Working Days following the receipt of notice from either Party notifying the other Party of its intent to submit a Dispute to Arbitration, Buyer and Seller shall mutually select and appoint an arbitrator (the "Arbitrator") to resolve the Dispute. If at the end of such ten (10) Working-Day period the Arbitrator has not been selected and appointed, then each Party shall, within five (5) Working Days, thereafter, select an arbitrator. The two arbitrators shall then jointly select a third arbitrator (each an "Arbitrator") within ten (10) Working Days after the appointment of the second Arbitrator. Any Arbitrator acting hereunder shall be a qualified neutral third party not having any prior, current, or known or anticipated future affiliation or association with Seller or Buyer. If the Dispute involves a pricing matter hereunder, each Arbitrator shall have a minimum of ten (10) years' (immediately prior to the appointment) general experience in the purchase and sale of natural gas. 9.3 ARBITRATION. Upon selection and appointment of the Arbitrators, each Party shall deliver to the other Party and to the Arbitrators, within ten (10) Working -21- Days of the appointment of the Arbitrators, a written proposal stating its proposed outcome together with supporting materials and documentation. Each Party may submit its written counterproposal together with supporting materials and documentation, within ten (10) Working Days of receipt of the written proposal from the other Party, to both that Party and the Arbitrators. The Arbitrators may request additional information or documentation from either Party, which information or documentation shall be timely provided. No later than twenty (20) Working Days after the counterproposals are submitted, the Arbitrators shall select and adopt either the outcome desired by Seller or the outcome desired by Buyer, without modification or compromise. All Arbitrations shall take place in Houston, Harris County, Texas. 9.4 PRICING INSTRUCTIONS. If the Dispute involves the determination of the Index Price, the Arbitrators shall be given the following instructions, unless the Parties agree in writing upon other instructions: (i) In determining the Index Price, the Arbitrators will recognize that the Parties selected INSIDE FERC as representative of the fair market value of Seller's Gas at each Pricing Point on the Effective Date; (ii) The Index Price shall be reported on a Monthly basis from a publication or other information source publicly available; and (iii) The Arbitrators shall determine the Index Price by selecting either the Index Price proposed by Seller or the Index Price proposed by Buyer, without modification or compromise. 9.5 PRICE PAYABLE DURING ARBITRATION. If the Dispute relates to the publication or other information source then being used to determine the Index Price, the price paid during the Arbitration shall be determined from such publication or information source or, if such publication or information source is no longer available, the price shall be determined from the last such publication or information source that was -22- available. Upon the conclusion of the Arbitration, the price paid by Buyer to Seller for such Seller's Gas shall be adjusted retroactively to the date the Arbitration was invoked. The Party owing the other Party as a result of such retroactive adjustment shall pay to such other Party the amounts due under the redetermined Index Price within ten (10) Working Days following the Arbitrator's decision. 9.6 FINALITY OF AWARD AND COSTS OF ARBITRATION. The determination of the Arbitrators shall be final and binding on the Parties, except in the event of manifest material error or misconduct by the Arbitrators. Each Party shall bear its own costs and expenses and share equally the costs and expenses of the Arbitrators and the arbitration. 9.7 SUPPLEMENTAL ARBITRATION RULES. Each Arbitration shall be administered in accordance with the terms of this Article 9 and the Commercial Arbitration Rules of the American Arbitration Association. Judgment on any award rendered by the Arbitrators may be entered in any court having jurisdiction. ARTICLE 10 TAXES The price to be paid by Buyer to Seller for Seller's Gas purchased and sold hereunder is inclusive of all production, severance, ad valorem, and/or similar taxes levied on the production of Seller's Gas prior to the Delivery Points, and all such taxes shall be borne and paid by Seller. If state law requires Buyer to remit such taxes to the collecting authority, then Buyer shall do so and deduct the taxes so paid on Seller's behalf from payments otherwise due to Seller hereunder. Buyer shall pay and be responsible for all federal, Indian, state or local sales, use, consumption, and/or similar taxes which may now or hereafter be imposed on the transfer of title or possession of Seller's Gas. -23- ARTICLE 11 PAYMENT 11.1 MONTHLY PAYMENT. Not later than the fifteenth (15th) day of each Month, Seller shall provide Buyer with a statement setting forth the volumes of gas delivered at the Delivery Points in the prior Month along with an invoice for payment based thereon. If actual volumes at the Delivery Points are not available by the fifteenth (15th) day of the Month, Seller may furnish statements and invoices based on Seller's Estimate. By no later than the last Working Day of the Month following the production Month, Buyer shall make payment of the amount set forth in Seller's statement by wire transfer into Seller's account in accordance with Seller's instructions. Buyer shall submit to Seller with each Monthly payment a schedule showing, for each Delivery Point for such Month, the quantity of Seller's Gas delivered to such Delivery Point, the Pricing Point, the Index Price, and any Transportation Expenses and Imbalance Penalties attributable to Seller's Gas from such Delivery Point. If requested by Seller, payment to Seller hereunder shall be made through a bank or escrow account established, funded, and maintained in a manner acceptable to Seller in all respects. 11.2 PAYMENT DEFAULT. If Buyer fails to pay Seller for Seller's Gas for any Month within three (3) Working Days of the date required under Section 11.1, Seller may, at its option, either, singularly or in combination, (i) immediately terminate this Agreement, or (ii) suspend performance under this Agreement until all indebtedness under this Agreement is paid in full. 11.3 ERRORS. If an error is discovered in any invoice rendered hereunder (including reconciliations for actual deliveries of any payments made by Buyer based on Seller's Estimate), such error shall be adjusted within thirty (30) Days after notice of the discovery of the error. If a dispute arises as to the amount payable pursuant to any invoice rendered hereunder, Buyer shall nevertheless pay when due the amount -24- not in dispute under such invoice. Such payment shall not be deemed to be a waiver of the right by Buyer to recoup any overpayment, nor shall acceptance of any payment be deemed to be a waiver by Seller of any underpayment. 11.4 OVERDUE PAYMENTS. If Buyer fails to pay the entire amount due to Seller when same is due, interest on any unpaid portion shall accrue at a rate equal to the lesser of (i) three percent (3%) above the rate of interest then most recently announced by Texas Commerce Bank, National Association as its "prime rate" and (ii) the maximum non-usurious rate of interest allowed by applicable law. 11.5 AUDITING. Each Party shall keep and maintain true and correct books, records, files, and accounts of all information reasonably related to the transactions contemplated by this Agreement (the "Records"), including all measurement records, all information used to determine prices and calculate invoices, and all invoices, statements, and payment records. All such Records shall be maintained for at least forty-eight (48) Months after the Month to which they pertain. Either Party may, at its own expense, audit, and copy the other Party's Records at any time during normal business hours upon at least fifteen (15) Days' written notice. No adjustment to any payment made by Buyer to Seller for Seller's Gas sold hereunder shall be made after the lapse of eighteen (18) Months from the date of any such payment, except for any adjustments to such payments due to volume adjustments of Seller's Gas delivered at the Delivery Points. ARTICLE 12 TERM 12.1 TERM. Unless sooner terminated as provided herein, this Agreement shall be effective on the Effective Date and shall continue in full force and effect thereafter until March 31, 2001. -25- 12.2. EARLY TERMINATION. Seller may terminate this Agreement, and immediately cease delivering and selling all Seller's Gas to Buyer under this Agreement, upon the occurrence of any of the following events: (i) the occurrence of an event which allows Seller to terminate this Agreement under Section 11.2; (ii) the occurrence of an event of default under any debt or credit agreement of Buyer for borrowed money (each a "Credit Agreement") that results in an obligation in excess of $10,000,000.00 becoming due before its stated maturity; (iii) Buyer makes an assignment or any general arrangement for the benefit of creditors, files a petition or otherwise commences, authorizes, or acquiesces in the commencement of a proceeding under any bankruptcy or similar law for the protection of creditors, or otherwise becomes insolvent or bankrupt; or (iv) Buyer fails to purchase at least (a) eighty percent (80%) of Seller's Gas made available at all Delivery Points in two (2) or more Months during any Contract Year or (b) ninety percent (90%) of Seller's Gas made available at all Delivery Points in any consecutive six (6)-Month period, other than as a result of Force Majeure. 12.3 RIGHTS OF EITHER PARTY TO TERMINATE. Either Party may terminate this Agreement by giving written notice (for the notice period specified) to the other Party upon the occurrence of any of the following events: (i) the taking by any governmental authority of the action described in Article 15, but only after giving the notice required by Article 15; or (ii) a material breach of this Agreement by the other Party which such defaulting Party fails to cure within thirty (30) days after receiving written notice of the breach from the nondefaulting Party. -26- 12.4 FINANCIAL REVIEW. Buyer shall provide to Seller (i) by the thirtieth (30th) day of each Month, internally prepared monthly unaudited financial statements of Buyer for the prior Month, (ii) by the forty-fifth (45th) day following the end of each calendar quarter, unaudited quarterly financial statements of Buyer, and (iii) by March 31 of each year, annually audited financial statements of Buyer accompanied by an opinion of independent auditors for the prior year. 12.5 BUYER'S FINANCIAL ASSURANCES. (a) REQUEST OF FINANCIAL ASSURANCES. Anything to the contrary herein notwithstanding, if at any time the financial condition of Buyer materially and adversely changes from its financial condition on the Effective Date, Seller may request in writing that Buyer deliver and maintain for Seller's benefit financial assurances acceptable to Seller in amount, form, issuer, term, and all other respects, in Seller's sole discretion (the "Financial Assurances"). (b) TEMPORARY RELEASE. Buyer shall provide the Financial Assurances to Seller within five (5) Working Days after the date of Seller's notice. If Buyer fails to provide Financial Assurances covering the value of all of Seller's Gas within such five (5) Working-Day period, Seller shall not be obligated to sell to Buyer under this Agreement any Seller's Gas that is not covered by such Financial Assurances, as determined by Seller, and Seller may sell such Seller's Gas to third parties. (c) PERMANENT RELEASE. Buyer shall have thirty (30) Working Days to obtain Financial Assurances covering the value of Seller's Gas released under Section 12.5(b) above. To the extent Buyer fails to provide Financial Assurances covering such released Seller's Gas within thirty (30) Working Days after the date of Seller's notice under Section 12.5(a), such Seller's Gas shall be permanently released from this Agreement. -27- (d) SUBSEQUENT RELEASE. If any Seller's Gas for which Buyer has provided Financial Assurances as set forth above is at any time thereafter not covered by Financial Assurances, such Seller's Gas shall be permanently released from this Agreement on the date Buyer ceases to provide such Financial Assurances. If all of Seller's Gas is permanently released from this Agreement, this Agreement shall terminate. (e) RELEASE OF FINANCIAL ASSURANCES. Buyer's obligation to provide and maintain Financial Assurances covering Seller's Gas under all provisions of this Section 12.5 shall cease at the time when the financial condition of Buyer is no longer materially and adversely different than its financial condition on the Effective Date. 12.6 NOTICE. Buyer shall notify Seller immediately upon receipt by Buyer of any notice of default under any Credit Agreement. ARTICLE 13 SELLER'S WARRANTY Seller warrants title to, or the right to sell, all Seller's Gas delivered under this Agreement. Seller also warrants that all Seller's Gas shall be free and clear from liens, encumbrances, and adverse claims including, but not limited to, liens to secure payment of production taxes, severance taxes, and ad valorem taxes. If Seller's title is questioned or becomes the subject of litigation, Seller shall indemnify and save Buyer harmless from and against all suits, actions, damages, costs and expenses relating thereto. -28- ARTICLE 14 FORCE MAJEURE 14.1 NONPERFORMANCE. Except with regard to a Party's obligation to make payments due under this Agreement, if either Party fails to observe or perform any of the covenants or obligations herein imposed upon it and such failure shall have been occasioned by, in connection with, or in consequence of Force Majeure, as hereinafter defined, such failure shall not be deemed to be a breach of such covenants or obligations of such Party. 14.2 DEFINITION. The term "Force Majeure" shall mean acts of God, strikes, lockouts, industrial disputes or disturbances, civil disturbances, interruptions by government or court orders, present or future orders of any regulatory body having jurisdiction, acts of the public enemy, wars, riots, inability to secure materials or labor, inability to secure rights-of-way, epidemics, landslides, lightning, earthquakes, fires, hurricanes, tropical storms, storms, floods, explosions, breakage or accident to machinery, pipelines or equipment, freezing of Seller's Wells or pipelines, well blowouts, craterings, partial or entire failure of gas wells, or any other situation, occurrence, or condition not reasonably within the control of the Party claiming suspension and which, by the exercise of due diligence, such Party is unable to overcome. 14.3 EXCLUSIONS. The term "Force Majeure" does not include (i) loss of Buyer's markets, or (ii) the loss, interruption, or curtailment of gathering or transportation capacity on any gathering or pipeline system for purposes of gathering or transporting all or any part of Seller's Gas from and after the Delivery Points, unless such loss, interruption, or curtailment is due to Force Majeure invoked by the operator of such gathering or pipeline system. 14.4 STRIKES. The settlement of strikes or lockouts shall be entirely within the discretion of the Party having the difficulty and the above requirement of the use of -29- diligence in restoring normal operating conditions shall not require the settlement of strikes or lockouts by acceding to the terms of the opposing party when such course is inadvisable in the discretion of the Party having the difficulty. 14.5 FORCE MAJEURE NOTICE. The Party affected by Force Majeure shall give written notice to the other Party of the Force Majeure and the expected duration as soon as reasonably practicable after the occurrence of the Force Majeure. 14.6 MARKETING OF FORCE MAJEURE GAS. If Buyer is unable to take Seller's Gas from any Delivery Points due to the occurrence of Force Majeure, Seller may market and sell such Seller's Gas from the affected Delivery Point to any third parties free from this Agreement and without any obligation to Buyer during the continuance of the Force Majeure. ARTICLE 15 CHOICE OF LAW AND GOVERNMENT REGULATIONS 15.1 CHOICE OF LAW. The transactions contemplated hereunder bear a reasonable relationship to, and shall be governed by and construed in accordance with, the laws of the State of Texas, excluding any law thereof which would direct the application of the law of any other jurisdiction. 15.2 REGULATIONS. This Agreement is subject to all present and future valid orders, rules, and regulations of any regulatory body or other authority of a state or the federal government having jurisdiction. Either Party shall have the right to contest before such regulatory body or authority, or in court, the validity of any such law, order, rule, or regulation. If any governmental authority reimposes price controls on Seller's Gas, or adopts any action, rule, or order which materially and adversely affects the rights or ability to perform of either Party, then the affected Party may terminate this Agreement by giving sixty (60) Days' written notice to the other Party. -30- ARTICLE 16 ASSIGNMENT 16.1 NO ASSIGNMENT. Except as permitted below, this Agreement may not be assigned in whole or in part by either Party without the prior written consent of the other Party. 16.2 MERGER. The Parties recognize that Adobe Gas Pipeline Company will be merged into Hadson Corporation on the Effective Date, and, upon consummation of such merger, Hadson Corporation will be the "Buyer" under this Agreement. 16.3 SALE OF SELLER'S GAS. Except as provided in Section 2.6, all of Seller's Gas shall remain dedicated to this Agreement notwithstanding any assignment or sale of any Seller's Wells producing Seller's Gas by Seller. Seller may, however, assign this Agreement to the extent this Agreement covers such Seller's Wells to any party purchasing such Seller's Wells without the consent of Buyer. Upon such assignment by Seller, Seller shall be fully released from any obligation to Buyer hereunder for the performance by Seller's assignee of this Agreement for such Seller's Wells. ARTICLE 17 MISCELLANEOUS 17.1 NOTICES. Any formal notice or other communication required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed properly given when hand delivered, telegraphed by prepaid telegram, transmitted by telecopy or mailed from within the United States by certified mail, return receipt requested, postage pre-paid, to the following addresses or such other address as a Party may designate in writing from time to time: -31- Buyer: Notices and Correspondence Hadson Gas Systems, Inc. 600 East John W. Carpenter Freeway Suite 201 Irving, Texas 75062-3977 Attention: Contract Administration Telephone: (214) 717-1499 Telecopy: (214) 717-0171 Seller: Notices and Correspondence: Santa Fe Energy Resources, Inc. 1616 South Voss Road, Suite 1000 Houston, Texas 77057-2696 Attention: Vice President, Marketing Telephone: (713) 783-2401 Telecopy: (713) 268-5716 Payments shall be made to: Santa Fe Energy Resources, Inc. 1616 South Voss Road, Suite 1000 Houston, Texas 77057-2696 Attention: Treasurer 17.2 INTEGRATED AGREEMENT. This Agreement, together with the exhibits and other material incorporated herein by reference, constitute the entire agreement of the Parties. 17.3 NO WAIVER. Waiver by either Party hereto of any one or more defaults by the other in the performance of any provisions of this Agreement shall not operate nor be construed as a waiver of any other default or defaults, or the same default on a subsequent occasion. 17.4 HEADINGS. The numbering and titling of particular provisions of this Agreement are for the purpose of facilitating administration and are not to be taken -32- into account or considered in construing the terms and provisions hereof, or to be deemed to qualify, modify, explain, or have any substantive effect on such provisions. 17.5 ACCESS. To the extent Seller has the legal right to do so, Seller grants to Buyer the right of ingress and egress to Development Wells and Exploration Wells to the extent Buyer needs such rights to implement any Buyer's Gathering Proposal, and the right to use all existing lease roads of Seller for such Development Wells and Exploration Wells. 17.6 LIMIT OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY INCIDENTAL, SPECIAL, CONSEQUENTIAL, PUNITIVE, EXEMPLARY, OR SIMILAR DAMAGES ARISING OUT OF OR RELATED TO THE PERFORMANCE OR NONPERFORMANCE OF THIS AGREEMENT. 17.7 AMENDMENT. This Agreement may not be amended, altered, revised, renewed, extended, or otherwise changed, except by a writing that refers to this Agreement and is executed by the Parties. 17.8 CONSTRUCTION OF AGREEMENT. In construing this Agreement, the following principles shall be followed: (i) no consideration shall be given to the captions of the articles, sections, subsections, or clauses, which are inserted for convenience in locating the provisions of this Agreement and not as an aid in its construction; (ii) no consideration shall be given to the fact or presumption that one Party had a greater or lesser hand in drafting this Agreement; (iii) examples shall not be construed to limit, expressly or by implication, the matter they illustrate; (iv) the word "includes" and its syntactical variants mean "includes, but is not limited to" and corresponding syntactical variant expressions; (v) a defined term has its defined meaning throughout this Agreement, regardless of whether it appears before or after the place in this Agreement where it is defined; -33- (vi) the plural shall be deemed to include the singular, and vice versa; and (vii) each exhibit, attachment, and schedule to this Agreement is a part of this Agreement, but if there is any conflict or inconsistency between the main body of this Agreement and any exhibit, attachment, or schedule, the provisions of the main body of this Agreement shall prevail. 17.9 RELATIONSHIP OF PARTIES. This Agreement does not create a partnership, joint venture, or relationship of trust or agency between the Parties. -34- IN WITNESS WHEREOF, the Parties have, by their duly authorized officers or agents, executed this Agreement as of the Effective Date. "SELLER" ATTEST: SANTA FE ENERGY RESOURCES, INC. /s/ MARK A. OLDER By:/s/ Title: VICE PRESIDENT "SELLER" ATTEST: SANTA FE ENERGY OPERATING PARTNERS, L.P. /s/ MARK A. OLDER By:/s/ Title: VICE PRESIDENT "BUYER" ATTEST: ADOBE GAS PIPELINE COMPANY /s/ MARK A. OLDER By:/s/ Title: SENIOR VICE PRESIDENT -35- EX-10.U 8 AGREEMENT OF SALE AND PURCHASE SANTA FE/HADSON EXHIBIT 10(u) AGREEMENT OF SALE AND PURCHASE by and among SANTA FE ENERGY RESOURCES, INC. SANTA FE ENERGY OPERATING PARTNERS, L.P. and BRIDGE OIL (U.S.A.) INC. December 2, 1993 TABLE OF CONTENTS Page I. DEFINED TERMS AND REFERENCES ......................... 1 1.1. Defined Terms ................................. 1 1.2. References .................................... 1 II. AGREEMENT TO SELL AND PURCHASE ....................... 8 III. PURCHASE PRICE ....................................... 9 IV. THE CLOSING .......................................... 9 4.1. Closing ...................................... 10 4.2. Seller's Closing Obligations.................. 10 4.3. Buyer's Closing Obligations................... 10 V. REPRESENTATIONS AND WARRANTIES OF SELLER.............. 10 5.1. Organization.................................. 11 5.2. Qualification ................................ 11 5.3. Authority Relative to This Agreement ......... 11 5.4. Noncontravention.............................. 11 5.5. Governmental Consents ........................ 11 5.6. Legal Proceedings ............................ 12 5.7. Compliance With Laws ......................... 12 5.8. Commitments .................................. 12 5.9. Title to Oil and Gas Properties .............. 12 5.10. Compliance with Agreements ................... 13 5.11. Take or Pay Arrangements ..................... 13 5.12. Receipts and Payments ........................ 13 5.13. Payment of Expenses .......................... 14 5.14. Sales of Production .......................... 14 5.15. Area of Mutual Interest and Other Agreements.. 14 5.16. Certain Filings .............................. 14 5.17. ERISA ........................................ 15 5.18. Taxes ........................................ 15 5.19. Undeveloped Acreage........................... 15 5.20. FIRPTA Disclaimer ............................ 15 5.21. Imbalances ................................... 15 i Page 5.22. Environmental Matters......................... 15 5.23. Registration Statement........................ 15 5.24. Taylorco Transaction ......................... 16 5.25. No Representation or Warranty ................ 16 VI. REPRESENTATION AND WARRANTIES OF BUYER................ 16 6.1. Organization ................................. 16 6.2. Qualification ................................ 16 6.3. Authority Relative to This Agreement ......... 17 6.4. Noncontravention.............................. 17 6.5. Governmental Approvals ....................... 17 6.6. Capitalization ............................... 17 6.7. Consideration Shares ......................... 18 6.8. Registration Statement ....................... 18 6.9. Charter and Bylaws ........................... 18 VII. COVENANTS AND AGREEMENTS OF THE PARTIES PRIOR TO, AT AND AFTER THE CLOSING.............................. 18 7.1. Operation of Properties Prior to Closing...... 19 7.2. Conduct of Buyer's Business Prior to Closing.. 19 7.3. Access to Information ........................ 23 7.4. Confidentiality .............................. 24 7.5. HSR Act Notification ......................... 24 7.6. Public Offering .............................. 24 7.7. Registration Rights Agreement ................ 25 7.8. Investment Agreement ......................... 25 7.9. Exploration Agreement......................... 25 7.10. Notice of Litigation ......................... 26 7.11. Notification of Certain Matters .............. 26 7.12. Preferential Right to Purchase ............... 26 7.13. Public Announcements ......................... 27 7.14. Filing and Recording of Assignments, Etc ..... 27 7.15. Access to Records After Closing .............. 27 7.16. Transfer of Geoscience Data .................. 28 7.17. Santa Fe Separate Disclosure Schedule ........ 28 7.18. Sales and Other Taxes ........................ 28 7.19. Fees and Expenses ............................ 28 7.20. Brokers. ..................................... 28 7.21. Over-allotment Option After Closing .......... 29 7.22. Agreement to Convey .......................... 29 7.23. Britt Ranch Imbalance ........................ 29 ii Page 7.24. Wyoming Ad Valorem Tax ....................... 30 7.25. Purchase of Taylorco NPI ..................... 30 7.26. Further Assurances ........................... 30 VIII. TITLE DEFECTS AND RELATED PURCHASE PRICE ADJUSTMENTS.. 31 8.1. Notice of Title Defects ...................... 31 8.2. Purchase Price Reductions for Title Defects .. 31 8.3. Purchase Price Increases...................... 32 8.4. Adjustment to Purchase Price ................. 34 8.5. Right to Terminate ........................... 34 8.6. Certain Agreements Regarding Disputes ........ 34 8.7. Allocations .................................. 36 IX. CONDITIONS TO OBLIGATIONS OF SELLER .................. 36 9.1. Representations and Warranties True .......... 36 9.2. Covenants and Agreements Performed............ 36 9.3. Certificate................................... 36 9.4. Opinion of Counsel ........................... 36 9.5. HSR Act ...................................... 36 9.6. Legal Proceedings ............................ 37 X. CONDITIONS TO OBLIGATION OF BUYER .................... 37 10.1. Representations and Warranties True .......... 37 10.2. Covenants and Agreements Performed ........... 37 10.3. Certificate .................................. 37 10.4. Opinion of Counsel ........................... 37 10.5. HSR Act ...................................... 37 10.6. Legal Proceedings ............................ 37 XI. TERMINATION, AMENDMENT AND WAIVER .................... 38 11.1. Termination .................................. 38 11.2. Amendment .................................... 38 11.3. Waiver........................................ 38 XII. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION.......... 39 12.1. Survival ..................................... 39 12.2. Indemnification by Seller .................... 40 12.3. Indemnification by Buyer ..................... 40 12.4. Certain Limitations on Seller's Liability .... 41 12.5. Procedure for Indemnification ................ 41 iii Page XIII. CASUALTY LOSS AND CONDEMNATION ....................... 42 XIV. CERTAIN ACCOUNTING ADJUSTMENTS........................ 43 14.1. Adjustments................................... 43 14.2. Accounting.................................... 44 XV. MISCELLANEOUS .......................................... 44 15.1. Notices ...................................... 44 15.2. Entire Agreement.............................. 45 15.3. Binding Effect: Successors and Assigns........ 45 15.4. Severability ................................. 46 15.5. No Third-Party Beneficiaries ................. 46 15.6. DTPA Waiver .................................. 46 15.7. Governing Law ................................ 46 15.8. Counterparts ................................. 47 iv AGREEMENT OF SALE AND PURCHASE THIS AGREEMENT OF SALE AND PURCHASE dated December 2, 1993, is made and entered into by and among Santa Fe Energy Resources, Inc., a Delaware corporation ("SFER"), Santa Fe Energy Operating Partners, L.P., a Delaware limited partnership ("SFEOP"), and Bridge Oil (U.S.A.) Inc., a Delaware corporation ("BRIDGE"). RECITALS: A. SFER and SFEOP desire to sell to Bridge certain oil, gas and mineral properties and other assets on the terms and conditions set forth herein and are herein sometimes collectively called the "SELLER." B. Bridge desires to purchase from Seller certain oil, gas and mineral properties and other assets on the terms and conditions contained herein and is herein sometimes called the "BUYER." AGREEMENT: NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual covenants and agreements contained herein, Seller and Buyer do hereby agree as follows: I. DEFINED TERMS AND REFERENCES 1.1. DEFINED TERMS. When used in this Agreement, the following terms shall have the respective meanings assigned to them in this SECTION 1.1 or in the articles, sections, subsections or other subdivisions referred to below: "ADDITIONAL SHARES" shall have the meaning assigned to it in SECTION 7.21. "AGREED DEFECT'' shall mean a Title Defect arising pursuant to SECTION 8.2 that is uncured, has not been waived prior to Closing by Buyer and for which there is no disagreement between Buyer and Seller as to whether it exists or has been cured or the amount of the related Purchase Price reduction. "AGREED INCREASE" shall mean an increase in the Purchase Price arising pursuant to SECTION 8.3 for which there is no disagreement between Buyer and Seller as to its existence or the amount thereof. 1 "AGREEMENT" shall mean this Agreement of Sale and Purchase, as hereafter amended or modified in accordance with the terms hereof. "APPLICABLE LAW" shall mean any statute, law, rule, or regulation or any judgment, order, writ, injunction, or decree of any Governmental Entity to which a specified person or property is subject. "APPLICABLE CONTRACT" shall mean any joint operating agreement or any purchase, sale, transportation, balancing, processing, or treating agreement or any unitization, communitization, pooling, lease, farm-out, farm-in, royalty, overriding royalty, development, easement, right-of-way, or other agreement with respect to any of the rights, titles, interests and estates agreed to be sold to Buyer hereunder, or production or the proceeds of production from any of such rights, titles, interests and estates. "BRIDGE COMMON STOCK" shall mean the shares of common stock of Buyer, $.01 par value per share. "BRIDGE LP" shall have the meaning assigned to it in SECTION 15.3. "BUYER" shall have the meaning assigned to it in PARAGRAPH B of the Recitals. "BUYER GROUP" shall have the meaning assigned to it in SECTION 12.2. "CASH PORTION OF PURCHASE PRICE" shall mean that portion of the Purchase Price payable to Seller in cash as determined in accordance with ARTICLES III, VIII and XIV and SECTIONS 7.1 and 7.12. "CLAIMED DEFECT" shall mean a claimed Title Defect arising pursuant to SECTION 8.2 for which there is a disagreement between Buyer and Seller as to whether it exists or has been cured or the amount of the related Purchase Price reduction and which has not been waived by Buyer prior to Closing. "CLAIMED INCREASE" shall mean a claimed increase in the Purchase Price arising pursuant to SECTION 8.3 for which there is a disagreement between Buyer and Seller as to whether it exists or the amount thereof. "CLOSING" shall have the meaning assigned to it in SECTION 4.1. "CLOSING DATE" shall have the meaning assigned to it in SECTION 4.1. 2 "CODE" shall mean the Internal Revenue Code of 1986 or any successor statute or statutes, as amended from time to time. "CONSIDERATION SHARES" shall mean the shares of Bridge Common Stock to be issued to Seller as determined in accordance with ARTICLE III and SECTION 7.21. "DAMAGES" shall have the meaning assigned to it in SECTION 12.2. "EFFECTIVE DATE" shall mean 7:00 a.m., local time, at the location of the Properties on December 1, 1993. "ENVIRONMENTAL CLAIM" shall have the meaning assigned to it in SECTION 12.1. "ENVIRONMENTAL LAWS" shall mean all Applicable Laws relating to health, safety or the environment. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "EXCLUDED ASSETS" shall refer to any of the Properties that are excluded from the transactions contemplated hereby pursuant to SECTION 7.1, 7.12 or 8.2. "EXPLORATION AGREEMENT" shall have the meaning assigned to it in SECTION 7.9. "GEOSCIENCE DATA" shall mean Seller's geological and geophysical data related to the Oil and Gas Properties, including (without limitation), prospect and other maps, the seismic records listed in SCHEDULE C, well logs, scout tickets, and completion cards related to the Oil and Gas Properties. "GOVERNMENTAL ENTITY" shall mean any court or tribunal in any jurisdiction (domestic or foreign) or any public, governmental, or regulatory body, agency, department, commission, board, bureau, or other authority or instrumentality (domestic or foreign). "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "HYDROCARBONS" shall mean crude oil, natural gas, casinghead gas, condensate, sulphur, natural gas liquids and other liquid or gaseous hydrocarbons (including C02), and shall also refer to any other minerals of every kind and character which may be covered by or included in the Oil and Gas Properties. 3 "IMBALANCE" shall mean any gas production imbalance existing with respect to any of the Oil and Gas Properties, together with any related rights or obligations as to future cash and/or gas balancing (subject, however, to SECTION 7.23). "INITIAL REGISTRATION STATEMENT" shall have the meaning assigned to it in SECTION 6.8. "INITIAL SHARES" shall have the meaning assigned to it in ARTICLE III. "INITIAL STOCK VALUE" shall have the meaning assigned to it in ARTICLE III. "INVESTMENT AGREEMENT" shall have the meaning assigned to it in SECTION 7.8. "NGPA" shall have the meaning assigned to it in SECTION 5.16. "NGPA REGULATIONS" shall have the meaning assigned to it in SECTION 5.16. "NON-OPERATED PROPERTIES" shall mean those Properties with respect to which Seller is not serving as operator. "OFFERING" shall mean the public offering of Bridge Common Stock referenced in SECTION 7.6. "OFFERING CLOSING DATE" shall mean the date on which Buyer consummates the sale of the Bridge Common Stock pursuant to the Offering. "OFFERING PRICE" shall mean the public offering price set forth on the cover page of the final prospectus relating to the registration statement filed with the SEC with respect to the Offering. "OFFERING TERMINATION NOTICE" shall have the meaning assigned to it in SECTION 7.6. "OIL AND GAS PROPERTIES" shall mean the properties described in PARAGRAPHS (a), (b), and (c) of the definition of "Properties." "PARENT" shall mean Bridge Oil Limited, an Australian company. "PERMITTED ENCUMBRANCES" shall mean any of the following matters: 4 (a) the terms, conditions, restrictions, exceptions, reservation, limitations and other matters contained in the agreements, instruments and documents which create or reserve to Seller its interests in any of the Oil and Gas Properties, provided they do not operate (i) to reduce the net revenue interest, nor increase the working interest (without a corresponding increase in the net revenue interest), of Seller in the Oil and Gas Properties as reflected in SCHEDULE A hereto or (ii) to reduce the net acres of Seller in the Oil and Gas Properties as reflected in SCHEDULE B hereto; (b) any tax, regulatory, mechanic's, materialman's, contractor's, operator's, lessor's, or other liens or encumbrances created by contract or law which are undetermined or inchoate; (c) all Applicable Contracts listed in the Santa Fe Separate Disclosure Schedule to the extent that any Applicable Contract does not result in any mortgage, lien or security interest on any of the Properties; (d) easements for streets, alleys, highways, pipelines, telephone lines, power lines, railways and other similar rights-of- way, on, over, or in respect of property owned or leased by Seller or over which Seller owns rights-of-way, easements, permits, or licenses to the extent such matters, individually or in the aggregate, do not interfere materially with oil and gas operations on the Oil and Gas Properties; (e) rights reserved to or vested in any Governmental Entity to control or regulate any of the Properties in any manner; (f) conventional rights of reassignment arising immediately prior to the termination or expiration of an oil and gas lease or upon a decision or election by the owner of an oil and gas lease to surrender or abandon all or any portion of same; (g) rights to consent by, required notices to, filings with, or actions by Governmental Entities in connection with the sale, transfer or conveyance of federal, state, Indian or other governmental agency oil and gas leases or interests therein, where the same are customarily obtained or made subsequent to the assignment of such oil and gas leases or interests therein; and (h) any agreement, contract, lease, instrument, permit, amendment, or extension entered into by Seller following the date of this Agreement in accordance with SECTION 7.1. "PROCEEDINGS" shall mean all proceedings, actions, claims, suits, investigations, and inquiries by or before any arbitrator or Governmental Entity. 5 "PROPERTIES" shall mean: (a) All of Seller's right, title and interest in and to the lands underlying the leases and other documents described in Schedules A and B (and in and to any ratifications and/or amendments to such leases and other documents, whether or not such ratifications or amendments are described in such Schedules A and B) and all wells (including wells which may be currently producing, not producing, in the process of or awaiting completion, or drilling) located upon such lands or upon any lands with which any portion of such leases or lands may be pooled, communitized, or unitized (either voluntary or by compulsory order); (b) Without limitation of the foregoing, all other right, title and interest (of whatever kind or character, whether legal or equitable, and whether vested or contingent) of Seller in and to the oil, gas and other minerals in and under and that may be produced from the lands underlying the leases or other documents described in Schedules A and B (including, without limitation, interests in oil, gas and/or mineral leases covering such lands, overriding royalty interests, production payments and net profits interests in such lands, and fee royalty interests, fee mineral interests and other interests in such oil, gas and other minerals); (c) All rights, titles and interests of Seller in and to, or otherwise derived from all presently existing and valid oil, gas and/or mineral unitization, pooling, and/or communitization agreements, declarations and/or orders in and to the properties covered and the units created thereby (including, without limitation, units formed under orders, rules, regulations or other official acts of any Governmental Entity having jurisdiction, voluntary unitization agreements, designations and/or declarations, and so called "working interest units" created under operating agreements or otherwise) which relate to any of the properties described in paragraphs (a) and (b)above; (d) All production from the properties described in paragraphs (a), (b), and (c) above after the Effective Date and all merchantable allowable oil or liquids owned by Seller and stored in tanks on the lands covered by the leases and other documents described on Schedules A and B on the Effective Date; (e) All rights and obligations of Seller with respect to Imbalances in existence as of the Effective Date (subject to Section 7.23). (f) All rights, titles and interests of Seller in and to all presently existing and valid production sales contracts, operating agreements, and other agreements and contracts which relate to any of the properties described in PARAGRAPHS (a), (b) and (c) above, or which relate to the exploration, development, operation or maintenance thereof or the 6 treatment, storage, transportation or marketing of production therefrom (or allocated thereto), including accounts receivable and payable arising from any of the foregoing and attributable to any period after the Effective Date; (g) All rights, titles and interests of Seller in and to all materials, supplies, machinery, equipment, improvements, and other personal property and fixtures (including, but not by way of limitation, the items listed in Schedule D) appurtenant to the properties described in PARAGRAPHS (a), (b) and (c) above; and (h) All of Seller's lease files, abstracts and title opinions, production records, well files, accounting records (but not including general financial accounting or tax accounting records), Geoscience Data, and all other files, documents and records which directly relate to the properties described above (unless, subject to SECTION 7.16, Seller is prohibited from transferring any such items pursuant to the terms of a third-party agreement). The Properties shall not include any properties or other assets of Seller classified hereunder as Excluded Assets. "PURCHASE PRICE" shall have the meaning assigned to it in ARTICLE III. "PURCHASE PRICE INCREASES" shall have the meaning assigned to it in SECTION 8.3. "PURCHASE PRICE REDUCTIONS" shall have the meaning assigned to it in SECTION 8.2. "REGISTRATION RIGHTS AGREEMENT" shall have the meaning assigned to it in SECTION 7.7. "REGISTRATION STATEMENT'' shall have the meaning assigned to it in SECTION 7.6. "RESERVE REPORT" shall mean that certain reserve report attached as SCHEDULE E. "ROYALTY TRUST" shall mean that certain Trust Agreement of the Santa Fe Energy Trust dated November 19, 1992, between SFER and Texas Commerce Bank, National Association, as Trustee. "SANTA FE SEPARATE DISCLOSURE SCHEDULE" shall have the meaning assigned to it in SECTION 7.17. "SCHEDULE A" shall mean SCHEDULES A-1 and A-2. 7 "SCHEDULE B" shall mean SCHEDULES B-1, B-2 and B-3. "SEC" shall mean the Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SELLER" shall have the meaning assigned to it in PARAGRAPH A of the Recitals. "SELLER GROUP" shall have the meaning assigned to it in SECTION 12.3. "SFER SUB" shall have the meaning assigned to it in SECTION 15.3. "SPLIT POINT" shall have the meaning assigned to it in SECTION 12.4(b). "SURVIVAL DATE" shall have the meaning assigned to it in SECTION 12.1. "TAYLORCO" shall mean Taylorco, Inc. "TAYLORCO PURCHASE AGREEMENT" shall mean that certain Purchase Agreement dated as of August 22, 1988, by and between SFEOP and Taylorco, as amended. "THRESHOLD AMOUNT" shall have the meaning assigned to it in SECTION 12.4 (b). "TITLE DEFECT" shall refer to any matter which would cause the representations of Seller in Section 5.9 not to be true. "UNDERWRITERS" shall mean the underwriters named in the Registration Statement. "UNDERWRITING AGREEMENT" shall mean the underwriting agreement to be entered into by Morgan Stanley & Co. Incorporated, Donaldson Lufkin & Jenrette Securities Corporation, UBS Securities Inc. and S.G. Warburg and Co. Inc., as representatives of the Underwriters, and Buyer relating to the Offering. 1.2. REFERENCES. All references in this Agreement to articles, sections, subsections and other subdivisions refer to corresponding sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any of such subdivisions are for convenience only and shall not constitute part of such subdivisions and shall be disregarded in construing the language contained in such subdivisions. The words "this 8 Agreement", "herein", "hereby", "hereof", "hereunder" and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. Words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. II. AGREEMENT TO SELL AND PURCHASE At the Closing and subject to the terms and conditions hereof, Seller shall sell, transfer, assign, convey and deliver to Buyer, and Buyer shall purchase, acquire, accept and pay for, the Properties. III. PURCHASE PRICE The total consideration for the Properties (the "PURCHASE PRICE") shall be payable in cash and Bridge Common Stock as follows. The portion of the Purchase Price to be paid by Buyer in cash shall be $15,000,000 (unless otherwise adjusted as provided below). The portion of the Purchase Price to be paid by Buyer in Bridge Common Stock (unless otherwise adjusted as provided below) shall be that number of shares of Bridge Common Stock (the "Initial Shares") which, immediately upon the consummation of the Offering and the Closing hereunder, shall equal 10% of all issued and outstanding shares of Bridge Common Stock excluding any shares of Bridge Common Stock issued under the Bridge Oil & Gas, Inc. 1993 Stock Option Plan in such amount and as described in the Initial Registration Statement; provided, that if the product of the Initial Shares and the Offering Price (the "Initial Stock Value") is less than $36,000,000, then Buyer shall, at its option, either (a) increase the portion of the Purchase Price to be paid in cash by an amount equal to the difference between $36,000,000 and the Initial Stock Value, (b) increase the number of shares of Bridge Common Stock to be tendered by an amount such that the product of the total shares of Bridge Common Stock so tendered and the Offering Price equals $36,000,000 or (c) increase the portion of the Purchase Price to be paid in cash and increase the number of shares of Bridge Common Stock to be tendered such that the sum of (i) the additional cash referred to above in this clause (c), plus (ii) the product of the additional shares of Bridge Common Stock referred to above in this clause (c) and the Offering Price, plus (iii) the Initial Stock Value equals $36,000,000; provided further, that if Buyer makes a determination not to consummate the Offering in accordance with the provisions of Section 7.6, the number of shares of Bridge Common Stock shall be reduced to zero and the portion of the Purchase Price to be paid in cash shall be increased to $51,000,000 (unless otherwise adjusted as provided below); and, provided further, that if Buyer consummates the Offering and (A) the aggregate proceeds realized therefrom is an amount less than $75,000,000 (prior to underwriting discounts and payment of expenses attributable to the Offering) or (B) the proceeds received by Buyer from the sale of Bridge Common Stock, after deducting therefrom all amounts paid or, 9 at the Closing Date, anticipated to be paid to Parent out of such proceeds is less than $25,000,000 (prior to underwriting discounts and payment of expenses attributable to the Offering), then, at Seller's option, the number of shares of Bridge Common Stock shall be reduced to zero and the portion of the Purchase Price to be paid in cash shall be increased to $51,000,000 (unless otherwise adjusted as provided below). Buyer shall also be required to tender to Seller additional shares of Bridge Common Stock under the circumstances described in SECTION 7.21. The portion of the Purchase Price to be paid in cash shall be subject to adjustment as provided in this ARTICLE III, in SECTIONS 7.1 and 7.12 and in ARTICLES VIII and XIV. IV. THE CLOSING 4.1. CLOSING. The Closing of the transactions contemplated hereunder (the "CLOSING") shall take place in the offices of SFER, at 10:00 a.m. local time, or at such other place or time as the parties may agree in writing, (a) if the Offering is consummated, on the Offering Closing Date or (b) if the Offering is not consummated, on the date which is 10 days after the date on which Seller receives the Offering Termination Notice from Buyer (or, if such date on which the Closing would otherwise occur under this CLAUSE (b) is not a business day in the State of Texas, on the first business day in the State of Texas immediately thereafter). The date on which the Closing is required to take place is herein referred to as the "CLOSING DATE." 4.2. SELLER'S CLOSING OBLIGATIONS. At the Closing, Seller shall deliver to Buyer the following: (a) a duly executed Conveyance, substantially in the form of EXHIBIT 4.2(a) in all material respects, effective as of the Effective Date; (b) letters in lieu of transfer order (or similar documentation), in form acceptable to both parties; (c) the certificate of Seller referred to in SECTION 10.3; (d) the legal opinion referred to in SECTION 10.4; and (e) evidence of Seller's compliance with the HSR Act. 4.3. BUYER'S CLOSING OBLIGATIONS. At the Closing, Buyer shall deliver to Seller the following: (a) the Cash Portion of the Purchase Price by wire transfer of immediately available funds to a bank account or bank accounts designated by Seller; 10 (b) a certificate or certificates representing the Consideration Shares registered in the name of Seller; (c) the certificate of Buyer referred to in SECTION 9.3; (d) the legal opinions referred to in SECTION 9.4; and (e) evidence of Buyer's compliance with the HSR Act. V. REPRESENTATIONS AND WARRANTIES OF SELLER SFER and SFEOP, jointly and severally, hereby represent and warrant to Buyer that: 5.1. ORGANIZATION. SFER is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and SFEOP is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware. Seller has all requisite power and authority to own, lease, and operate the Properties and to carry on its business as now being conducted. 5.2. QUALIFICATION. Seller is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the Properties are located to the extent such qualification or licensing is required. 5.3. AUTHORITY RELATIVE TO THIS AGREEMENT. Seller has full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution, delivery, and performance by Seller of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by all necessary corporate (in the case of SFER) or partnership (in the case of SFEOP) action of Seller. This Agreement has been duly executed and delivered by Seller and constitutes, and each other agreement, instrument, or document executed or to be executed by Seller in connection with the transactions contemplated hereby has been, or when executed will be, duly executed and delivered by Seller and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Seller, enforceable against Seller in accordance with their respective terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally. 5.4. NONCONTRAVENTION. The execution, delivery, and performance by Seller of this Agreement and the consummation by it of the transactions contemplated hereby do not and will not (a) conflict with or result in a violation of any provision of its Certificate of Incorporation or Bylaws (in the case of SFER) or its partnership agreement and other governing documents 11 (in the case of SFEOP), (b) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation, or acceleration under, any bond, debenture, note, mortgage, indenture, lease, agreement, or other instrument or obligation to which Seller is a party or by which Seller or any of the Properties may be bound, (c) result in the creation or imposition of any lien, charge, pledge, mortgage, security interest, easement or other encumbrances of every type or description, whether imposed by law, agreement or otherwise, upon any of the Properties, or (d) assuming compliance with the matters referred to in SECTION 5.5, violate any Applicable Law binding upon Seller or any of the Properties. 5.5. GOVERNMENTAL CONSENTS. No consent, authorization or approval of any Governmental Entity is required for the execution and delivery by Seller of this Agreement or the transfer to Buyer in accordance with this Agreement of the Properties except (a) for the requirements of the HSR Act and (b) for filings which constitute a Permitted Encumbrance in accordance with PARAGRAPH (g) of the definition thereof. 5.6. LEGAL PROCEEDINGS. Except as otherwise set forth in SCHEDULE 5.6, there are no Proceedings pending or, to Seller's knowledge, overtly threatened against or involving Seller which might result in the impairment or loss of title to any of the Oil and Gas Properties or the value thereof or impede the operation of any of the Oil and Gas Properties or that, if adversely determined, would delay or prevent the consummation of the transactions contemplated hereby. 5.7. COMPLIANCE WITH LAWS. Except as set forth in SCHEDULE 5.7, Seller is not in violation of or in default under any Applicable Law relating to the ownership or operation of the Oil and Gas Properties, and no claim is pending or, to Seller's knowledge, overtly threatened with respect to any such matters which if determined adversely to Seller would have such effect (provided, that with respect to Non-Operated Properties, the foregoing representation is limited to Seller's knowledge). Without limitation of the foregoing, and except as provided in SCHEDULE 5.7, all of the wells comprising a part of the Oil and Gas Properties have been drilled and completed in accordance with Applicable Law, and no well comprising a part of the Oil and Gas Properties is or was subject to any penalty on production allowables because of overproduction or any other violation of Applicable Law which would now or hereafter prevent such well from being entitled to its full legal and regular allowable production as prescribed by any Governmental Entity (provided, that with respect to Non-Operated Properties, the foregoing representation and warranty is limited to Seller's knowledge). 5.8. COMMITMENTS. Except as provided in the Applicable Contracts listed in the Santa Fe Separate Disclosure Schedule, the oil, gas or mineral leases or other interests constituting the Oil and Gas Properties listed on SCHEDULE A and the Applicable Contracts relating thereto, under circumstances as they exist and will exist as of the Closing Date (a) contain no provisions that 12 require the drilling of additional wells or other material development operations in order to earn or continue to hold all or a portion of such Oil and Gas Properties and (b) contain no provisions that require the commitment or investment of funds (other than routine expenses incurred in the normal operation of existing wells on such Oil and Gas Properties), which provisions described in CLAUSES (a) and (b) cannot be avoided by no more than the release of all or part of such Oil and Gas Properties. 5.9. TITLE TO OIL AND GAS PROPERTIES. Seller has good and defensible title to the Oil and Gas Properties, free and clear of all mortgages, liens, security interests, encumbrances and other burden except for the Permitted Encumbrances. With respect to each Oil and Gas Property listed on SCHEDULE A, the ownership of Seller in such Oil and Gas Property (a) entitles Seller to receive not less than the net revenue interest of Seller set forth in SCHEDULE A of the oil and gas produced, saved and marketed from or attributable to such Oil and Gas Property and (b) obligates Seller to bear the costs and expenses relating to maintenance, development, production and operation in an amount not greater than the working interest of Seller for such Oil and Gas Property set forth in SCHEDULE A (without a corresponding increase in the net revenue interest). With respect to each Oil and Gas Property listed on SCHEDULE B, Seller has the right to explore for, and produce and market, oil and gas attributable to the number of net acres for such Oil and Gas Property stated on SCHEDULE B. All preferential rights of purchase that exist with respect to the transfer by Seller to Buyer of the Oil and Gas Properties will be as set forth in the Santa Fe Separate Disclosure Schedule and will have been exercised or waived prior to the Closing. All consents of third parties that exist with respect to the transfer by Seller to Buyer of the Oil and Gas Properties (exclusive of those described in SECTION 5.5) will be as set forth in the Santa Fe Separate Disclosure Schedule and will have been obtained prior to the Closing. All of the wells comprising a part of the Oil and Gas Properties have been drilled and completed within the boundaries of the applicable leases or within limits otherwise permitted by a valid and enforceable pooling, unit or other agreement or contract. 5.10. COMPLIANCE WITH AGREEMENTS. The Santa Fe Separate Disclosure Schedule will contain a complete and accurate list of all Applicable Contracts in effect on the date of this Agreement, and Seller is not in default with regard to any agreement listed therein (except as to any such matters that may or would result in a Title Defect); provided, however, that with respect to the Non-Operated Properties, the representations and warranties in this SECTION 5.10 are made solely to the knowledge of Seller. Except as set forth in the Santa Fe Separate Disclosure Schedule, Seller has not been notified or advised in writing by any other party to an Applicable Contract of such party's intention or desire to terminate or modify in any material respect such Applicable Contract (exclusive, however, of any such termination or modification permitted in SECTION 7.1). 5.11. TAKE OR PAY ARRANGEMENTS. Seller is not obligated by virtue of a prepayment arrangement, "take or pay" arrangement, production payment, or other instrument to deliver or 13 suffer the delivery of oil, gas and other minerals produced from the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor without deduction or credit on account of such arrangement from the price which would otherwise be received, except as described in the Applicable Contracts listed in the Santa Fe Separate Disclosure Schedule. 5.12. RECEIPTS AND PAYMENTS. Except for those matters identified on SCHEDULE 5.12, Seller is currently receiving for each well listed on SCHEDULE A-l (other than a well identified as a "composite well" on SCHEDULE A-1) payment for at least the net revenue interest set forth in SCHEDULE A-1 for such well without (a) any delay such that payment is not received within 90 days as to wells operated by Seller and six months as to wells not operated by Seller after the end of the month in which production occurs; (b) suspense; or (c) any indemnity other than indemnities customarily given in connection with division orders or sales or other applicable contracts. Except as shown on SCHEDULE 5.12, Seller is not currently paying more than the percentage of operating and other costs for each well listed on SCHEDULE A-1 (other than a well identified as a "composite well" on SCHEDULE A-l) than the working interest set forth in SCHEDULE A-l for such well and Seller is current for all costs and expenses pertaining thereto for which it has been billed. 5.13. PAYMENT OF EXPENSES. All expenses, (including, without limitation, all bills for labor, materials and supplies used or furnished for use in connection with the Oil and Gas Properties, and all severance, production, ad valorem and other similar taxes) and liabilities relating to the ownership or operation of the Oil and Gas Properties, have been, and are being, paid on a timely basis (provided, however, with respect to Non-Operated Properties, the representations and warranties in this SECTION 5.13 are made solely to the knowledge of Seller). 5.14. SALES OF PRODUCTION. There exist no agreements or arrangements for the sale of production from the Oil and Gas Properties (including, without limitation, calls on, or other rights to purchase, production, whether or not the same are currently being exercised) other than (a) as contained in the agreements or other documents identified in the Santa Fe Separate Disclosure Schedule and (b) agreements or arrangements which are cancelable on 60 days' notice or less without penalty or detriment (provided, that with respect to Non-Operated Properties, the foregoing representation and warranty is limited to Seller's knowledge). 5.15. AREA OF MUTUAL INTEREST AND OTHER AGREEMENTS. Except for those agreements or tax partnerships listed in the Santa Fe Separate Disclosure Schedule or otherwise referred to in the agreements or other documents identified in the Santa Fe Separate Disclosure Schedule, no Oil and Gas Property is subject to (a) any area of mutual interest agreements, (b) any farm-out agreement under which any party thereto is entitled to receive assignments not yet made, or could earn additional assignments after the Effective Date, or (c) any tax partnership. 14 5.16. CERTAIN FILINGS. With respect to Oil and Gas Properties of which Seller is operator: (a) Seller has filed or caused to be filed with applicable Federal agencies applications required to be filed for well category determinations under the Natural Gas Policy Act of 1978 (the "NGPA") and rules and regulations of the Federal Energy Regulatory Commission under the NGPA (the "NGPA Regulations") relating to the Oil and Gas Properties; (b) each such application has been approved, withdrawn by Seller, or is pending approval by the appropriate state and Federal agency; (c) all of such applications to the extent filed and not amended or withdrawn are in compliance in all material respects with the requirements of the NGPA and the NGPA Regulations; and (d) no further applications are required under the NGPA or the NGPA Regulations to allow the legal sale of all gas produced from the Oil and Gas Properties at a price equal to the price for such gas currently being received. 5.17. ERISA. Seller and its Related Companies (as defined below) have paid and discharged when due all liabilities under ERISA which if unpaid would result in the imposition of a lien against the Properties. The term "Related Companies" means all corporations, trades, or businesses during any period that they are, along with the Seller, members of a controlled group of corporations or a controlled group of trades or businesses (as described in Section 414(b) and (c), respectively, of the Code). 5.18. TAXES. Seller and its affiliates have paid and discharged when due all taxes due and owing by them which if unpaid would result in a lien against the Properties. None of the Properties is subject to any lease, safe harbor lease or other arrangement pursuant to which Buyer will be treated after the Closing Date as the owner for Federal income tax purposes. 5.19. UNDEVELOPED ACREAGE. With respect to the Properties described in SCHEDULE B and except as otherwise contemplated in the Exploration Agreement, Seller has not created any royalty interest, overriding royalty interest or similar burdens in favor of Seller or any affiliate of Seller. 5.20. FIRPTA DISCLAIMER. Seller is not a foreign person or foreign corporation under the Deficit Reduction Act of 1984, 26 U.S.C. Section 1445, ET SEQ. and none of the Purchase Price needs to be withheld pursuant to such statute or the regulations promulgated thereunder. 5.21. IMBALANCES. To Seller's knowledge, the information relating to Imbalances stated in SCHEDULE 5.21 is true and correct as of the date reflected in such Schedule. 5.22. ENVIRONMENTAL MATTERS. Except as described in SCHEDULE 5.22, Seller has complied with all applicable Environmental Laws relating to the ownership and operation of the Oil and Gas Properties. Except as described in SCHEDULE 5.22, there are no pending or, to Seller's knowledge, overtly threatened, actions, suits, written notices or Proceedings by any Governmental Entity or third party relating to any violation or alleged violation by Seller of any 15 applicable Environmental Laws with respect to the Oil and Gas Properties. Seller has obtained or filed all environmental notices, permits or similar authorizations required to be obtained or filed in connection with the ownership or operation of the Oil and Gas Properties. Except as described in SCHEDULE 5.22, no condition exists on or with respect to any of the Oil and Gas Properties which would subject Seller, Buyer or any of the Oil and Gas Properties to any remedial obligations under any applicable Environmental Laws. Buyer hereby acknowledges that this SECTION 5.22 is the exclusive representation and warranty made by Seller in this Agreement with respect to applicable Environmental Laws and no other representation and warranty in this Agreement shall be deemed to cover such matters. 5.23. REGISTRATION STATEMENT. None of the information supplied by Seller in writing specifically for use in the Registration Statement, at the time it becomes effective, will contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or will omit to state any material fact necessary in order to make the statement therein not false or misleading. 5.24. TAYLORCO TRANSACTION. "Payout" (as defined in the Taylorco Purchase Agreement) has occurred under the terms of the Taylorco Purchase Agreement. 5.25. NO REPRESENTATION OR WARRANTY. Notwithstanding anything to the contrary in this Agreement (including this ARTICLE V), Seller makes no representation or warranty with respect to, and Buyer assumes the risk of and shall satisfy itself with respect to, the physical condition of the equipment, personal property and other fixtures included in the Properties. THE EQUIPMENT, PERSONAL PROPERTY AND OTHER FIXTURES INCLUDED IN THE PROPERTIES IS SOLD "AS IS, WHERE IS" AND SELLER MAKES NO WARRANTY, WHETHER EXPRESS OR IMPLIED, IN FACT OR IN LAW, OF MERCHANTABILITY, FITNESS FOR ANY PURPOSE, STATE OF REPAIR, CONDITION OR SAFETY OF THE EQUIPMENT, PERSONAL PROPERTY AND OTHER FIXTURES INCLUDED IN THE PROPERTIES. Seller also makes no representation or warranty with respect to the quality, quantity or volume of the Hydrocarbons in and under the Oil and Gas Properties. VI. REPRESENTATION AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller that: 6.1. ORGANIZATION. Buyer is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease, and operate its properties and to carry on its business as now being conducted. 16 6.2. QUALIFICATION. Buyer is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the property owned, leased, or operated by it or the conduct of its business requires such qualification or licensing. 6.3. AUTHORITY RELATIVE TO THIS AGREEMENT. Buyer has full power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. The execution, delivery, and performance by Buyer of this Agreement, and the consummation by it of the transactions contemplated hereby, have been duly authorized by all necessary corporate action of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes, and each other agreement, instrument, or document executed or to be executed by Buyer in connection with the transactions contemplated hereby has been, or when executed will be, duly executed and delivered by Buyer and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Buyer, enforceable against Buyer in accordance with their respective terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally. 6.4. NONCONTRAVENTION. The execution, delivery, and performance by Buyer of this Agreement and the consummation by it of the transactions contemplated hereby do not and will not (a) conflict with or result in a violation of any provision of the charter or bylaws of Buyer, (b) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation, or acceleration under, any bond, debenture, note, mortgage, indenture, lease, agreement, or other instrument or obligation to which Buyer is a party or by which Buyer or any of its properties may be bound, (c) result in the creation or imposition of any lien, charge, pledge, mortgage, security interest, easement or other encumbrance of every type or description, whether imposed by law, agreement or otherwise, upon the properties of Buyer, other than the Properties, or (d) assuming compliance with the matters referred to in SECTION 6.5, violate any Applicable Law binding upon Buyer. 6.5. GOVERNMENTAL APPROVALS. No consent, approval, order, or authorization of, or declaration, filing, or registration with, any Governmental Entity is required to be obtained or made by Buyer in connection with its execution, delivery, or performance of this Agreement or the consummation by it of the transactions contemplated hereby, other than (a) compliance with any applicable requirements of the HSR Act; (b) compliance with any applicable requirements of the Securities Act; (c) compliance with any applicable state securities laws; and (d) filings with Governmental Entities to occur in the ordinary course following the consummation of the transactions contemplated hereby. 17 6.6. CAPITALIZATION. All issued and outstanding shares of capital stock of Buyer have been validly issued and are fully paid and nonassessable, and no shares of capital stock of Buyer are subject to, nor have any been issued in violation of, preemptive or similar rights. Except for the obligations of Buyer pursuant to this Agreement and except as otherwise disclosed in the Initial Registration Statement, there are outstanding (a) no options or other rights to acquire from Buyer, and no obligation of Buyer to issue or sell, any shares of capital stock or other voting securities of Buyer or any securities of Buyer convertible into or exchangeable for such capital stock or voting securities, and (b) no equity equivalents, interests in the ownership or earnings, or other similar rights of or with respect to Buyer. There are no outstanding obligations of Buyer to repurchase, redeem, or otherwise acquire any shares of its capital stock. 6.7. CONSIDERATION SHARES. The Consideration Shares have been duly authorized for issuance and, when issued and delivered by Buyer in accordance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable. The issuance of the Consideration Shares under this Agreement is not subject to any preemptive or similar rights. 6.8. REGISTRATION STATEMENT. The Registration Statement initially filed with the SEC (the "INITIAL REGISTRATION STATEMENT") shall conform in all material respects to the draft of such document attached hereto as EXHIBIT 6.8. The Initial Registration Statement shall comply with the form, disclosure and other requirements of the Securities Act. None of the information included by Buyer in the Initial Registration Statement will contain any statement which, at such time and in light of the circumstances under which it will be made, is false or misleading with respect to any material fact, or will omit to state any material fact necessary in order to make the statements therein not false or misleading; provided that Buyer assumes no responsibility for, and makes no representation or warranty with respect to, information in the Initial Registration Statement which is provided in writing by Seller for inclusion therein. There will be no material change in any of the information set forth in the form of the Registration Statement on the date declared effective by the SEC and on the Closing Date from that set forth in the Initial Registration Statement. None of the information included by Buyer in the Registration Statement at the time the Registration Statement becomes effective and on the Closing Date, will contain any statement which, at such time and in light of the circumstances under which it will be made, is false or misleading with respect to any material fact, or will omit to state any material fact necessary in order to make the statements therein not false or misleading; provided that Buyer assumes no responsibility for, and makes no representation or warranty with respect to, information included in the Registration Statement which is provided in writing by Seller specifically for inclusion therein. The Registration Statement shall comply when declared effective by the SEC and on the Closing Date with the form, disclosure and other requirements of the Securities Act. 6.9. CHARTER AND BYLAWS. Buyer has delivered to Seller accurate and complete copies of the Certificate of Incorporation and Bylaws of Buyer as currently in effect. 18 VII. COVENANTS AND AGREEMENTS OF THE PARTIES PRIOR TO, AT AND AFTER THE CLOSING 7.1. OPERATION OF PROPERTIES PRIOR TO CLOSING. From and after the date of execution of this Agreement and until the Closing, except as otherwise consented to by Buyer in writing, Seller shall: (a) continue to operate the Properties in the ordinary course of business (and where Seller is not the operator of a Property, will continue its actions as a non-operator in the ordinary course of business), consistent with its past operating practices; (b) maintain in full force and effect primary insurance covering the Properties having the coverages, deductibles, retentions and co-insurance provisions substantially as described in EXHIBIT 7.1(b); (c) use its reasonable best efforts to preserve in full force and effect all leases, operating agreements, easements, rights-of-way, permits, licenses, contracts and other agreements which relate to the Properties (except for those contracts or other agreements which expire on their own term without action by Seller) and perform all obligations of Seller in or under any such agreement relating to such Properties; (d) use its reasonable best efforts to maintain its relationships with suppliers, customers and others having business relations with Seller with respect to the Properties so that they will be preserved for Buyer on and after the Closing Date; (e) not enter into any agreement or arrangement granting any preferential right to purchase any of the Properties or requiring the consent of any person to the transfer and assignment of any of the Properties hereunder, except in connection with performance by Seller of any Applicable Contract; (f) not enter into any sales or supply contracts relating to the Properties that are not terminable on notice of sixty (60) days or less; (g) (i) not sell, farmout, transfer, release, abandon (in each case other than as required by any Applicable Contract or Applicable Law) or otherwise dispose of any of the Properties, other than the sale of Hydrocarbons in the ordinary course of business or as permitted in SECTIONS 7.12 and 15.3 or (ii) mortgage, pledge or otherwise encumber any of the Properties; 19 (h) maintain all equipment included in the Properties in accordance with customary industry operating practices and procedures (to the extent that Seller is the operator with respect to such Properties); (i) promptly notify Buyer of the receipt of any notice or claim of default, breach, termination or cancellation (whether by Seller or another party) of any Applicable Contract (provided, however, that with respect to the Non-Operated Properties, such notice shall be delivered to Buyer promptly after Seller has knowledge of such); (j) promptly notify Buyer of any destruction of or damage to any of the Oil and Gas Properties which Seller reasonably estimates to be in excess of $20,000 or of any event or condition that would in Seller's reasonable opinion result in any such destruction or damage (provided, however, that with respect to the Non-Operated Properties, such notice shall be delivered to Buyer promptly after Seller has knowledge of such); (k) maintain the books, accounts and records of Seller relating to the Oil and Gas Properties in the usual, regular and ordinary manner of Seller on a basis consistent with prior years; (l) safeguard, maintain and secure all files and records (including computer programs and data banks), engineering, geological, seismic and geophysical data, reports and maps and all other data of Seller relating to the Oil and Gas Properties; (m) not consent to any individual AFE exceeding $20,000 attributable to the Oil and Gas Properties; (n) not make any other decision, including, without limitation, casing point elections, which Seller expects to result in expenditures after the date of this Agreement related to any Oil and Gas Property in an amount greater than $20,000; (o) not modify, amend, cancel or terminate any Applicable Contract affecting any of the Oil and Gas Properties other than a termination arising pursuant to the terms thereof without action by Seller; (p) not enter into any joint venture, partnership, mining partnership or business association relating to any of the Oil and Gas Properties, or enter into any unitization, communitization, pooling or operating agreement relating to any of the Oil and Gas Properties other than as required by Applicable Law; 20 (q) not decline to participate in or not refuse to consent to an activity or project with respect to any of the Oil and Gas Properties, whether by action or inaction, such that the Seller's net revenue interest in such properties is diminished or reduced, except where such election or refusal is as a result of an election of Buyer not to approve an AFE which requires its consent pursuant to CLAUSE (m) above or not to grant its consent under PARAGRAPH (n) above (and the failure of Buyer to notify Seller of its consent within five days (or such shorter time as specified by Seller, if the applicable agreements or other exigent circumstances outside of Seller's control so require) following prompt written notice of such AFE from Seller (in the case of PARAGRAPH (m)) or following a prompt written request therefor from Seller (in the case of PARAGRAPH (n)) shall be deemed to constitute its disapproval); (r) except as permitted by SECTION 15.3 and as provided with respect to the "Master Gas Purchase Agreement" described below, not enter into any new transaction with any affiliate of Seller affecting the costs and revenues of the Properties after the Effective Date, including an amendment to any existing such agreement with any affiliate of Seller relating to the Properties; (s) comply with all Applicable Laws pertaining to the Properties; (t) cause all delay rentals, shut-in royalties, minimum royalties, and other royalties or payments that are necessary to maintain in force Seller's rights in and to the Oil and Gas Properties to be timely and properly paid (subject, however, to the limitations described below in this SECTION 7.1); and (u) not acquire any additional interests in the Oil and Gas Properties or lands adjoining the Oil and Gas Properties. Notwithstanding the other provisions of this SECTION 7.1: (i) Seller may take any actions it determines to be reasonably necessary under emergency circumstances and provided Buyer is notified as soon thereafter as possible; and (ii) Seller shall have no liability to Buyer for the incorrect payments under PARAGRAPH (t) above or for any failure to make any such payments, except in those instances in which Seller is contractually obligated to make such payments and such contractual obligations have not been assumed by another party. Any consent requested of Buyer with respect to the matters covered by this SECTION 7.1 shall not be unreasonably withheld or action with respect thereto unduly delayed. Buyer agrees that Seller is authorized to execute and deliver that certain Master Gas Purchase Agreement by and among SFER, SFEOP and Adobe Gas Pipeline Company, in the form of the agreement attached as an exhibit to that certain Agreement of Merger dated July 28, 1993, by and among SFER, Adobe Gas Pipeline 21 Company and Hadson Corporation, and (subject to the consummation of the transactions contemplated hereby) Buyer agrees to expressly assume SFER's obligations thereunder to the extent applicable to the Oil and Gas Properties conveyed hereunder. In connection with the provisions described in PARAGRAPHS (m), (n) and (a) above, Seller and Buyer further agree as follows. If an activity or other project is proposed with respect to an Oil and Gas Property for which Seller is required to obtain Buyer's consent pursuant to either PARAGRAPH (m) or PARAGRAPH (n) above, and (x) Buyer declines to give its consent and (y) Seller, at the time of requesting Buyer's consent, notifies Buyer that Seller desires to participate in the proposed activity or other project (and to pay the costs attributable to Seller's interest with respect thereto), then such Oil and Gas Property will be excluded from the transactions contemplated hereby (and will be deemed to be an Excluded Asset) and the Cash Portion of the Purchase Price will be reduced by the amount allocated to such Oil and Gas Property in SCHEDULE A or B. If an activity or other project is proposed with respect to an Oil and Gas Property for which Seller is required to obtain Buyer's prior consent pursuant to either PARAGRAPH (m) or PARAGRAPH (n) above, and (x) Seller, at the time of requesting Buyer's consent, informs Buyer in writing that Seller would not recommend participation in such operation or activity, (y) Seller is nonetheless required to participate in the proposed activity or project pursuant to the provisions of PARAGRAPH (q) above, and (z) the transactions contemplated by this Agreement are not consummated and this Agreement is terminated pursuant to ARTICLE XI, then, promptly after the point in time when this Agreement is so terminated, Buyer shall purchase from Seller, and Seller shall convey and assign to Buyer (without any warranties, of title or otherwise), such Oil and Gas Property for an amount equal to the amount allocated to such Oil and Gas Property in SCHEDULE A or B. In connection with PARAGRAPH (u) above, Seller and Buyer further agree as follows. If Seller is offered an additional interest in an Oil and Gas Property or lands adjoining any Oil and Gas Property, Seller shall give prompt notice to that effect to Buyer, which notice shall describe in reasonable detail the interest involved, shall set forth the amount of the proposed purchase price and any other obligations and commitments, shall set forth whether Seller desires to acquire such interest for its own account and shall set forth the time by which Buyer must notify Seller as to whether or not Buyer consents to such acquisition. If Buyer declines to grant its consent to the acquisition (or fails to give a timely response) and Seller had indicated that it desired to purchase the interest for its own account, then Seller may so purchase such interest for its own account free and clear of any obligations to Buyer hereunder. If Buyer grants its consent to the acquisition and the transactions contemplated hereby are consummated, then Seller shall convey such interest to Buyer at Closing and Buyer shall reimburse Seller at the Closing for the amount of the purchase price paid by Seller therefor and assume Seller's obligations and commitments therewith. If Buyer grants its consent to the acquisition, Seller had indicated it did not desire to purchase the interest for its own account and the transactions contemplated hereby are not consummated and this Agreement is terminated pursuant to ARTICLE XI, then promptly after the 22 point in time when this Agreement is so terminated, Seller shall convey such interest to Buyer (without any warranties of title or otherwise) and Buyer shall reimburse Seller for the amount of the purchase price therefor and assume Seller's obligations and commitments therewith. Notwithstanding the foregoing or anything else herein to the contrary (including specifically PARAGRAPH (u) above, Santa Fe shall be permitted to make an acquisition of additional interests in Oil and Gas Properties and/or the lands adjoining the Oil and Gas Properties and shall have no obligations or duties to Buyer hereunder with respect thereto, provided that such additional interests comprise 20% or less of the total value of the oil and gas properties and other interests to be acquired by Seller in connection with such acquisition. 7.2. CONDUCT OF BUYER'S BUSINESS PRIOR TO CLOSING. During the period from the date hereof to the Closing, Buyer (a) shall conduct its business and operations in accordance in all material respects with the conduct of its business and operations as described in the Initial Registration Statement and in compliance with all Applicable Laws; (b) shall use its reasonable best efforts to preserve, maintain, and protect its properties; and (c) shall use its reasonable best efforts to preserve intact its business organization, to keep available the services of its officers and employees, and to maintain existing relationships with licensors, licensees, suppliers, contractors, distributors, customers, and others having business relationships with it. Without limiting the generality of the foregoing, and except as otherwise expressly contemplated in this Agreement or as described in the Initial Registration Statement, prior to the Closing, Buyer shall not, without the prior written consent of Seller: (i) amend its charter or bylaws; (ii) (A) issue, sell, or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase, or otherwise) any shares of its capital stock of any class or any other securities or equity equivalents; or (B) amend in any respect any of the terms of any such securities outstanding as of the date hereof; or (iii) (A) split, combine, or reclassify any shares of its capital stock; (B) declare, set aside, or pay any dividend or other distribution (whether in cash, stock, or property or any combination thereof) in respect of its capital stock; (C) repurchase, redeem, or otherwise acquire any of its securities; or (D) adopt a plan of complete or partial liquidation or resolutions providing for or authorizing a liquidation, dissolution, merger, consolidation, restructuring, recapitalization, or other reorganization of Buyer. 7.3. ACCESS TO INFORMATION. Between the date hereof and the Closing, (a) Seller shall give Buyer and its authorized representatives reasonable access to the offices, properties, records, marketing agreements, files, seismic data, engineering reports and evaluations, books of account, computer records and all other information of Seller pertaining to the Properties, including all 23 land material, for the investigation of the Properties, the status thereof and the title thereto, through Buyer's employees, attorneys, independent public accountants or outside consultants and (b) Buyer shall give Seller and its authorized representatives reasonable access to the offices, properties, records, marketing arrangements, files, etc. of Buyer; provided, however, that such investigations shall be conducted during normal business hours and in a manner that does not unreasonably interfere with Seller's or Buyer's, as the case may be, normal operations and employee relationships. Each party shall cause its personnel to assist the other party in making such investigation and transferring the Properties, and the operations thereof, and shall cause its counsel, accountants, employees and other representatives to be reasonably available to the other party for such purposes. During such investigation, each party shall have the right to make copies of such records, files and other materials of the other party as such party may deem advisable. 7.4. CONFIDENTIALITY. The confidentiality agreements (a) dated October 8, 1993, between Seller and Buyer and (b) dated October 1, 1993, between Seller and Parent, as each are modified by that certain letter dated October 8, 1993, among Seller, Buyer and Parent, shall remain in full force and effect. 7.5. HSR ACT NOTIFICATION. To the extent required by the HSR Act, each of the parties hereto shall (a) file or cause to be filed, as promptly as practicable but in no event later than 15 days after the execution and delivery of this Agreement, with the Federal Trade Commission and the United States Department of Justice, all reports and other documents required to be filed by such party under the HSR Act concerning the transactions contemplated hereby and (b) use its reasonable best efforts to promptly comply with or cause to be complied with any requests by the Federal Trade Commission or the United States Department of Justice for additional information concerning such transactions, in each case so that the waiting period applicable to this Agreement and the transactions contemplated hereby under the HSR Act shall expire as soon as practicable after the execution and delivery of this Agreement. Each party hereto agrees to request, and to cooperate with the other party or parties in requesting, early termination of any applicable waiting period under the HSR Act. 7.6. PUBLIC OFFERING. Buyer agrees that within ten days after the execution and delivery of this Agreement, Buyer shall file a registration statement (such registration statement, plus all incorporated documents, exhibits and financial statements, and any amendments thereto, being called the "REGISTRATION STATEMENT") with the SEC in contemplation of a public offering of not less than $75,000,000 of Bridge Common Stock. Buyer will use its best efforts to cause the Registration Statement to become effective and to sell the registered shares in the above contemplated public offering not later than March 31, 1994, to realize aggregate proceeds therefrom in an amount not less than $75,000,000 (prior to underwriting discounts and payment of expenses attributable to the Offering) and to realize proceeds, after deducting therefrom all amounts paid or, at the Closing Date, anticipated to be paid to Parent out of such proceeds, in 24 an amount not less than $25,000,000 (prior to underwriting discounts and payment of expenses attributable to the Offering); provided, that Buyer shall not be required to consummate such offering if it determines in its sole and absolute discretion that the price per share of Bridge Common Stock which would otherwise be received in connection therewith is not an acceptable price per share of Bridge Common Stock or that such offering is otherwise not in the best interests of Buyer or Parent. If Buyer makes a determination not to consummate the above contemplated public offering, it shall as promptly as possible give written notice to that effect to Seller (such notice being called the "OFFERING TERMINATION NOTICE") which notice shall be given to Seller no later than March 31,1994; provided, that if such offering is not consummated on or before March 31, 1994, and if Seller has not otherwise received an Offering Termination Notice by March 31, 1994, then Buyer shall be deemed to have given Seller an Offering Termination Notice on March 31,1994. Seller will cooperate with Buyer in the preparation of the Registration Statement and will furnish or make available all information, including financial information, with respect to the Properties which Buyer reasonably requests for inclusion therein in order to comply with Applicable Laws. Buyer will furnish to Seller a copy of the Initial Registration Statement and each amendment or supplement thereto. Buyer shall keep Seller informed from time to time as to the status of the Registration Statement and in any event shall inform Seller (a) upon the effectiveness of the Registration Statement under the Securities Act, (b) upon pricing of the securities under the Registration Statement or (c) upon receipt by Buyer of notice from the SEC of notice of the issuance of a stop order with respect to the Registration Statement. Seller and Buyer agree that a preliminary closing of the transactions contemplated hereby shall be held on or about one business day prior to the date on which the public offering contemplated by the Registration Statement is consummated. At any such preliminary closing, the closing documents under this Agreement shall be presented and examined by Buyer and Seller and all documents deemed satisfactory shall be held in escrow until the Closing. 7.7. REGISTRATION RIGHTS AGREEMENT. Seller and Buyer shall enter into a "REGISTRATION RIGHTS AGREEMENT" (as herein called) at (and subject to the occurrence of) the Closing in substantially the form of such agreement as set forth as EXHIBIT 7.7 (provided, that at the Closing Seller acquires Bridge Common Stock as provided in ARTICLE III). 7.8. INVESTMENT AGREEMENT. Seller, Buyer and Parent shall enter into an "Investment Agreement" (as herein called) at (and subject to the occurrence of) the Closing in substantially the form of such agreement as set forth as EXHIBIT 7.8 (provided, that at the Closing Seller acquires Bridge Common Stock as provided in ARTICLE III). 7.9. EXPLORATION AGREEMENT. SFEOP and Buyer shall enter into an "Exploration Agreement" (as herein called) at (and subject to the occurrence of) the Closing in substantially the form of such agreement as set forth as EXHIBIT 7.9. 25 7.10. NOTICE OF LITIGATION. Until the Closing, (a) Buyer, upon learning of the same, shall promptly notify Seller of any Proceeding which is commenced or threatened against Buyer and which affects this Agreement or the transactions contemplated hereby and (b) Seller, upon learning of the same, shall promptly notify Buyer of any Proceeding which is commenced or threatened against Seller and which affects this Agreement or the transactions contemplated hereby. 7.11. NOTIFICATION OF CERTAIN MATTERS. Seller shall give prompt notice to Buyer of (a) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty contained in ARTICLE V to be untrue or inaccurate at or prior to the Closing and (b) any failure of Seller to comply with or satisfy any covenant, condition, or agreement to be complied with or satisfy any covenant, condition, or agreement to be complied with or satisfied by Seller hereunder. Buyer shall give prompt notice to Seller of (i) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty contained in ARTICLE VI to be untrue or inaccurate at or prior to the Closing and (ii) any failure of Buyer to comply with or satisfy any covenant, condition, or agreement to be complied with or satisfied by Buyer hereunder. The delivery of any notice pursuant to this Section shall not be deemed to (A) modify the representations or warranties hereunder of the party delivering such notice, (B) modify the conditions set forth in ARTICLES IX and X, or (C) limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.12. PREFERENTIAL RIGHT TO PURCHASE. Seller shall request, from the appropriate parties (and in accordance with the documents creating such rights or requirements), waivers of the preferential rights to purchase, or requirements that consent to assignments be obtained, which exist with respect to the transfer by Seller to Buyer of any of the Oil and Gas Properties. Seller shall have no obligation hereunder other than to so request such waivers (I.E., Seller shall have no obligation to assure that such waivers are obtained), and if any such waiver is not obtained, Buyer may treat such failure to obtain such waiver as a matter which constitutes a Title Defect; provided, however, that if the third party holding a preferential right to purchase exercises such right and completes the purchase of the subject Oil and Gas Property prior to the Closing, such Oil and Gas Property shall be excluded from the transactions contemplated hereby (and shall be deemed to be an Excluded Asset) and the Cash Portion of the Purchase Price shall be reduced by the amount allocated to such Oil and Gas Property on SCHEDULE A or B; provided, further, that if a third party holding a right to consent to an assignment of an Oil and Gas Property listed in SCHEDULE A or B, which consent was not obtained prior to Closing and was not treated as a Title Defect, notifies Buyer or Seller after the Closing but prior to the second anniversary date of the Closing Date that such third party objects to the transfer of such Oil and Gas Property to Buyer, Buyer and Seller shall take either of the following actions, as mutually determined: (a) title to such Oil and Gas Property shall be reassigned to Seller as of the Effective Date, Seller shall pay to Buyer an amount equal to the amount allocated to such Oil and Gas Property on 26 SCHEDULE A or B, and Buyer shall account to Seller for all revenues and costs attributable to such Oil and Gas Property from and after the Effective Date until the date of reassignment and tender to Seller the amount of net income attributable to such Oil and Gas Property from the Effective Date to the date of reassignment; or (b) title to such Oil and Gas Property shall be reassigned to Seller, and Buyer and Seller shall enter into a written arrangement on terms mutually acceptable to the both of them the purpose of which will be to provide Buyer the same economic benefits from such Oil and Gas Property as if title to such Oil and Gas Property were still held by it. 7.13. PUBLIC ANNOUNCEMENTS. The parties hereto agree that prior to making any public announcement or statement with respect to the transactions contemplated by this Agreement, the party desiring to make such public announcement or statement shall consult with the other party hereto and exercise its reasonable best efforts to (a) agree upon the text of a joint public announcement or statement to be made by both or such parties or (b) obtain approval of the other party hereto to the text of a public announcement or statement to be made solely by Seller or Buyer, as the case may be. Nothing contained in this Section shall be construed to require either party to obtain approval of the other party hereto to disclose information with respect to the transactions contemplated by this Agreement to any state or federal governmental authority or agency to the extent required by Applicable Laws or necessary to comply with the disclosure requirements of any stock exchange having jurisdiction over the disclosing party. 7.14. FILING AND RECORDING OF ASSIGNMENTS, ETC. Buyer shall be solely responsible for all filings and recording of assignments and other documents related to the Properties and for all fees connected therewith, and Buyer shall furnish Seller with pertinent recording data. Seller shall not be responsible for any loss to Buyer because of Buyer's failure to file or record documents correctly or promptly. Bearer shall promptly file all appropriate forms, declarations or bonds with federal and state agencies relative to its assumption of operations and Seller shall cooperate with Buyer in connection with such filings. 7.15. ACCESS TO RECORDS AFTER CLOSING. Buyer agrees to maintain the files and records of Seller that are acquired pursuant to this Agreement until the fourth anniversary of the Closing Date (or for such longer period of time as Seller shall advise Buyer is necessary in order to have records available with respect to open years for tax audit purposes), or, if any of such records pertain to any claim or dispute pending on the fourth anniversary of the Closing Date, Buyer shall maintain any of such records designated by Seller until such claim or dispute is finally resolved and the time for all appeals has been exhausted. Buyer shall provide Seller and its representatives reasonable access to and the right to copy such files and records for the purposes of (a) preparing and delivering any accounting provided for under this Agreement and adjusting, prorating and settling the charges and credits provided for in this Agreement, (b) complying with any law, rule or regulation affecting Seller's interest in the Properties prior to the Closing Date, (c) preparing any audit of the books and records of any third party relating to Seller's interest in the Properties 27 prior to the Closing Date or responding to any audit prepared by such third parties, (d) preparing tax returns, (e) responding to or disputing any tax audit or (f) asserting, defending or otherwise dealing with any claim or dispute under this Agreement. In no event shall Buyer destroy any such files and records without giving Seller sixty (60) days advance written notice thereof and the opportunity, at Seller's expense, to obtain such files and records prior to their destruction. 7.16. TRANSFER OF GEOSCIENCE DATA. The parties hereto acknowledge and agree that Seller shall be required to transfer the Geoscience Data to the extent that if, in Seller's reasonable opinion at the Closing, it can do so without incurring liability by violating the terms of a third-party agreement; provided, however, that in those instances in which Seller can avoid such liability by obtaining the consent of a third party, it will use its reasonable efforts (without any obligation to pay additional fees or incur any significant or undue cost or expense) to do so; provided, further, that to the extent that a transfer of such data is prohibited, but the review by Buyer of such data is not, then Seller shall (without obligation to pay additional fees or incur any substantial or undue cost or expense) maintain such data which shall be maintained in Houston, Texas, as long as Seller or any affiliate of Seller maintains an office in Houston, Texas, and thereafter at Seller's principal place of business for five years following the Closing and Buyer shall have the continuing right to review such data. 7.17. SANTA FE SEPARATE DISCLOSURE SCHEDULE. As promptly as reasonably practicable and in any event no later than December 20, 1993, Seller shall deliver to Buyer a schedule or schedules setting forth: (a) a list of all Applicable Contracts in effect on the Effective Date and all Applicable Contracts in effect on the date of this Agreement; (b) a list of all preferential rights of purchase that exist with respect to the transfer by Seller to Buyer of the Oil and Gas Properties; and (c) a list of all consents of third parties that exist with respect to the transfer by Seller to Buyer of the Oil and Gas Properties. Such schedule or schedules shall be herein called the "SANTA FE SEPARATE DISCLOSURE SCHEDULE." 7.18. SALES AND OTHER TAXES. Buyer shall bear and timely pay (a) upon receipt of the invoice of Seller thereof, all state or local government sales taxes incident to the transfer of the Properties to Buyer, (b) all documentary, transfer and other similar state and local government taxes incident to the transfer of the Properties to Buyer and (c) all costs or fees required to obtain consents to assign any Federal or state leases included in the Properties. 7.19. FEES AND EXPENSES. Except as otherwise expressly provided in this Agreement, all fees and expenses, including fees and expenses of counsel, financial advisors, and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such fee or expense, whether or not the Closing shall have occurred. 7.20. BROKERS. Seller agrees to indemnify and hold harmless Buyer (without regard to the limitations set forth in ARTICLE XII) from and against any and all losses, claims, damages, 28 costs and expenses, including, without limitation, reasonable attorneys' fees and expenses, Buyer may sustain or incur as a result of any claim for a commission or fee by a broker or finder acting on behalf of Seller. Buyer agrees to indemnify and hold harmless (without regard to the limitations set forth in ARTICLE XII) Seller from and against any and all losses, claims, damages, costs and expenses, including, without limitation, reasonable attorneys' fees and expenses, Seller may sustain or incur as a result of any claim for a commission or fee by a broker or finder acting on behalf of Buyer. 7.21. OVER-ALLOTMENT OPTION AFTER CLOSING. If the Underwriters exercise the over-allotment option granted to them by Buyer under the Underwriting Agreement and the number of shares of Bridge Common Stock has not been reduced to zero pursuant to ARTICLE III, Buyer shall, within 15 days after the exercise of such option, deliver to Seller a certificate or certificates representing shares (the "ADDITIONAL SHARES") of Bridge Common Stock in an amount such that the sum of (a) the shares of Bridge Common Stock tendered to Seller pursuant to ARTICLE III plus (b) the Additional Shares, shall equal 10% of all issued and outstanding shares of Bridge Common Stock excluding any shares of Bridge Common Stock issued under the Bridge Oil & Gas Inc. 1993 Stock Option Plan in the amount and as described in the Initial Registration Statement (but taking into account the exercise by the Underwriters of such over-allotment option). In consideration therefor and simultaneously therewith, Seller shall, in the event and to the extent that the Initial Stock Value is less than $36,000,000, deliver to Buyer cash in an amount equal to the number of Additional Shares multiplied by the Offering Price. 7.22. AGREEMENT TO CONVEY. Except for any interest in any well, which interest is burdened by the net profits interest conveyed to the Royalty Trust, or except for any well located in any of the counties listed in SCHEDULE 7.22, Seller agrees that to the extent not otherwise conveyed to Buyer at the Closing, Seller will convey and assign to Buyer any interest which Seller owns as of as of the date hereof (exclusive of any interest disposed of by Seller in accordance with SECTION 7.1) in any well that, under Applicable Law, is located within one legal location of, and in the same reservoir as, any well or unit listed on SCHEDULE A-1 or any proposed unit for an undrilled well listed on SCHEDULE A-1. 7.23. BRITT RANCH IMBALANCE. Upon the consummation of the transactions contemplated hereby, Buyer shall succeed to the position of Seller with respect to the Imbalances. As a result of such succession, Buyer shall (a) be entitled to receive any and all benefits, including payments of proceeds of production in excess of amounts which it would otherwise be entitled to produce and receive by virtue of ownership of the Oil and Gas Properties, which Seller would have been entitled to receive by virtue of such positions and (b) shall be obligated to suffer any detriments (whether the same be in the form of obligations to deliver production which would have otherwise been attributable to its ownership of the Oil and Gas Properties without receiving full payment therefor, or be in the form of the obligation to make payment in cash) which Seller would have been obligated to suffer by virtue of such positions. Notwithstanding the foregoing or anything 29 else herein to the contrary, Buyer and Seller agree that Buyer shall pay to Seller, and Seller shall be entitled to receive from Buyer, 75% of all amounts that Buyer or its assigns hereafter receives that is attributable to the "under-produced" position of Seller with respect to the Oil and Gas Property identified on SCHEDULE 5.21 as (and herein called) "Britt Ranch." Buyer agrees that from and after the Closing it will use and will cause its assigns to use its reasonable best efforts to collect all amounts due and owing it attributable to the above-described underproduction and to otherwise enforce all rights and privileges under the applicable gas balancing provisions governing Britt Ranch. Payment of amounts due and owing Seller under this SECTION 7.23 shall be made by Buyer promptly after receipt of the underlying funds in which Seller is accorded the above described rights. All payments to Seller under this Section shall be accompanied by a schedule prepared by Buyer that sets forth a reasonably detailed description of the facts and circumstances giving rise to such payment and the manner in which the amount paid to Seller was calculated. Buyer agrees to provide Seller and its representatives with reasonable access during Buyer's normal business hours to Buyer's books and records maintained in connection with the Imbalance on Britt Ranch and to such other information in Buyer's possession as Seller may reasonably request with respect thereto. 7.24. WYOMING AD VALOREM TAX. Seller and Buyer specifically agree that all ad valorem taxes in respect of the Properties imposed by the State of Wyoming that are due and payable in calendar year 1994 and thereafter, shall be the sole responsibility of Buyer (and Seller shall have no liability with respect thereto) and shall not be included in the adjustments to the Purchase Price under ARTICLE XIV. 7.25. PURCHASE OF TAYLORCO NPI. If, prior to the transfer hereunder by Seller to Buyer of an Oil and Gas Property that is burdened with a net profits interest in favor of Taylorco pursuant to the Taylorco Purchase Agreement, Taylorco elects to sell such net profits interest to Seller pursuant to Section 4.8(b) of the Taylorco Purchase Agreement at a price satisfactory to Buyer, Buyer shall reimburse Seller at Closing for the amount paid by Seller to Taylorco. 7.26. FURTHER ASSURANCES. After the Closing each of the parties will execute, acknowledge and deliver to the other such further instruments, and take such other action, as may be reasonably requested in order to more effectively assure to said party all of the respective properties, rights, titles, interests, estates, and privileges intended to be assigned, delivered or inuring to the benefit of such party in consummation of the transactions contemplated hereby. 30 VIII. TITLE DEFECTS AND RELATED PURCHASE PRICE ADJUSTMENTS 8.1. NOTICE OF TITLE DEFECTS. Buyer shall, by no later than December 27, 1993, give Seller written notice of any claimed Title Defect, which notice shall set forth (a) a brief description of the matter constituting the claimed Title Defect; (b) supporting documents reasonably necessary for Seller to verify the claimed Title Defect; (c) the identity of the Oil and Gas Property that is affected by the claimed Title Defect; and (d) any claimed Purchase Price reduction attributable to the claimed Title Defect. Buyer shall be deemed to have waived all Title Defects of which Seller has not been given such notice by such date. Seller shall have the right, but not the obligation, to attempt to cure any claimed Title Defect within 20 days after Seller receives Buyer's notice of Title Defect. Buyer shall be obligated to notify Seller in writing of Buyer's acceptance or rejection of the result obtained by Seller in its efforts to cure any claimed Title Defects not more than five days after Seller notifies Buyer in writing of such result. If Seller disagrees that a Title Defect exists or is uncured or disagrees with the amount of the related Purchase Price reduction claimed by Buyer in any notice given in accordance with this SUBSECTION (A), then Buyer and Seller shall promptly meet and negotiate in good faith in an attempt to resolve the disagreement. If Buyer and Seller are unable to resolve their disagreement and if the item is not waived by Buyer as a Title Defect prior to Closing, then, for purposes hereof, the item which is the subject of disagreement shall be deemed to be a Title Defect. 8.2. PURCHASE PRICE REDUCTIONS FOR TITLE DEFECTS. With respect to any uncured Title Defect determined to exist pursuant to SECTION 8.1 and not waived by Buyer prior to the Closing, the amount allocated to any Title Defect shall be determined as follows: (a) If the Title Defect results in a complete failure of Seller's title to any Oil and Gas Property listed on SCHEDULE A-1, the amount allocated to that Title Defect shall equal the dollar amount allocated to that Oil and Gas Property as set forth in SCHEDULE A-1 attached hereto. (b) If the Title Defect does not result in a complete failure of Seller's title to any Oil and Gas Property listed on SCHEDULE A-1 but results in a decrease in the net revenue interest for that Oil and Gas Property from that shown in SCHEDULE A-1, then the amount allocated to that Title Defect shall be equal to the product of the dollar amount allocated to that Oil and Gas Property as set forth in SCHEDULE A-1 multiplied by a fraction the numerator of which is the difference between (A) the net revenue interest for that Oil and Gas Property set forth in SCHEDULE A-1 and (B) the actual net revenue interest of Seller in that Oil and Gas Property, and the denominator of which is the net revenue interest for that Oil and Gas Property set forth in SCHEDULE A-1. (c) If the Title Defect does not result in a complete failure of Seller's title to any Oil and Gas Property listed on SCHEDULE A-1 that is not a "composite property" (as 31 reflected in such Schedule) but results in an increase in the working interest for that Oil and Gas Property from that shown in SCHEDULE A-1, then the amount allocated to such Title Defect shall be an amount equal to the present value as of the Effective Date (discounted at 10% compounded annually) of the future costs and expenses related to the maintenance, development and operation of such Oil and Gas Property which are forecasted in the Reserve Report, multiplied by the amount (expressed in terms of a percentage) that the increase in working interest in such Oil and Gas Property exceeds any corresponding increase in net revenue interest in such Oil and Gas Property from that shown in SCHEDULE A-1. (d) If the Title Defect results in a complete failure of Seller's title to any Oil and Gas Property listed on SCHEDULE B, then the amount allocated to such Title Defect shall be an amount equal to the product of the dollar amount per acre set forth in SCHEDULE B for that Oil and Gas Property multiplied by the number of net acres set forth in SCHEDULE B for that Oil and Gas Property. (e) If the Title Defect does not result in a complete failure of Seller's title to any Oil and Gas Property listed on SCHEDULE B but results in a reduction in the number of net acres for that Oil and Gas Property from that shown in SCHEDULE B, then the amount allocated to such Title Defect shall be an amount equal to the product of the dollar amount per acre set forth in SCHEDULE B for that Oil and Gas Property multiplied by the difference between (A) the number of net acres set forth in SCHEDULE B for that Oil and Gas Property and (B) the actual number of net acres of Seller in that Oil and Gas Property. The sum of the amounts allocated to the Title Defects described above shall be herein called the "PURCHASE PRICE REDUCTIONS." If a Title Defect that is not waived by Buyer prior to Closing results in a complete failure of Seller's title to an Oil and Gas Property, such Oil and Gas Property shall be excluded from the transactions contemplated hereby. If a Title Defect that is not waived by Buyer prior to Closing does not result in a complete failure of Seller's title to an Oil and Gas Property, that portion of such Oil and Gas Property that is affected by the Title Defect shall be excluded from the transactions contemplated hereby to the extent practicable. 8.3. PURCHASE PRICE INCREASES. Seller shall, by no later than December 27, 1993, give Buyer written notice of any matters of the type described in SUBSECTIONS (A) through (C) below, which Seller believes should result in an increase in the Purchase Price. Such notice shall set forth: (a) a brief description of the matter giving rise to the claimed increase in the Purchase Price; (b) supporting documents reasonably necessary for Buyer to verify the claimed increase in Purchase Price; (c) the identity of the Oil and Gas Property that is affected by the claimed increase in Purchase Price; and (d) the amount of the claimed increase in Purchase Price. If Buyer disagrees that a claimed increase in Purchase Price is warranted or disagrees with the 32 amount of the related increase in the Purchase Price claimed by Seller in any notice given in accordance with this SECTION 8.3, then Buyer and Seller shall promptly meet and negotiate in good faith in an attempt to resolve the disagreement. If Buyer and Seller are unable to resolve their disagreement and if Seller does not waive its claim for an increase in the Purchase Price prior to the Closing, then, for purposes hereof, the matter which is the subject of disagreement shall result in an increase in the Purchase Price. The Purchase Price shall, in any event, be increased in the event the circumstances described in SUBSECTION (D) below are operative. An increase in the Purchase Price, to the extent not waived by Seller prior to the Closing, shall be determined as follows: (a) If it is determined that the ownership by Seller of an Oil and Gas Property listed in SCHEDULE A-1 entitles Seller to a net revenue interest in that Oil and Gas Property in excess of that shown in SCHEDULE A-1, then the amount of the increase to the Purchase Price shall equal the product of the dollar amount allocated to that Oil and Gas Property as set forth on SCHEDULE A-1 multiplied by a fraction, the numerator of which is the difference between (a) the actual net revenue interest of Seller for that Oil and Gas Property and (B) the net revenue interest for that Oil and Gas Property set forth in SCHEDULE A-1 and the denominator of which is the net revenue interest for that Oil and Gas Property set forth in SCHEDULE A-1. (b) If it is determined that with respect to an Oil and Gas Property listed in SCHEDULE A-1 (other than a "composite property" as reflected thereon) that Seller's working interest for that Oil and Gas Property is less than that shown on SCHEDULE A-1, then the amount of the increase in the Purchase Price shall be an amount equal to the present value as of the Effective Date (discounted at 10% compounded annually) of the future costs and expenses related to the maintenance, development and operation of such Oil and Gas Property which are forecasted in the Reserve Report, multiplied by the amount (expressed in terms of a percentage) that the decrease in working interest in such Oil and Gas Property exceeds any corresponding decrease in net revenue interest in such Oil and Gas Property from that shown in SCHEDULE A-1. (c) If it is determined that the ownership by Seller of an Oil and Gas Property listed in SCHEDULE B entitles Seller to net acres in that Oil and Gas Property in excess of that shown in SCHEDULE B, then the amount of the increase in the Purchase Price shall equal the product of the dollar amount set forth in SCHEDULE B for that Oil and Gas Property multiplied by the difference between (A) the actual number of net acres of Seller in that Oil and Gas Property and (B) the number of net acres set forth in SCHEDULE B for that Oil and Gas Property. (d) If (i) Seller owns a well that is not an Oil and Gas Property and that, under Applicable Law, is more than one legal location removed from and in the same reservoir 33 as a well or unit that is listed on SCHEDULE A-1 or any proposed unit for an undrilled well listed on SCHEDULE A-1, and with respect to which Seller elects to offer to Buyer for inclusion with the Properties to be conveyed hereunder and (ii) Seller and Buyer mutually agree upon the purchase price for such well and to include it with the Properties to be conveyed, then the Purchase Price shall be increased by the amount of the mutually agreed upon purchase price. The sum of the increases in the Purchase Price described above shall be herein called the "PURCHASE PRICE INCREASES." 8.4. ADJUSTMENT TO PURCHASE PRICE. If the Purchase Price Reductions are greater than the Purchase Price Increases, then the Cash Portion of the Purchase Price payable by Buyer at Closing shall be reduced to the extent of the difference between such amounts. If the Purchase Price Increases are greater than the Purchase Price Reductions, then the Cash Portion of the Purchase Price shall be increased to the extent of the difference between A and B, where A is the difference between the Purchase Price Increases and the Purchase Price Reductions, and where B is $400,000. 8.5. RIGHT TO TERMINATE. If the amount of the reduction or increase to the Cash Portion of the Purchase Price determined pursuant to SECTION 8.4 equals or exceeds $1,000,000, then, subject to SUBSECTIONS (b) and (c) below of SECTION 8.6, either Seller or Buyer shall have the right to terminate this Agreement. 8.6. CERTAIN AGREEMENTS REGARDING DISPUTES. (a) If (i) neither party has the right to terminate this Agreement pursuant to SECTION 8.5, (ii) the parties hereto were unable to resolve their disagreement over any Claimed Defects or any Claimed Increases pursuant to the terms hereof and (iii) the Closing occurs, then, (A) at the Closing, the Cash Portion of the Purchase Price shall be reduced by the amount of Agreed Defects and increased by the amount of Agreed Increases and (B) within five days after the Closing, either party hereto may submit its disagreement over any Claimed Defects or any Claimed Increases for resolution pursuant to the provisions of SUBSECTION (d) below. (b) If (i) either party has the right to terminate this Agreement pursuant to SECTION 8.5, and (ii) the parties hereto were unable to resolve their disagreement over Claimed Defects or Claimed Increases pursuant to the terms hereof, then, upon the election of Buyer, Seller shall forfeit its right to terminate this Agreement pursuant to SECTION 8.5, provided, that (A) at the Closing, the Cash Portion of the Purchase Price shall be reduced by the amount of Agreed Defects and increased by the amount of Agreed Increases (provided, that in no event can the Cash Portion of the Purchase Price be 34 reduced by more than $1,000,000), (B) within five days after the Closing, either party hereto may submit its disagreement over such Claimed Defects or Claimed Increases for resolution pursuant to the provisions of SUBSECTION (D) below and (C) in no event can the amount of the reduction to the Purchase Price, giving effect to all Agreed Defects and Agreed Increases and after operation of SUBSECTION (d) below, exceed $1,000,000. (c) If (i) either party has the right to terminate this Agreement pursuant to SECTION 8.5 and (ii) the parties hereto were unable to resolve their disagreement over Claimed Defects or Claimed Increases pursuant to the terms hereof, then, upon the election of Seller, Buyer shall forfeit its right to terminate this Agreement pursuant to SECTION 8.5, provided that (A) at the Closing, the Cash Portion of the Purchase Price shall be reduced by the amount of Agreed Defects and increased by the amount of Agreed Increases (provided that in no event can the Cash Portion of the Purchase Price be increased by more than $1,000,000) and (B) within five days after the Closing, either party hereto shall submit its disagreement over such Claimed Defects or Claimed Increases for resolution pursuant to SUBSECTION (d) below and (C) in no event can the amount of the increase to the Purchase Price, giving effect to Agreed Defects and Agreed Increases and after operation of SUBSECTION (d) below, exceed $1,000,000. (d) Any disagreement between the parties hereto of the type referenced in SUBSECTION (A), SUBSECTION (B) or SUBSECTION (C) above, shall be finally settled by arbitration conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, except as such rules may conflict with the provisions of this SUBSECTION (D) (in which event the provisions of this SUBSECTION (D) shall control). Each party shall choose one arbitrator and a third arbitrator shall be selected by mutual agreement of the party-appointed arbitrators within 30 days after the date of the last party-appointed arbitrator. If for any reason a vacancy occurs in the panel of arbitrators, a replacement arbitrator shall be appointed by the party who selected the predecessor arbitrator (or, if the predecessor arbitrator was appointed by the party-appointed arbitrators, the party-appointed arbitrators shall appoint the replacement arbitrator). Any decision of the arbitrators shall be final and binding upon the parties hereto. If, as a result of the decision of the arbitrators, the Cash Portion of the Purchase Price should be reduced, Seller shall pay to Buyer in cash by wire transfer of immediately available funds, within two business days after the decision of the arbitrators, an amount equal to such reduction with interest thereon from the Closing Date until payment at the lower of the prime rate of interest charged by Bank of Montreal (as adjusted from time to time to reflect changes in such rate) or the highest lawful rate permitted by applicable law. If, as a result of the decision of the arbitrators, the Cash Portion of the Portion Price should be increased, Buyer shall pay to Seller in cash by wire transfer of immediately available funds, within two business days after the decision of the arbitrators, an amount equal to such increase with interest thereon from the Closing Date until payment at the 35 lower of the prime rate of interest charged by Bank of Montreal (as adjusted from time to time to reflect changes in such rate) or the highest lawful rate permitted by applicable law. The fees of the arbitrators and the costs of the arbitration shall be shared equally by the parties hereto. 8.7. ALLOCATIONS. It is hereby agreed that the dollar amount allocated to any Oil and Gas Property on either SCHEDULE A or SCHEDULE B shall be used only for the purposes set forth in SECTION 7.1, in this ARTICLE VIII and for purposes of determining value in the event of the exercise of any preferential right of purchase relating to any of the Oil and Gas Properties, and is not intended as a measure of value for any other or general purpose. IX. CONDITIONS TO OBLIGATIONS OF SELLER The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment on or prior to the Closing Date of each of the following conditions: 9.1. REPRESENTATIONS AND WARRANTIES TRUE. All the representations and warranties of Buyer contained in this Agreement, and in any agreement, instrument, or document delivered pursuant hereto or in connection herewith on or prior to the Closing Date, shall be true and correct in all material respects on and as of the Closing Date as if made on and as of such date. 9.2. COVENANTS AND AGREEMENTS PERFORMED. Buyer shall have performed and complied with in all material respects all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. 9.3. CERTIFICATE. Seller shall have received a certificate executed by a duly authorized officer of Buyer, dated the Closing Date, representing and certifying that the conditions set forth in SECTIONS 9.1 and 9.2 have been fulfilled. 9.4. OPINION OF COUNSEL. Seller shall have received an opinion of Fulbright & Jaworski L.L.P., dated the Closing Date, covering the matters described in EXHIBIT 9.4A and in a form reasonably acceptable to Seller. Seller shall have received an opinion of legal counsel to Parent (which counsel shall be reasonably acceptable to Seller) dated the Closing Date, covering the matters described in EXHIBIT 9.4B and in a form reasonably acceptable to Seller. 9.5. HSR ACT. All waiting periods (and any extensions thereof) applicable to this Agreement and the transactions contemplated hereby under the HSR Act shall have expired or been terminated. 36 9.6. LEGAL PROCEEDINGS. No Proceedings shall, on the Closing Date, be pending or threatened seeking to restrain, prohibit, or obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. X. CONDITIONS TO OBLIGATION OF BUYER The obligations of Buyer to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment on or prior to the Closing Date of each of the following conditions: 10.1. REPRESENTATIONS AND WARRANTIES TRUE. All the representations and warranties of Seller contained in this Agreement, and in any agreement, instrument, or document delivered pursuant hereto or in connection herewith on or prior to the Closing Date, shall be true and correct on and as of the Closing Date as if made on and as of such date, except for such breaches of or inaccuracies in such representations and warranties which individually or in the aggregate would not result in any material adverse change in or relating to the value to Buyer of the Properties taken as a whole immediately after the Closing. 10.2. COVENANTS AND AGREEMENTS PERFORMED. Seller shall have performed and complied with in all material respects all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. 10.3. CERTIFICATE. Buyer shall have received a certificate executed by a duly authorized officer of Seller, dated the Closing Date, representing and certifying that the conditions set forth in SECTIONS 10.1 and 10.2 have been fulfilled. 10.4. OPINION OF COUNSEL. Buyer shall have received an opinion of Thompson & Knight, P.C., dated the Closing Date, covering the matters described in EXHIBIT 10.4 and in a form reasonably acceptable to Buyer. 10.5. HSR ACT. All waiting periods (and any extensions thereof) applicable to this Agreement and the transactions contemplated hereby under the HSR Act shall have expired or been terminated. 10.6. LEGAL PROCEEDINGS. No Proceedings shall, on the Closing Date, be pending or threatened seeking to restrain, prohibit, or obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. 37 XI. TERMINATION, AMENDMENT AND WAIVER 11.1. TERMINATION. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing in the following manner: (a) by mutual written consent of Seller and Buyer; or (b) by either Seller or Buyer, if: (i) the Closing shall not have occurred on or before April 11, 1994, unless such failure to close shall be due to a breach of this Agreement by the party seeking to terminate this Agreement pursuant to this CLAUSE (i); or (ii) there shall be any statute, rule, or regulation that makes consummation of the transactions contemplated hereby illegal or otherwise prohibited or a Governmental Entity shall have issued an order, decree, or ruling or taken any other action permanently restraining, enjoining, or otherwise prohibiting the consummation of the transactions contemplated hereby, and such order, decree, ruling, or other action shall have become final and nonappealable; or (c) by either Seller or Buyer as the case may be, as provided in SECTION 8.5; or (d) by Buyer, as provided in ARTICLE XIII. In the event of the termination of this Agreement pursuant to this SECTION 11.1 by Seller or Buyer, written notice thereof shall forthwith be given to the other party specifying the provision hereof pursuant to which such termination is made, and this Agreement shall become void and have no effect, except that the agreements contained in this Section and in SECTIONS 7.4, 7.13 and 7.19 and 7.20 shall survive the termination hereof. Nothing contained in this Section shall relieve any party from liability for any breach of this Agreement. 11.2. AMENDMENT. This Agreement may not be amended except by an instrument in writing signed by or on behalf of all the partieshereto. 11.3. WAIVER. Each of Seller and Buyer may (a) waive any inaccuracies in the representations and warranties of the other contained herein or in any document, certificate, or writing delivered pursuant hereto or (b) waive compliance by the other with any of the other's agreements or fulfillment of any conditions to its own obligations contained herein. Any agreement on the part of a party hereto to any such waiver shall be valid only if set forth in an 38 instrument in writing signed by or on behalf of such party. No failure or delay by a party hereto in exercising any right, power, or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. XII. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 12.1. SURVIVAL. The representations, and warranties of the parties hereto contained in this Agreement or in any certificate, instrument, or document delivered pursuant hereto and the covenants of the parties shall not survive the Closing, regardless of any investigation made by or on behalf of any party, except as hereinafter provided: (a) the representations and warranties of Seller contained in SECTION 5.22 shall not survive the Closing, except as to any Environmental Claim (as defined below), in which case such representations and warranties shall survive until the fifth anniversary of the Closing Date, (b) the representations and warranties of Seller and Buyer contained in SECTIONS 5.23 and 6.8 shall survive until the expiration of the limitation period under the applicable statute of limitations, (c) the representations and warranties of Seller in SECTIONS 5.1, 5.2, 5.3, 5.4, 5.5, 5.8, 5.10, 5.11, 5.14, 5.15, 5.17, 5.18, 5.19, 5.20 and 5.24 shall survive until the second anniversary of the Closing Date, (d) all representations and warranties of Buyer, other than those contained in SECTION 6.8, shall survive until the second anniversary of the Closing Date, (e) the covenants of the parties in SECTIONS 7.1, 7.2, and 7.21 and in the second proviso of SECTION 7.12 shall survive until the second anniversary of the Closing Date, and (f) the covenants of the parties in SECTIONS 7.14, 7.15, 7.16, 7.18, 7.19, 7.20, 7.22, 7.23, 7.24 and 7.26 shall survive the Closing Date (each such anniversary and time of expiration, if any, a "SURVIVAL DATE"). From and after a Survival Date, no party hereto or any shareholder, director, officer, employee, or affiliate of such party shall be under any liability whatsoever (whether pursuant to this SECTION 12.1 or otherwise with respect to any representation, warranty or covenant to which such Survival Date relates unless before the Survival Date for such representation or warranty it shall have received from the party seeking indemnification written notice of the existence of the claim for or in respect of which indemnification is sought. Such notice shall set forth with reasonable specificity, to the extent then known (i) the basis under this Agreement, and the facts that otherwise form the basis, of such claim, (ii) an estimate of the amount of such claim (which estimate shall not be conclusive of the final amount of such claim) and an explanation of the calculation of such estimate, including a statement of any significant assumptions employed therein, and (iii) the date on and manner in which the party delivering such notice became aware of the existence of such claim. As used herein, "ENVIRONMENTAL CLAIM" shall mean any claim, action, suit or proceeding made, brought or filed, as the case may be, by a Governmental Entity or other third party against Buyer, arising out of or relating to a condition existing as of the Closing or an event occurring prior to the Closing that is in contravention of or in breach of any of the representations and warranties made by Seller in SECTION 5.22 as of the date hereof or as of the Closing. 39 12.2. INDEMNIFICATION BY SELLER. Subject to the terms and conditions of this ARTICLE XII, Seller shall indemnify, defend, and hold harmless Buyer, its affiliates, their respective directors, officers, employees, and agents, and each of the heirs, legal representatives, successors, and assigns of any of the foregoing (collectively, the "BUYER GROUP"), from and against any and all claims, actions, causes of action, demands, assessments, losses, damages, liabilities, judgments, settlements, penalties, costs, and expenses (including reasonable attorneys' fees and expenses), of any nature whatsoever (collectively, "DAMAGES"), asserted against, resulting to, imposed upon, or incurred by any member of the Buyer Group, directly or indirectly, by reason of or resulting from: (a) any inaccuracy in or breach of any representation or warranty of Seller contained in this Agreement which survives the Closing Date; (b) any breach by Seller of any of its covenants or agreements contained in this Agreement which survives the Closing Date; (c) any claim, action or proceeding made or brought by a third party arising out of or attributable to the ownership or operation of the Properties prior to the Closing Date (other than matters covered in the representations of Seller in SECTION 5.9 and described in CLAUSE (D) below) and then only if Buyer gives notice to Seller of the claim of Buyer for such indemnification prior to the second anniversary of the Closing Date; and (d) any Environmental Claim. 12.3. INDEMNIFICATION BY BUYER. Subject to the terms and conditions of this ARTICLE XII, Buyer shall indemnify, defend, and hold harmless Seller, its affiliates, their respective directors, officers, employees, and agents, and each of the heirs, legal representatives, successors, and assigns of any of the foregoing (collectively, the "SELLER GROUP"), from and against any and all Damages asserted against, resulting to, imposed upon, or incurred by any member of the Seller Group, directly or indirectly, by reason of or resulting from: (a) any inaccuracy in or breach of any representation or warranty of Buyer contained in this Agreement which survives the Closing Date; (b) any breach by Buyer of any of its covenants or agreements contained in this Agreement which survives the Closing Date; and (c) any claim, action or proceeding made or brought by a third party arising out of or attributable to the ownership or operation of the Properties after the Closing Date. 40 12.4. CERTAIN LIMITATIONS ON SELLER'S LIABILITY. Notwithstanding anything in this ARTICLE XII or elsewhere in this Agreement to the contrary: (a) No indemnification shall be required to be made by Seller pursuant to SECTIONS 12.2(A), (B) and (C), until and except to the extent that the aggregate amount of Damages thereunder exceeds $1,000,000. (b) The indemnification obligation of Seller under SECTION 12.2(d) shall be subject to the following. No indemnification shall be required to be made by Seller pursuant to SECTION 12.2(d), until and except to the extent that the aggregate amount of Damages thereunder exceeds $1,000,000 (the "THRESHOLD AMOUNT"). Thereafter, Seller shall be required to indemnify the Buyer Group for all Damages under SECTION 12.2(d) in excess of the Threshold Amount until that point in time when Seller has indemnified the Buyer Group for Damages in an aggregate amount equal to $2,000,000 (the "SPLIT POINT"). From and after the Split Point, Seller shall be required to indemnify the Buyer Group for (i) 75% of all Damages under SECTION 12.2(d), to the extent that Buyer gives notice to Seller of the claim of Buyer for such indemnification prior to the second anniversary of the Closing Date and (ii) 50% of all Damages under SECTION 12.2(d), to the extent that Buyer gives notice to Seller of the claim of Buyer for such indemnification on or after the second anniversary of the Closing Date but prior to the fifth anniversary of the Closing Date. Seller shall have no further liability under Environmental Laws with respect to the Oil and Gas Properties as to any claims in connection therewith arising after the fifth anniversary of the Closing Date. (c) The amount of Damages required to be paid by Seller to indemnify the Buyer Group pursuant to this ARTICLE XII shall be reduced to the extent of any amounts in excess of $1,000,000 actually received by any member of the Buyer Group after the Closing Date pursuant to the terms of the insurance policies (if any) covering the subject claim. 12.5. PROCEDURE FOR INDEMNIFICATION. Within ten days after receipt by an indemnified party under SECTION 12.2 or 12.3 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party under such Section, give written notice to the indemnifying party of the commencement thereof, but the failure so to notify the indemnifying party shall not relieve it of any liability that it may have to any indemnified party except to the extent the indemnifying party demonstrates that the defense of such action is materially prejudiced thereby. In case any such action shall be brought against an indemnified party and it shall give written notice to the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. If the indemnifying party elects to assume the defense of such action, 41 the indemnified party shall have the right to employ separate counsel at its own expense and to participate in the defense thereof. If the indemnifying party elects not to assume (or fails to assume) the defense of such action, the indemnified party shall be entitled to assume the defense of such action with counsel of its own choice, at the expense of the indemnifying party. If the action is asserted against both the indemnifying party and the indemnified party and there is a conflict of interests which renders it inappropriate for the same counsel to represent both the indemnifying party and the indemnified party, the indemnifying party shall be responsible for paying for separate counsel for the indemnified party; provided, however, that if there is more than one indemnified party, the indemnifying party shall not be responsible for paying for more than one separate firm of attorneys to represent the indemnified parties, regardless of the number of indemnified parties. If the indemnifying party elects to assume the defense of such action, (a) no compromise or settlement thereof may be effected by the indemnifying party without the indemnified party's written consent (which shall not be unreasonably withheld) unless the sole relief provided is monetary damages that are paid in full by the indemnifying party and (b) the indemnifying party shall have no liability with respect to any compromise or settlement thereof effected without its written consent (which shall not be unreasonably withheld). XIII. CASUALTY LOSS AND CONDEMNATION If after the Effective Date and prior to the Closing, any part of the Properties shall be destroyed by fire or any other cause (but not to a substantial extent) or shall be taken by condemnation or the exercise of eminent domain (but not to a substantial extent), then if Closing occurs, Seller shall pay at Closing to Buyer all proceeds of insurance or condemnation (to the extent then received and not subject to payment or reimbursement by Seller or its affiliates) which were paid in respect of such loss or taking; if any proceeds of insurance or condemnation, to the extent not subject to payment or reimbursement by Seller or its affiliates, are received by Seller after the Closing, Seller shall promptly tender such proceeds to Buyer. In the event that either so much of the Properties are damaged or destroyed by fire or other event or taken by condemnation or purchase in lieu thereof, after the Effective Date but before the Closing, to the extent that the value allocated to all those Properties so affected, as set forth on SCHEDULE A, exceeds $5,000,000, then the Properties shall be deemed to have been destroyed or harmed to a substantial extent for the purpose of this ARTICLE XIII. If the Properties are destroyed or harmed to a substantial extent as above described, then Buyer shall have the right to elect either (a) to close this transaction as if the Properties had not been destroyed or harmed to a substantial extent, whereupon Seller shall make the payments described in the first sentence of this ARTICLE XIII, or (b) to terminate this Agreement, whereupon Seller and Buyer shall be released and relieved of all further obligation hereunder, as provided in ARTICLE XI. 42 XIV. CERTAIN ACCOUNTING ADJUSTMENTS 14.1. ADJUSTMENTS. Except as otherwise provided herein, (x) all costs and revenues attributable to the Properties and the operations thereon prior to the Effective Date shall be the obligation of and for the benefit of Seller and (y) all costs and revenues attributable to the Properties and the operations thereon after the Effective Date shall be the obligation of and for the benefit of Buyer. The Purchase Price shall be adjusted upward by the following: (i) the value of all merchantable, allowable oil in storage on the Effective Date at the location of each Property that is credited to the Property, based upon the actual prices being paid less the cost of transportation, however paid, and less taxes and other expenses, if any, deducted by the purchaser of the oil; and (ii) the amount (less amounts which have been collected from others in reimbursement of the following direct expenditures) of all actual expenditures of Seller (including royalties, delay rentals and other charges, and ad valorem, property, production, excise, severance, windfall profit and other taxes (other than income taxes), based upon or measured by the ownership of property or the production of Hydrocarbons or the receipt of proceeds therefrom), expenses, including drilling and completion expenses, billed under applicable operating agreements and, in the absence of an operating agreement, expenses of the sort customarily billed under such agreements, but excluding any of Seller's or any of its affiliate's overhead and administrative expenses or office lease expenses, paid by or on behalf of Seller and to the extent, in accordance with generally accepted accounting principles, in connection with the Properties in the ordinary course of business after the Effective Date, plus an amount calculated at the rate of $40,000 per month to the Closing as the sole compensation to Seller for its overhead and administrative expenses and office lease expenses in connection with supervising the Properties, plus the amount of any expenditures attributable to the Oil and Gas Properties prior to the Effective Date with respect to the projects or other activities listed on SCHEDULE 14.1 or hereafter approved by Buyer. The Purchase Price shall be adjusted downward by the following: (A) the proceeds received by Seller in connection with the Properties to the extent, in accordance with generally accepted accounting principles, attributable to the period after the Effective Date, including income resulting from combined fixed rate overhead charges under applicable operating agreements and the proceeds received by Seller from the disposition after the Effective Date (with or without the prior consent from Buyer as provided in SECTION 7.1) of all or any portion of the Properties; (B) an amount equal to all ad valorem, property, production, excise, severance, windfall profit and similar taxes and assessments (but not including income taxes) based upon or measured by the ownership of property or the production of Hydrocarbons or the receipt of proceeds therefrom accruing or relating to the Properties prior to the Effective Date to the extent not paid by Seller before the Closing Date and thereafter assumed by Buyer; (C) the amount of all actual direct expenditures of Seller (including royalties, rentals and other charges, expenses, including drilling and completion expenses, billed under applicable operating agreements and, in the absence of an operating agreement, expenses of the sort customarily billed under such 43 agreements), that are, in accordance with generally accepted accounting principles, attributable to the ownership or the operation of the Properties before the Effective Date, to the extent not paid by the Seller before the Closing Date and thereafter assumed by Buyer; (D) all amounts collected by Seller as operator (or otherwise) from other working interest owners attributable to such parties' shares of the costs and expenses of an operation or operations after the Effective Date for which (and to the extent) Seller has not yet actually paid such costs and expenses; and (E) the proceeds received by Seller in connection with the Properties described in SCHEDULE 14.1 attributable to the period prior to the Effective Date. 14.2. ACCOUNTING. No later than 15 days prior to Closing, Seller shall furnish Buyer with an estimated accounting showing in reasonable detail the adjustments described in and subject to SECTION 14.1. If pursuant to such estimated accounting either Seller or Buyer shall owe any obligation to the other, then the Cash Portion of the Purchase Price paid at Closing shall be adjusted to reflect such charges and credits which are necessary to accomplish such adjustment. Promptly after the Closing Date (but not later than one hundred eighty (180) days thereafter), Seller shall furnish Buyer with a final accounting showing in reasonable detail the adjustments described in and subject to SECTION 14.1. For a period of 90 days following receipt by Buyer of such accounting, Seller shall provide Buyer and its representatives with access to all records reasonably required to compute all adjustments pursuant to this ARTICLE XIV. If within ninety (90) days after Seller furnishes such final accounting to Buyer, Buyer and Seller are unable to agree on such final accounting, then either Seller or Buyer may submit such dispute to the accounting firm of Arthur Andersen & Co. and the determination made as to such dispute by such accounting firm shall be final and binding upon Seller and Buyer. Final settlement shall be made within thirty (30) days following agreement by the Buyer and Seller or final determination by said accounting firm. The fees charged by said accounting firm for making determinations under this SECTION 14.2 shall be paid one-half (1/2) by Buyer and one-half (l/2) by Seller. The parties agree that if actual ad valorem taxes on the Oil and Gas Properties for a particular state for calendar year 1993 are still not known at the time of the final accounting, appropriate adjustments consistent with SECTION 14.1 will be made to reflect such actual ad valorem taxes after the final accounting, provided such adjustments are made within one year after the Closing. XV. MISCELLANEOUS 15.1. NOTICES. All notices or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be given either (a) in person, (b) by United States mail, certified or registered, return receipt requested, postage prepaid, (c) by prepaid telegram, telex, telecopy or similar means (with signed confirmed copy to follow by mail 44 in the same manner as provided in CLAUSE (B) above) or (d) by expedited delivery service with proof of delivery, to the parties at the following addresses (or at such other addresses as shall be specified by the parties by like notice): If to Seller: Santa Fe Energy Resources, Inc. Santa Fe Energy Operating Partners, L.P. 1616 South Voss Road, Suite 1000 Houston, Texas 77057 ATTN: John R. Womack Fax: 713/268-5341 If to Buyer: Bridge Oil (U.S.A.) Inc. 12404 Park Central Drive Suite 400 Dallas, Texas 75251 ATTN: Dr. George G. Fenton Fax: 214-788-0656 For purposes of the foregoing, any notice required or permitted to be given shall be deemed to be delivered and given on the date actually delivered to the address specified above. 15.2. ENTIRE AGREEMENT. This Agreement, together with the Schedules, Exhibits and the other writings referred to herein or delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. 15.3. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties; provided, that prior to the Closing, either SFER or SFEOP (or both) may assign all or a portion of its respective interest in the Properties to a wholly-owned subsidiary of SFER (the "SFER SUB"), subject to the following: (a) SFER or SFEOP (as appropriate) shall cause the SFER Sub to convey the Properties so assigned to it to Buyer at the Closing in accordance with the terms hereof; (b) SFER and SFEOP shall notify Buyer no later than two business days prior to the Closing as to which of the parties (SFER, SFEOP and SFER Sub) shall receive the Cash Portion of the Purchase Price 45 and the Bridge Common Stock to be delivered at the Closing; (c) SFER Sub shall agree (in a form reasonably acceptable to Buyer) that it will be jointly and severally liable with Seller for Seller's duties and obligations to Buyer hereunder; and (d) in no event shall the assignment of Properties by SFER or SFEOP to the SFER Sub in any way relieve SFER or SFEOP of its duties and obligations hereunder; provided, further, that Buyer shall have the right to designate Bridge Oil Company, L.P., a Delaware limited partnership ("BRIDGE LP"), as the party to whom Seller shall convey the Properties at the Closing and assign its rights hereunder with respect thereto, subject to the prior receipt by Seller of an agreement (in a form reasonably acceptable to Seller) of Bridge LP to become jointly and severally liable with Buyer for Buyer's duties and obligations to Seller hereunder. 15.4. SEVERABILITY. If any provision of this Agreement is held to be unenforceable, this Agreement shall be considered divisible and such provision shall be deemed inoperative to the extent it is deemed unenforceable, and in all other respects this Agreement shall remain in full force and effect; provided, however, that if any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be so limited and shall be enforceable to the maximum extent permitted by applicable law. 15.5. NO THIRD-PARTY BENEFICIARIES. It is the intent of the parties hereto that no third-party beneficiary rights be created or deemed to exist in favor of any person not a party to this Agreement, unless otherwise expressly agreed to in writing by the parties. 15.6. DTPA WAIVER. TO THE EXTENT APPLICABLE TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, BUYER WAIVES THE PROVISIONS OF THE TEXAS DECEPTIVE TRADE PRACTICES ACT, CHAPTER 17, SUBCHAPTER E, SECTION 17.41 THROUGH 17.63, INCLUSIVE (OTHER THAN SECTION 17.55A, WHICH IS NOT WAIVED), TEX. BUS. & COMM. CODE. IN ORDER TO EVIDENCE ITS ABILITY TO GRANT SUCH WAIVER, BUYER HEREBY REPRESENTS AND WARRANTS TO SELLER THAT BUYER (A) IS IN THE BUSINESS OF SEEKING OR ACQUIRING, BY PURCHASE OR LEASE, GOODS OR SERVICES FOR COMMERCIAL OR BUSINESS USE, (B) HAS ASSETS OF $5,000,000 OR MORE ACCORDING TO ITS MOST RECENT FINANCIAL STATEMENT PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, (C) HAS KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS THAT ENABLE IT TO EVALUATE THE MERITS AND RISKS OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, AND (D) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION. 15.7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. 46 15.8. COUNTERPARTS. This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute but one and the same agreement. IN WITNESS WHEREOF. THIS AGREEMENT HAS BEEN EXECUTED AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN. SELLER SANTA FE ENERGY RESOURCES, INC. By: J. R. WOMACK Name: J. R. Womack Title: Vice President SELLER: SANTA FE ENERGY OPERATING PARTNERS, L.P. By: SANTA FE PACIFIC EXPLORATION COMPANY, Managing Partner By: J. R. WOMACK Name: J. R. Womack Title: Vice President BUYER: BRIDGE OIL (U.S.A.) INC. By: GEORGE G. FENTON Name: George G. Fenton Title: President 47 EXHIBIT 9.4A BUYER 1. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. 2. The execution, delivery and performance by Buyer of the Agreement, the Registration Rights Agreement, the Investment Agreement and the Exploration Agreement (the "Buyer Documents") are within the corporate power and authority of Buyer and do not (i) contravene or violate any provisions of the Certificate of Incorporation or Bylaws of Buyer, as amended to the date hereof, or (ii) contravene or result in any breach of or constitute a default under any applicable law, rule or regulation or any material loan, note or other agreement or instrument known to us to which Buyer is a party or by which it or any of its properties are bound. 3. The execution, delivery and performance by Buyer of the Buyer Documents have each been duly authorized by the Board of Directors of Buyer, and no other corporate or shareholder action is required to be taken to authorize such execution, delivery andperformance. 4. The Buyer Documents have each been duly executed and delivered by Buyer and constitute legal, valid and binding obligations of Buyer enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or general principles of equity, whether applied by a court of law or equity. 5. No consent, approval, authorization or order of any court or governmental agency or authority which has not been obtained is required in connection with the execution, delivery and performance by Buyer of the Buyer Documents, except for filings with governmental entities to occur in the ordinary course following consummation of the transactions contemplated by the Agreement. 6. The Consideration Shares issued pursuant to the Agreement have been duly authorized and are validly issued, fully paid and nonassessable. 7. The Registration Statement has become effective and, to the best of our knowledge, no stop order suspending its effectiveness has been issued. 1 EXHIBIT 9.4B PARENT 1. Parent is a corporation duly organized, validly existing and in good standing under the laws of Australia. 2. The execution, delivery and performance by Parent of the Investment Agreement are within the corporate power and authority of the Parent and do not (i) contravene or violate any provisions of the charter provisions of Parent, as amended to the date hereof, or (ii) contravene or result in any breach of or constitute a default under any applicable law, rule or regulation or any material loan, note or other agreement or instrument known to us to which Parent is a party or by which it or any of its properties are bound. 3. The execution, delivery and performance by Parent of the Investment Agreement has been duly authorized by the Board of Directors of Parent, and no other corporate or shareholder action is required to be taken to authorize such execution, delivery and performance. 4. The Investment Agreement has been duly executed and delivered by Parent and constitutes a legal, valid and binding obligation of Parent enforceable in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or general principles of equity, whether applied by a court of law or equity. 5. No consent, approval, authorization or order of any court or governmental agency or authority which has not been obtained is required in connection with the execution, delivery and performance by Parent of the Investment Agreement. 1 EXHIBIT 10.4 SFER 1. SFER is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. 2. The execution, delivery and performance by SFER of the Agreement, the Registration Rights Agreement and the Investment Agreement (the "SFER Documents") are within the corporate power and authority of SFER and do not (i) contravene or violate any provisions of the Certificate of Incorporation or Bylaws of SFER, as amended to the date hereof, or (ii) contravene or result in any breach of or constitute a default under any applicable law, rule or regulation or any material loan, note or other agreement or instrument known to us to which SFER is a party or by which it or any of its properties are bound. 3. The execution, delivery and performance by SFER of the SFER Documents have each been duly authorized by the Board of Directors of SFER, and no other corporate or shareholder action is required to be taken to authorize such execution, delivery and performance. 4. The SFER Documents have each been duly executed and delivered by SFER and constitute legal, valid and binding obligations of SFER enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or general principles of equity, whether applied by a court of law or equity. 5. No consent, approval, authorization or order of any court or governmental agency or authority which has not been obtained is required in connection with the execution, delivery and performance by SFER of the SFER Documents, except for filings with governmental entities to occur in the ordinary course following consummation of the transactions contemplated by the Agreement and except no opinion is expressed with respect to any preferential rights or consents to assignment applicable to the Properties. 1 EXHIBIT 10.4 SFEOP 1. SFEOP is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware. 2. The execution, delivery and performance by SFEOP of the Agreement and the Exploration Agreement (the "SFEOP Documents") are within the partnership power and authority of the SFEOP and do not (i) contravene or violate any provisions of the Agreement of Limited Partnership of SFEOP, as amended to the date hereof, or (ii) contravene or result in any breach of or constitute a default under any applicable law, rule or regulation or any material loan, note or other agreement or instrument known to us to which SFEOP is a party or by which it or any of its properties are bound. 3. The execution, delivery and performance by SFEOP of the SFEOP Documents have each been duly authorized in accordance with the Agreement of Limited Partnership of SFEOP, as amended to the date hereof, and no other partnership or partner action is required to be taken to authorize such execution, delivery and performance. 4. The SFEOP Documents have each been duly executed and delivered by SFEOP and constitute legal, valid and binding obligations of SFEOP enforceable in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally or general principles of equity, whether applied by a court of law or equity. 5. No consent, approval, authorization or order of any court or governmental agency or authority which has not been obtained is required in connection with the execution, delivery and performance by SFEOP of the SFEOP Documents, except for filings with governmental entities to occur in the ordinary course following consummation of the transactions contemplated by the Agreement and except no opinion is expressed with respect to any preferential rights or consents to assignment applicable to the Properties. 1 EX-10.V 9 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT EXHIBIT 10(v) AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT dated as of March 16, 1994 among SANTA FE ENERGY RESOURCES, INC., the Banks signatory hereto, TEXAS COMMERCE BANK NATIONAL ASSOCIATION as Co-Agent and Administrative Agent and NATIONSBANK OF TEXAS, N.A. as Co-Agent TABLE OF CONTENTS Section 1. Definitions and Accounting Matters . . . . . . . . . 1 1.1. Certain Defined Terms . . . . . . . . . . . . . . . . . 1 1.2. Accounting Terms and Determinations . . . . . . . . . . 40 1.3. Classes and Types of Loans . . . . . . . . . . . . . . 41 Section 2. Commitments . . . . . . . . . . . . . . . . . . . . . 42 2.1. Loans . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.2. Terminations, Reductions and Changes of Commitments and Facility A Maximum Amounts . . . . . . . . . . . . . . 44 2.3. Fees . . . . . . . . . . . . . . . . . . . . . . . . . 46 2.4. Affiliates; Lending Offices . . . . . . . . . . . . . . 47 2.5. Several Obligations . . . . . . . . . . . . . . . . . . 47 2.6. Notes . . . . . . . . . . . . . . . . . . . . . . . . . 48 2.7. Optional Reserve Report . . . . . . . . . . . . . . . . 48 2.8. Release of Mortgages . . . . . . . . . . . . . . . . . 48 2.9. Use of Proceeds . . . . . . . . . . . . . . . . . . . . 49 2.10.Original Credit Documents Not Terminated . . . . . . . 49 2.11.Sale of Certain Properties . . . . . . . . . . . . . . 49 Section 3. Borrowings, Prepayments and Selection of Interest Rates . . . . . . . . . . . . . . . . . 50 3.1. Borrowings . . . . . . . . . . . . . . . . . . . . . . 50 3.2. Prepayments . . . . . . . . . . . . . . . . . . . . . . 50 3.3. Selection of Interest Rates . . . . . . . . . . . . . . 52 Section 4. Payments of Principal and Interest . . . . . . . . . 53 4.1. Repayment of Loans . . . . . . . . . . . . . . . . . . 53 4.2. Interest . . . . . . . . . . . . . . . . . . . . . . . 53 Section 5. Payments; Pro Rata Treatment; Computations, Etc. . . 54 5.1. Payments . . . . . . . . . . . . . . . . . . . . . . . 54 5.2. Pro Rata Treatment . . . . . . . . . . . . . . . . . . 55 5.3. Computations . . . . . . . . . . . . . . . . . . . . . 55 5.4. Minimum and Maximum Amounts . . . . . . . . . . . . . . 55 5.5. Certain Actions, Notices, Etc . . . . . . . . . . . . . 55 5.6. Non-Receipt of Funds by the Agent . . . . . . . . . . . 57 5.7. Sharing of Payments, Etc. . . . . . . . . . . . . . . . . 57 Section 6. Yield Protection and Illegality . . . . . . . . . . . 58 6.1. Additional Costs. . . . . . . . . . . . . . . . . . . . 58 6.2. Limitation on Types of Loans . . . . . . . . . . . . . 60 6.3. Illegality . . . . . . . . . . . . . . . . . . . . . . 61 6.4. Substitute Alternate Base Rate Loans . . . . . . . . . 62 6.5. Compensation . . . . . . . . . . . . . . . . . . . . . 62 6.6. Capital Adequacy . . . . . . . . . . . . . . . . . . . 63 -i- Section 7. Conditions Precedent . . . . . . . . . . . . . . . . 64 7.1. Closing Conditions . . . . . . . . . . . . . . . . . . 64 7.2. All Loans . . . . . . . . . . . . . . . . . . . . . . . 66 Section 8. Representations and Warranties . . . . . . . . . . . 67 8.1. Corporate Existence . . . . . . . . . . . . . . . . . . 67 8.2. Information . . . . . . . . . . . . . . . . . . . . . . 68 8.3. Litigation; Compliance . . . . . . . . . . . . . . . . 68 8.4. No Breach . . . . . . . . . . . . . . . . . . . . . . . 69 8.5. Corporate Action . . . . . . . . . . . . . . . . . . . 69 8.6. Approvals . . . . . . . . . . . . . . . . . . . . . . . 69 8.7. Regulations G, U and X . . . . . . . . . . . . . . . . 70 8.8. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 70 8.9. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 70 8.10.Subsidiaries . . . . . . . . . . . . . . . . . . . . . 70 8.11.Investment Company Act . . . . . . . . . . . . . . . . 70 8.12.Public Utility Holding Company Act . . . . . . . . . . 70 8.13.Environmental Matters . . . . . . . . . . . . . . . . . 71 8.14.Title . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 9. Covenants . . . . . . . . . . . . . . . . . . . . . . 72 9.1. Financial Statements and Certificates . . . . . . . . . 72 9.2. Inspection of Property . . . . . . . . . . . . . . . . 76 9.3. Compliance with Environmental Laws . . . . . . . . . . 77 9.4. Payment of Taxes . . . . . . . . . . . . . . . . . . . 77 9.5. Maintenance of Insurance . . . . . . . . . . . . . . . 77 9.6. Restricted Payments and Restricted Investments . . . . 78 9.7. Lien, Debt and Other Restrictions. . . . . . . . . . . 79 9.8. Issuance of Stock by Restricted Subsidiaries . . . . . 91 9.9. Coverage Ratios . . . . . . . . . . . . . . . . . . . . 91 9.10.Prepayment of Junior Securities . . . . . . . . . . . . 91 Section 10. Defaults. . . . . . . . . . . . . . . . . . . . . . . 91 10.1.Events of Default. . . . . . . . . . . . . . . . . . . 91 Section 11. The Agent . . . . . . . . . . . . . . . . . . . . . . 96 11.1.Appointment, Powers and Immunities . . . . . . . . . . 96 11.2.Reliance by Agent . . . . . . . . . . . . . . . . . . . 96 11.3.Defaults . . . . . . . . . . . . . . . . . . . . . . . 97 11.4.Rights as a Bank . . . . . . . . . . . . . . . . . . . 97 11.5.INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . 98 11.6.Non-Reliance on the Agent and Other Banks . . . . . . . 98 11.7.Failure to Act . . . . . . . . . . . . . . . . . . . . 98 11.8.Resignation or Removal of the Agent . . . . . . . . . . 99 Section 12. Miscellaneous . . . . . . . . . . . . . . . . . . . 99 12.1.Waiver . . . . . . . . . . . . . . . . . . . . . . . . 99 -ii- 12.2.Notices . . . . . . . . . . . . . . . . . . . . . . . . 99 12.3.Expenses, Etc. . . . . . . . . . . . . . . . . . . . . 100 12.4.INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . 100 12.5.Amendments, Etc. . . . . . . . . . . . . . . . . . . . 101 12.6.Successors and Assigns . . . . . . . . . . . . . . . . 102 12.7.Survival; Term; Reinstatement . . . . . . . . . . . . . 105 12.8.Limitation of Interest . . . . . . . . . . . . . . . . 106 12.9.Captions . . . . . . . . . . . . . . . . . . . . . . . 107 12.10.Counterparts . . . . . . . . . . . . . . . . . . . . . 107 12.11.GOVERNING LAW . . . . . . . . . . . . . . . . . . . . 107 12.12.Severability . . . . . . . . . . . . . . . . . . . . . 107 12.13.Chapter 15 Not Applicable . . . . . . . . . . . . . . 108 Exhibit A - Form of Facility A Note Exhibit B - Form of Facility B Note Exhibit C - Request for Extension of Credit Exhibit D - Assignment Agreement Exhibit E - Facility A Maximum Amount Exhibit F - Preliminary Available Amount Schedule I - Restricted and Unrestricted Subsidiaries Schedule II - Liens and Funded Debt Schedule III - Initial Approved Assumptions and Price Protection Agreements Schedule IV - Coverage Report Schedule V - Subordination Provisions Schedule VI - Opinion of Andrews & Kurth, L.L.P. Schedule VII - Opinion of David L. Hicks Schedule VIII- Mortgages Schedule IX - Jurisdictions for Which Certificates Are to Be Provided Schedule X - Designated Debt -iii- AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT This Amended and Restated Revolving Credit Agreement (as amended, modified, supplemented and restated from time to time, this "AGREEMENT") dated as of March 16, 1994, is by and among SANTA FE ENERGY RESOURCES, INC. (the "COMPANY"), a Delaware corporation; each of the lenders which is or which may from time to time become a signatory hereto (individually a "BANK" and collectively the "BANKS"); TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), a national banking association, as Administrative Agent for the Banks (in such capacity, together with its successors in such capacity, the "AGENT"); and TCB and NATIONSBANK OF TEXAS, N.A. ("NATIONSBANK"), a national banking association, as Co-Agents (in such capacity, the "CO-AGENTS"). INTRODUCTION. The Company, the Banks, the Agent and the Co-Agents entered into that certain Revolving and Term Credit Agreement dated as of May 20, 1992. They now wish to amend and restate that agreement as it has been amended prior to the date hereof. AGREEMENTS. The parties agree as follows: Section 1. DEFINITIONS AND ACCOUNTING MATTERS. 1.1. CERTAIN DEFINED TERMS. As used herein, the following terms shall have the following meanings: "ACHIEVEMENT DATE" shall mean the first date on which both (a) the aggregate minimum Qualifying Amount of Junior Securities to be used in determining the applicable table on EXHIBIT E for the Facility A Maximum Amount and the applicable table on EXHIBIT F for the Preliminary Available Amount has been issued and the gross proceeds thereof received by the Company and (b) all Designated Debt for the aggregate Qualifying Amount of Junior Securities actually issued, as shown on SCHEDULE X, shall have been repaid or Defeased. In determining any Achievement Date, the Qualifying Amounts of Junior Securities issued on such date, on the Qualifying Date and on each additional date, if any, on which Junior Securities have been issued shall be aggregated. For example, if there is only one issuance of Junior Securities and such issuance is in a Qualifying Amount of $75,000,000, the Facility A Maximum Amount will thereafter be determined according to Table Four of EXHIBIT E, the Preliminary Available Amount will thereafter be determined according to Table Four of EXHIBIT F, and the Qualifying Date and the Achievement Date will be the same. For example, if there are two issuances of Junior Securities, one in the amount of $75,000,000 and a later one in the amount of $50,000,000, the Qualifying Date will be the date of the first issuance, which will also be the Achievement Date for the $75,000,000 level in both EXHIBIT E and EXHIBIT F, and the Facility A Maximum Amount will be determined according to Table Four of EXHIBIT E and the Preliminary Available Amount will be determined according to Table Four of EXHIBIT F until the date of the second issuance; the date of the second issuance will be the Achievement Date for the $125,000,000 level in both EXHIBIT E and EXHIBIT F, and the Facility A Maximum Amount will thereafter be determined according to Table Two of EXHIBIT E and the Preliminary Available Amount will thereafter be determined according to Table Two of EXHIBIT F. An Achievement Date must occur, if at all, prior to July 1, 1994. "ADDITIONAL COSTS" shall have the meaning ascribed to such term in SECTION 6.1. "ADOBE" shall mean Adobe Resources Corporation, formerly a Delaware corporation. "ADOBE PROPERTIES" shall mean oil, gas and mineral properties and other assets owned by Adobe at the time of the Merger. "AFFILIATE" shall mean, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person; and with respect to an individual, "AFFILIATE" shall also mean any individual related to such individual by blood or marriage. As used in this definition, "CONTROLS", "CONTROLLED BY" and "UNDER COMMON CONTROL WITH" shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "AGGREGATE COMMITMENT" shall mean the total of all Commitments of all Banks. "ALTERNATE ANNUAL DEBT SERVICE COVERAGE RATIO" shall mean, as of any date of determination and for the Calculation Period in which such date occurs and for each Calculation Period thereafter to and including the Calculation Period including December 31, 1998, the lowest of the ratios obtained by dividing (a) Combined CFADS (calculated on the basis of the Most Recent Engineering Report) for such Calculation Period by (b) the sum of (1) the Alternate Debt Service of the Company and the Restricted Subsidiaries for such Calculation Period PLUS (2), at all times and -2- to the extent the Special Subsidiary Qualifying Conditions are met, the Special Subsidiary Percentage times the Alternate Debt Service of the Special Subsidiary for such Calculation Period (in each case calculated on the basis set forth in the most recent Coverage Report delivered pursuant to SECTION 9.1 and taking into account any incurrence or prepayment of Covered Debt by the Company or any of the Restricted Subsidiaries or the Special Subsidiary since the date of such Coverage Report). "ALTERNATE BASE RATE" shall mean, for any date, a rate per annum (rounded upwards, if necessary, to the next higher 1/100%) equal to the greater of (a) the Prime Rate in effect on such day or (b) the Fed Funds Rate in effect for such day plus 1/2%. Any change in the Alternate Base Rate due to a change in the Fed Funds Rate shall be effective on the effective date of such change in the Fed Funds Rate. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Fed Funds Rate for any reason, including the inability or failure of the Agent to obtain sufficient bids or publications in accordance with the terms hereof, the Alternate Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. "ALTERNATE BASE RATE LOANS" shall mean Loans which bear interest at a rate based upon the Alternate Base Rate. "ALTERNATE DEBT SERVICE" shall mean, for any Calculation Period and with respect to any Person, the total of principal payments in respect of Covered Debt of such Person and the total of interest payments (using, with respect to interest to accrue, the interest rates set forth in the most recent Approved Assumptions for such Covered Debt not bearing interest at a fixed rate; if some or all of such Covered Debt bears interest at one or more fixed rates as of the date of determination of Alternate Debt Service but such Covered Debt will not bear interest at such fixed rate or rates to the end of such Calculation Period, then interest payments in respect of Alternate Debt Service with respect to such Covered Debt shall be calculated on the basis of such fixed rate or rates for such time as the same shall be applicable to such Covered Debt, and then at the interest rates set forth in the most recent Approved Assumptions) in respect of Covered Debt of such Person, in each case paid and scheduled to be paid during such Calculation Period; PROVIDED that the principal amount of any Covered Debt of such Person which by its terms matures on a date within such Calculation Period but which may reasonably be expected to be reborrowed in a Rollover on such date shall not be deemed, for purposes of this definition, to be scheduled to be paid on such date; and PROVIDED FURTHER that for purposes of this definition it shall be assumed that (a) surety bonds for environmental purposes -3- and letters of credit issued for the account of a Person will be fully drawn upon their respective expiry dates, (b) the reimbursement obligations of a Person with respect to all surety bonds for environmental purposes and letters of credit issued for its account shall be satisfied immediately and considered as a "principal payment" for purposes of this definition. "AMENDMENT TO DEED OF TRUST" shall mean that certain First Amendment to Deed of Trust, Mortgage, Assignment of Production and Security Agreement of even date herewith, in Proper Form, amending the Deed of Trust to reflect the changes effected by this Agreement. "AMENDMENT TO LEASEHOLD DEED OF TRUST" shall mean that certain First Amendment to Leasehold Deed of Trust and Security Agreement of even date herewith, in Proper Form, amending certain of the Mortgages to reflect the changes effected by this Agreement. "AMENDMENT TO LOUISIANA SECURITY AGREEMENT" shall mean that certain First Amendment to Security Agreement, Assignment of Production and Financing Statement of even date herewith, in Proper Form, amending certain of the Mortgages to reflect the changes effected by this Agreement. "AMENDMENT TO SECURITY AGREEMENT -- CONTRACT RIGHTS" shall mean that certain First Amendment to Security Agreement -- Accounts, Inventory, Equipment and Contract Rights of even date herewith, in Proper Form, amending certain of the Mortgages to reflect the changes effected by this Agreement. "AMENDMENT TO SECURITY AGREEMENT -- STOCK" shall mean that certain First Amendment to Security Agreement -- Pledge of even date herewith, in Proper Form, amending the Stock Pledge Agreement to reflect the changes effected by this Agreement. "ANNUAL DEBT SERVICE COVERAGE RATIO" shall mean, as of any date of determination and for the Calculation Period in which such date occurs and for each Calculation Period thereafter to and including the Calculation Period including December 31, 1998, the lowest of the ratios obtained by dividing (a) Combined CFADS (calculated on the basis of the Most Recent Engineering Report) for such Calculation Period by (b) the sum of (1) the Debt Service of the Company and the Restricted Subsidiaries for such Calculation Period PLUS (2), at all times and to the extent the Special Subsidiary Qualifying Conditions are met, the Special Subsidiary Percentage times the Debt Service of the Special Subsidiary for such Calculation Period (in each case calculated on the basis set forth in the most recent Coverage Report delivered pursuant to SECTION 9.1 and taking into account any incurrence or prepayment of -4- Covered Debt by the Company or the Restricted Subsidiaries or the Special Subsidiary since the date of such Coverage Report). "APPLICABLE ENVIRONMENTAL LAWS" shall mean all applicable environmental or pollution-control Legal Requirements governing, without limitation, wastewater effluent, solid and hazardous waste or substances and air emissions, together with any other applicable requirements for conducting, on a timely basis, reporting, record-keeping, periodic tests and monitoring for contamination of ground water, surface water, air and land and for biological toxicity of the aforesaid, including, without limitation, the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended by the Superfund Amendments and Reauthorization Act), the Toxic Substances Control Act, the Safe Drinking Water Act, the Hazardous Materials Transportation Act, the Clean Air Act, the Clean Water Act, the Oil Pollution Act, the Texas Water Code, the Texas Health and Safety Code, the Texas Natural Resources Code, the Louisiana Environmental Quality Act, the Louisiana Air Control Law, the Louisiana Water Control Law, the Louisiana Solid Waste Management and Resource Recovery Law, the Louisiana Hazardous Waste Control Law, the Louisiana Oil Spill Prevention and Response Act, the Louisiana Resource Recovery and Development Act, the Louisiana Waste Reduction Law, the Louisiana Hazardous Material Information Development, Preparedness, and Response Act, the Louisiana State and Local Coastal Resources Management Act of 1978, the Louisiana Coastal Wetlands Conservation and Restoration Act, the Louisiana Abandoned Oilfield Waste Site Law, and the Louisiana Mineral Code, in each case as amended from time to time. "APPLICABLE LENDING OFFICE" shall mean, for each Bank and for each Type of Loan, the lending office of such Bank (or of an Affiliate of such Bank) designated for such Type of Loan below its name on the signature pages hereof or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from time to time specify to the Agent and the Company as the office by which its Loans of such Type are to be made and/or issued and maintained. "APPLICABLE MARGIN" shall mean, on any day: (a) With respect to any Alternate Base Rate Loan, the per annum percentage set forth at the appropriate intersection in the table shown below; where the vertical axis is the SLOR Coverage Ratio on such day (assuming the Available Amount is fully drawn and that the aggregate unpaid principal balance of the Facility A Notes is equal to the Facility A Maximum Amount FOR DETERMINATIONS RELATED TO THE INDEPENDENT ENGINEERING REPORT and on the basis of the actual aggregate amount of outstanding Facility A Loans, Facility B Loans and Letter of Credit Liabilities FOR ALL OTHER -5- DETERMINATIONS) and the horizontal axis is the Annual Debt Service Coverage Ratio on such day (assuming the Available Amount is fully drawn and that the aggregate unpaid principal balance of the Facility A Notes is equal to the Facility A Maximum Amount for determinations related to the Independent Engineering Report and on the basis of the actual aggregate amount of outstanding Facility A Loans, Facility B Loans and Letter of Credit Liabilities for all other determinations): ALTERNATE BASE RATE LOANS SLOR Annual Debt Service COVERAGE RATIO COVERAGE RATIO Equal to or greater than Equal to or Less than 1.20 but less greater than 1.20 than 1.25 1.25 Less than 1.85 1.00% 1.00% 1.00% Equal to or greater than 1.85 but less than 1.95 .75% .50% .50% Equal to or greater than 1.95 but less than 2.00 .75% .25% .25% Equal to or greater than 2.00 .75% .25% 0% The initial Applicable Margin for Alternate Base Rate Loans shall be .75% per annum. The Applicable Margin shall be determined upon the delivery of each Independent Engineering Report. Thereafter, the Applicable Margin shall be determined according to the preceding table at the time of each delivery of a Coverage Report and each Request for Extension of Credit, but, except as provided in SUBSECTIONS (c) and (d) below, shall never be less than the Applicable Margin determined upon the delivery of such Independent Engineering Report until the next determination of the SLOR Coverage Ratio and Annual Debt Service Coverage Ratio in accordance with this definition at the time of the delivery of the next Independent Engineering Report, whereupon the minimum Applicable Margin shall be reset. (b) The Applicable Margin for any Eurodollar Loan on any day shall be 1.00% more than the Applicable Margin for Alternate Base -6- Rate Loans in effect on such day. The initial Applicable Margin for Eurodollar Loans shall be 1.75% per annum. (c) On the Qualifying Date, the Applicable Margin for Alternate Base Rate Loans and for Eurodollar Loans shall be automatically reduced to .50% per annum and 1.50% per annum, respectively. (d) At any time on or after the Qualifying Date but prior to July 1, 1994 the Company may choose not more often than once to recalculate the SLOR Coverage Ratio and the Annual Debt Service Coverage Ratio by giving written notice to the Co-Agents. Such recalculation shall be made using new Approved Assumptions approved in connection with such recalculation by Banks with aggregate Commitment Percentages of 75% or more and using the Independent Engineering Report most recently furnished in accordance with this Agreement. Upon any such recalculation, the Company shall notify the Co-Agents of the recalculated ratios, whereupon the Agent shall redetermine the Applicable Margin for Alternate Base Rate Loans and for Eurodollar Loans according to the table set forth in SUBSECTION (a) above. The Applicable Margin as so redetermined shall become effective on the date of such redetermination and shall remain in effect until the next determination of Applicable Margin in accordance with this Agreement. "APPLICABLE PERIODS" shall mean the Applicable Periods identified on EXHIBIT E and EXHIBIT F. "APPROVED ASSUMPTIONS" shall mean: (a) until the first delivery of an Independent Engineering Report hereunder, those assumptions set forth on SCHEDULE III; (b) thereafter, for each Independent Engineering Report hereunder, assumptions as to product prices, interest rates, escalation rates, discount rates and future levels of production curtailment, which assumptions shall be determined by the Co-Agents after consultation with the Company and set forth (x) in the case of each Required Reserve Report, in a notice sent to the Banks on or before January 21 of each such year and in a notice from the Agent to the Company on or prior to the next succeeding February 1 or (y) in the case of each Optional Reserve Report, in a notice -7- sent to the Banks within 30 days of the delivery of the notice to the Co-Agents required by SECTIONS 2.7 and 2.8 and in a notice from the Agent to the Company on or prior to a date 10 days after the date of such notice to the Banks, and (c) for purposes of SUBSECTION (d) of the definition of "Applicable Margin" and the second sentence of SECTION 2.8, assumptions determined by the Co-Agents after consultation with the Company and set forth in a notice sent to the Banks within 30 days of the Company's notice to the Co-Agents and in a notice from the Agent to the Company on or prior to a date 10 days after the date of such notice to the Banks; PROVIDED that, in the case of CLAUSES (b) and (c) preceding such assumptions are, within ten days after any such notice is sent to the Banks, approved (as indicated in one or more notices received by the Agent within such ten-day period) by Banks with aggregate Commitment Percentages of 75% or more. If the assumptions proposed by the Co-Agents are not approved, the Banks will work to determine and approve alternative assumptions in good faith in accordance with their customary oil and gas lending practices. Approved Assumptions set forth in a notice to the Company shall govern until new Approved Assumptions are set forth in a notice to the Company as provided herein, and shall be used, without limitation, in preparation of the next Independent Engineering Report required to be delivered pursuant to SECTION 9.1 or permitted to be delivered pursuant to SECTIONS 2.7 or 2.8. "ASSIGNMENT AGREEMENT" shall mean an Assumption and Assignment Agreement substantially in the form of EXHIBIT D. "ATTRIBUTABLE DEBT" shall mean the lesser of (a) the fair market value of the assets sold pursuant to any Sale and Leaseback Transaction (which determination shall be based upon a written opinion (the cost of which shall be borne exclusively by the Company) as to valuation from an independent valuation expert selected by the Company) or (b) the present value (discounted according to GAAP at the interest rate implicit in the lease) of the obligations of the lessee for rental payments during the term of any lease constituting a part of such Sale and Leaseback Transaction. "AVAILABLE AMOUNT" shall mean, subject always to the limitation set forth in SECTION 2.8, the Preliminary Available Amount from time to time in effect, as the same may be adjusted upward and downward in accordance with SECTION 2.1(b)(2) or permanently decreased in accordance with SECTION 2.2. -8- "AVAILABLE COMMITMENT" shall mean the Aggregate Commitment minus the Unavailable Commitment. "BOARD" shall mean the Board of Governors of the Federal Reserve System of the United States. "BUSINESS DAY" shall mean any day other than a day on which commercial banks are authorized or required to close in Houston, Texas or New York, New York, and where such term is used in the definition of "QUARTERLY DATE" or, if such day relates to a borrowing of, a payment or prepayment of principal of or interest on, or an Interest Period for, a Eurodollar Loan or a notice by the Company with respect to any such borrowing, payment, prepayment or Interest Period, which is also a day on which dealings in dollar deposits are carried out in the relevant Eurodollar interbank market. "CALCULATION PERIOD" shall mean the year ending on the last day of a March; with respect to calculations for a Calculation Period determined with reference to amounts for two calendar years, it shall be assumed (unless such amounts are due on scheduled dates, in which case such calculations shall be made with reference to such dates) that each such calendar year amount is spread evenly over the appropriate calendar year, with the result that each such amount for a Calculation Period beginning on an April 1 shall be composed of (a) 9/12 of the calendar year amount for the calendar year containing such April 1 plus (b) 3/12 of the calendar year amount for the next calendar year. "CAPITAL GAINS" shall mean gains (net of expenses and income taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (I.E., assets other than current assets). "CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which, under GAAP, is or will be required to be capitalized on the books of the Company or any Restricted Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with such principles. "CFADS" shall mean, for any Calculation Period and with respect to any Person, (a) Net Oil and Gas Income (PROVIDED that in calculating Combined CFADS, no more than 25% of Net Oil and Gas Income may be attributable to proved nonproducing and proved undeveloped Recognized Proved Reserves) LESS (b) Projected G & A Expense LESS (c) Projected Income Tax Expense PLUS (d) anticipated net income (or minus anticipated net losses) from the Price Protection Agreements (determined on the basis of the Approved Assumptions), (e) PLUS any anticipated gain, and MINUS any -9- anticipated loss, on Interest Rate Protection Agreements (determined on the basis of the Approved Assumptions), PLUS (f) other income from operations as reasonably projected under the Approved Assumptions, not to exceed 5% of Combined CFADS, and PLUS (g) proceeds of sales of assets permitted by the Credit Documents, to the extent (but only to the extent) such proceeds are applied as prepayments pursuant to SECTION 3.2(b), in each case for such Calculation Period and such Person. "CHANGE OF CONTROL" shall mean any change so that any Person (or any Persons acting together which would constitute a Group), together with any Affiliates or Related Persons thereof, shall at any time either (a) Beneficially Own more than 50% of the aggregate voting power of all classes of Voting Stock of the Company or (b) succeed in having sufficient of its or their nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the Board of Directors of the Company after such election who is an Affiliate or Related Person of such Person or Group, shall constitute a majority of the Board of Directors of the Company. As used herein (a) "BENEFICIALLY OWN" shall mean beneficially own as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or any successor provision thereto; (b) "GROUP" shall mean a "group" for purposes of Section 13(d) of the Exchange Act; (c) "RELATED PERSON" of any Person shall mean any other Person owning (1) 5% or more of the outstanding common stock of such Person or (2) 5% or more of the Voting Stock of such Person, 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. "CHAPTER ONE" shall mean Chapter One of the Texas Credit Code, as in effect on the date the document using such term was executed. "CLASS" shall have the meaning ascribed to such term in SECTION 1.3. "CODE" shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, together with all publicly available written regulations, rulings and interpretations thereof or thereunder by the Internal Revenue Service. "COLLATERAL" shall mean all property at any time subject to the Security Documents. "COMBINED CFADS" shall mean, for any Calculation Period, the sum of (a) CFADS of the Company and the Restricted Subsidiaries -10- PLUS, at all times and to the extent all Special Subsidiary Qualifying Conditions are met, (b) the product of (1) the Special Subsidiary Percentage times (2) the CFADS of the Special Subsidiary, in each case for such Calculation Period. "COMBINED COVERED DEBT" shall mean, as of any date, the sum of (a) the Covered Debt of the Company and the Restricted Subsidiaries PLUS, at all times and to the extent all Special Subsidiary Qualifying Conditions are met as of such date, (b) the product of (1) the Special Subsidiary Percentage times (2) the Covered Debt of the Special Subsidiary, all as of such date. "COMBINED GROUP" shall mean the Company, the Restricted Subsidiaries and the Special Subsidiary. "COMBINED RESERVE VALUE" shall mean, as of any date, the sum of (a) the Reserve Value of the Company and the Restricted Subsidiaries PLUS, at all times and to the extent all Special Subsidiary Qualifying Conditions are met as of such date, (b) the product of (1) the Special Subsidiary Percentage times (2) the Reserve Value of the Special Subsidiary, all as of such date. In calculating the Combined Reserve Value, no more than 25% of such Combined Reserve Value may be attributable to the combination of proved nonproducing and proved undeveloped Recognized Proved Reserves. "COMMITMENT FEE" shall mean the commitment fees payable by the Company to the Agent for the account of the Banks in their Commitment Percentages as provided in SECTION 2.3. "COMMITMENT PERCENTAGE" shall mean, as to any Bank, the per- centage equivalent of a fraction, the numerator of which is the aggregate of such Bank's Commitments, subject to reduction and the identification of new Banks pursuant to SECTION 12.6, and the denominator of which is the Aggregate Commitment. "COMMITMENTS" shall mean, as to any Bank, the aggregate of such Bank's Facility A Commitment, if any, and Facility B Commitment, if any. "CONSOLIDATED NET EARNINGS" shall mean consolidated gross revenues (including Capital Gains) of the Company and the Restricted Subsidiaries less all operating and non-operating expenses of the Company and the Restricted Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues any dividends, distributions or other payments received by the Company or any of its Restricted -11- Subsidiaries in connection with the Hadson Stock, unless received in the form of cash, or any dividends, distributions or other payments received by the Company or any of its Restricted Subsidiaries from the Special Subsidiary or gains resulting from write-up of assets, any equity of the Company or any Restricted Subsidiary in the unremitted earnings of any Person which is not a Restricted Subsidiary, any earnings of any Person acquired by the Company or any Restricted Subsidiary through purchase, merger or consolidation or otherwise for any year prior to the year of acquisition, or any deferred credit representing the excess of equity in any Restricted Subsidiary at the date of acquisition over the cost of the investment in such Restricted Subsidiary; all determined in accordance with GAAP. "CONSOLIDATED NET EARNINGS AVAILABLE FOR FIXED CHARGES" shall mean for any period the sum of (a) Consolidated Net Earnings for such period (PROVIDED that the maximum amount of Capital Gains included therein shall be $3,000,000 through December 31, 1990 and such maximum amount shall increase by $150,000 on the first day of each year thereafter); without duplication, (b) cash distributions received during such period by the Company and the Restricted Subsidiaries on their Investment in the Special Subsidiary to the extent not reinvested in the Special Subsidiary; to the extent deducted from gross revenues in determining Consolidated Net Earnings, (c) all provisions for any federal, state or other income taxes made by the Company and the Restricted Subsidiaries during such period; (d) Fixed Charges of the Company and the Restricted Subsidiaries during such period; (e) depreciation, depletion and amortization charges of the Company and the Restricted Subsidiaries for such period, and (f) all other non-cash charges of the Company and the Restricted Subsidiaries for such period, all determined in accordance with GAAP. "CONSOLIDATED NET TANGIBLE ASSETS" shall mean the aggregate net tangible assets of the Company and the Restricted Subsidiaries, determined as follows: (a) The MLP Investment (at such times as SFEP is treated as the Special Subsidiary) plus the aggregate gross book value of all the assets of the Company and the Restricted Subsidiaries, both real and personal, shall be computed, EXCLUDING, however, the following items: (1) all franchises, licenses, permits, patents, patent applications, copyrights, trademarks, trade names, goodwill, experimental or organizational expense, unamortized debt discount and expense, and all other assets which under GAAP are deemed intangible; -12- (2) any reacquired shares or reacquired Debt of the Company or the Restricted Subsidiaries; (3) any write-up of assets made after December 31, 1989; (4) 50% of the value of all assets of the Company and the Restricted Subsidiaries acquired after April 1, 1990 which are located outside the United States of America and Canada and not freely returnable to the United States of America or Canada, including any notes or accounts receivable from any debtor having any substantial part of its business, operations or properties located outside the United States of America and Canada, except notes or accounts receivable from such a debtor which arose in the ordinary course of business of the Company or any Restricted Subsidiary, as the case may be, to which such notes or accounts receivable are payable and which otherwise constitute current assets, but only to the extent of an amount of dollars readily realizable from such notes or accounts receivable by liquidation either directly or through a currency freely convertible into dollars; and (5) all Restricted Investments of the Company and the Restricted Subsidiaries (other than Restricted Investments in the capital stock of Hadson). (b) From the gross book value of the tangible assets of the Company and the Restricted Subsidiaries, determined as provided in the preceding CLAUSE (a), there shall be deducted the following items: (1) all reserves for depreciation, depletion, obsolescence and amortization of the assets of the Company and the Restricted Subsidiaries (other than assets excluded as provided in the preceding CLAUSE (a)), all proper reserves (other than reserves for deferred taxes and general contingency reserves and other reserves representing mere appropriations of surplus) which in accordance with GAAP should be set aside in connection with the business conducted by them; (2) all Current Debt of the Company and the Restricted Subsidiaries; and (3) all other liabilities of the Company and the Restricted Subsidiaries, including the reduction in equity attributable to minority interests but excluding deferred taxes, Funded Debt of the Company and the Restricted Subsidiaries, capital shares, surplus and general contingency reserves and other reserves representing mere appropriations of surplus. -13- (c) In the determination of Consolidated Net Tangible Assets, no amount shall be included therein on account of any excess cost of acquisition of shares of any Restricted Subsidiary over the net book value of the assets of such Restricted Subsidiary attributable to such shares at the date of such acquisition or on account of any excess of the net book value of the assets of any Restricted Subsidiary attributable to any shares of such Restricted Subsidiary at the date of acquisition of such shares over the cost of acquisition of such shares. "COVERAGE REPORT" shall mean a report substantially in the form of SCHEDULE IV setting forth the calculation of the TLOR Coverage Ratio, the SLOR Coverage Ratio, the Annual Debt Service Coverage Ratio and the Alternate Annual Debt Service Coverage Ratio. "COVERED DEBT" shall mean, for any Person, without duplication, (a) all obligations for borrowed money (including obligations for borrowed money consisting of or arising in connection with Junior Securities); (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business; (d) all Capitalized Lease Obligations; (e) all obligations in respect of production payments, proceeds production payments and similar financing arrangements; (f) all reimbursement obligations and all letter of credit advances with respect to letters of credit issued for the account of such Person, including the Letter of Credit Liabilities; (g) surety bonds for environmental purposes; (h) all obligations of the types described in CLAUSES (a) through (g) of this definition (collectively, "ORDINARY DEBT") of another Person secured by a Lien on any property of the Person as to which Covered Debt is being determined, regardless of whether such Ordinary Debt is assumed by such Person, and (i) all Ordinary Debt of another Person guaranteed (but excluding the obligations of the Company and the Restricted Subsidiaries arising solely by virtue of their serving as general partner of SFEP) by such Person; PROVIDED that Covered Debt shall not include Ordinary Debt or any obligation of the types described in CLAUSES (h) or (i) of this definition which is (1) non-recourse (either directly or contingently) as to all members of the Combined Group and (2) secured only by assets which are not Recognized Proved Reserves. "CREDIT DOCUMENTS" shall mean this Agreement, the Notes, the Letter of Credit Agreement, all Security Documents, the Notice of Entire Agreement, and all instruments, certificates and agreements now or hereafter executed or delivered to the Agent or any Bank pursuant to any of the foregoing. -14- "CURRENT DEBT" shall mean any obligation for borrowed money (and any notes payable and drafts accepted representing obligations for borrowed money) payable on demand or within a period of one year from the date of the creation thereof and any Guaranty with respect to Current Debt (of the kind otherwise described in this definition) of another Person; PROVIDED that any obligation shall be treated as Funded Debt, regardless of this term, if such obligation is renewable pursuant to the terms thereof or of a revolving credit or similar agreement effective for more than one year after the date of the creation of such obligation, or may be payable out of the proceeds of a similar obligation pursuant to the terms of such obligation or of any such agreement. "DEBT" shall mean Funded Debt and/or Current Debt, as the case may be. "DEBT SERVICE" shall mean, for any Calculation Period, the total of principal payments in respect of Covered Debt of the Person as to which Debt Service is to be determined and the total of interest payments (using, with respect to interest to accrue, the interest rates set forth in the most recent Approved Assumptions for such Covered Debt not bearing interest at a fixed rate; if some or all of such Covered Debt bears interest at one or more fixed rates as of the date of determination of Debt Service but such Covered Debt will not bear interest at such fixed rate or rates to the end of such Calculation Period, then interest payments in respect of Debt Service with respect to such Covered Debt shall be calculated on the basis of such fixed rate or rates for such time as the same shall be applicable to such Covered Debt, and then at the interest rates set forth in the most recent Approved Assumptions) in respect of Covered Debt of such Person, in each case paid and scheduled to be paid during such Calculation Period; PROVIDED that the principal amount of any Covered Debt of such Person which by its terms matures on a date within such Calculation Period but which may reasonably be expected to be reborrowed in a Rollover on such date shall not be deemed, for purposes of this definition, to be scheduled to be paid on such date; and PROVIDED FURTHER that for purposes of this definition it shall be assumed (to the extent relevant with respect to such Person) that (a) Letters of Credit will be fully drawn upon their respective expiry dates; (b) other letters of credit issued for the account of such Person will not be drawn; (c) surety bonds for environmental purposes issued on behalf of such Person will not be drawn, and (d) the reimbursement obligations of the Company under the Letter of Credit Agreement shall be satisfied immediately and considered as a "principal payment" for purposes of this definition. "DEED OF TRUST" shall mean the Deed of Trust, Mortgage, Assignment of Production and Security Agreement dated as of May 20, -15- 1992 from the Company to Gary K. Wright, Trustee for the benefit of the Agent, and the Agent on behalf of the Banks, as amended and modified from time to time, including pursuant to the Amendment to Deed of Trust. "DEFAULT" shall mean an Event of Default or an event which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DEFEASED" shall mean, with respect to any amount of Designated Debt, that the Company (a) shall have given to the holders of such Designated Debt irrevocable notice of the repayment of such Designated Debt, (b) shall have deposited with the trustee or an independent escrow or paying agent as trust funds the entire amount sufficient to pay at the date fixed for such repayment all of such Designated Debt, including principal, premium if any, and interest due or to become due to such date of repayment, such amount to be invested only in readily marketable direct full faith and credit obligations of the United States of America having maturities of not more than one year from date of issue, and (c) shall have paid or caused to be paid all other sums payable by the Company in connection with such Designated Debt. "DESIGNATED DEBT" shall mean the indebtedness of the Company described on SCHEDULE X. SCHEDULE X sets forth, for each range of Qualifying Amounts of Junior Securities, the maturities of Covered Debt which must be repaid in order for the Facility A Maximum Amount and the Preliminary Available Amount to reach the levels set forth in EXHIBITS E and F. "EBITD" shall mean for any period Consolidated Net Earnings for such period, plus the aggregate amounts deducted in determining Consolidated Net Earnings in respect of (a) all provisions for any federal, state or other income taxes made by the Company and the Restricted Subsidiaries during such period; (b) Fixed Charges of the Company and the Restricted Subsidiaries during such period; (c) depreciation, depletion and amortization charges of the Company and the Restricted Subsidiaries for such period, and (d) all other non-cash charges of the Company and the Restricted Subsidiaries for such period, all determined in accordance with GAAP. "ELIGIBLE ASSIGNEE" shall mean (a) a commercial bank having total assets in excess of $1,000,000,000 or (b) a finance company, insurance company, other financial institution or fund, acceptable to the Agent and the Company, which is regularly engaged in making, purchasing or investing in loans and having total assets in excess of $1,000,000,000. -16- "ENGINEERING SHORTFALL" shall mean the amount, if any, by which the sum of (a) the aggregate outstanding principal balance of the Facility B Notes PLUS (b) the aggregate Letter of Credit Liabilities shall exceed the Available Amount at the time of any delivery of (and as determined in accordance with) an Independent Engineering Report and its related Coverage Report. The effects of an Engineering Shortfall are described, among other places herein, in SECTIONS 2.1(a)(4), 2.1(b)(4), 2.2(a)(3), 2.8, 7.2(a), 7.2(e), 9.9, and 10.1(d) AND (e). An Engineering Shortfall shall continue until cured by presentation of a new Coverage Report demonstrating that the sum of (a) and (b) is equal to or less than the Available Amount then in effect. "ENVIRONMENTAL CLAIM" shall mean any claim, demand, action, cause of action, suit, judgment, governmental or private investigation relating to remediation or compliance with Applicable Environmental Laws, proceeding or lien, whether threatened, sought, brought or imposed, that seeks to recover costs, damages, punitive damages, expenses, fines, criminal liability, judgments, response costs, investigative and monitoring costs, abatement costs, attorney's fees, expert's fees or consultant's fees, or seeks to impose liability regarding the Company or any of its Subsidiaries, or any of their sites or properties for violations of Applicable Environmental Laws or for pollution, contamination, investigation, preservation, protection, remediation or clean up of the air, surface water, ground water, soil or wetlands, or otherwise in relation to the use, storage, generation, release, handling or disposal of materials and substances that are regulated by or subject to Applicable Environmental Laws. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations and interpretations by the Internal Revenue Service or the Department of Labor thereunder. "ERISA AFFILIATE" shall mean any trade or business (whether or not incorporated) which on and after December 5, 1990 is under common control with the Company within the meaning of the regulations under Section 414 of the Code. "EURODOLLAR BASE RATE" shall mean, with respect to any Interest Period for any Eurodollar Loan, the lesser of (a) the rate per annum (rounded upwards, if necessary, to the nearest 1/100%) determined by the Agent based upon rates quoted at approximately 11:00 a.m. (local time in the relevant Eurodollar interbank market) (or as soon thereafter as practicable) on the day two Business Days prior to the first day of such Interest Period for the offering BY TCB TO leading dealers in such Eurodollar interbank market of dollar deposits for delivery on the first day of such Interest -17- Period, in immediately available funds and having a term comparable to such Interest Period and in an amount comparable to the principal amount of the respective Eurodollar Loan to which such Interest Period relates or (b) the Highest Lawful Rate. Each determination of the Eurodollar Base Rate shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. "EURODOLLAR LOANS" shall mean Loans the interest on which is determined on the basis of rates referred to in the definition of "EURODOLLAR BASE RATE". "EURODOLLAR RATE" shall mean, for any Interest Period for any Eurodollar Loan, a rate per annum (rounded upwards, if necessary, to the nearest 1/100%) determined by the Agent to be equal to the product of (a) the Eurodollar Base Rate for such Loan for such Interest Period times (b) Statutory Reserves. "EVENT OF DEFAULT" shall have the meaning assigned to such term in SECTION 10. "EXISTING PRIORITY DEBT" at any time shall mean, to the extent that it is otherwise Priority Debt, an amount equal to the sum of (a) the Merger Debt at such time, (b) the outstanding principal amount of Debt under the Springing Lien Agreement at such time, and (c) the outstanding principal amount of Debt under those certain Credit Agreements of Petrolera Santa Fe S.A., dated as of June 25, 1991 and April 28, 1992, at such time. "FACILITY A COMMITMENT" shall mean, as to any Bank, the obligation, if any, of such Bank to make Facility A Loans to the Company in an initial principal amount up to but not exceeding such Bank's Commitment Percentage of the Facility A Maximum Amount from time to time in effect, which shall never exceed the amount set forth opposite such Bank's name on the signature pages hereof under the caption "Facility A Commitment" (as the same may be reduced from time to time pursuant to SECTION 2.2), and such Bank's obligation, if any, to make Facility A Readvances to the Company in an aggregate principal amount at any one time outstanding up to but not exceeding an amount equal to such Bank's Commitment Percentage times the Facility A Unused Commitment then in effect (as the same may be reduced from time to time pursuant to SECTION 2.2). "FACILITY A LOAN" shall mean a Loan (including a Facility A Readvance) made pursuant to SECTION 2.1(a). "FACILITY A MATURITY DATE" shall mean the earlier of (a) the date the principal amount then outstanding of and the accrued interest on the Facility A Loans and all fees and all other amounts -18- payable hereunder and under the Facility A Notes become due and payable pursuant to SECTION 10.1 or (b) December 31, 1998. "FACILITY A MAXIMUM AMOUNT" shall mean, on any day occurring during the respective Applicable Periods set forth in EXHIBIT E, the amount set forth for such Applicable Period in the applicable table in EXHIBIT E (as the same may be reduced from time to time pursuant to SECTION 2.2). The applicable table shall be determined according to the aggregate Qualifying Amount of Junior Securities issued by the Company as of the most recent Achievement Date, but to qualify for a particular table (other than Table Five), the Company must have repaid or Defeased, on or before such Achievement Date, all Designated Debt for such aggregate Qualifying Amount set forth on SCHEDULE X. "FACILITY A NOTES" shall mean the promissory notes of the Company evidencing the Facility A Loans, in the form of EXHIBIT A. "FACILITY A OPTIONAL PREPAYMENT" shall mean any prepayment of the Facility A Notes made pursuant to SECTION 3.2(a). "FACILITY A READVANCE" shall mean a readvance made pursuant to SECTION 2.1(a)(2) of any Facility A Optional Prepayment. "FACILITY A TERMINATION DATE" shall mean the earlier of (a) the Facility A Maturity Date and (b) the date the Facility A Commitments are terminated pursuant to SECTION 2.2. "FACILITY A UNUSED COMMITMENT" shall mean, on any date, the difference of (a) the Facility A Maximum Amount MINUS (b) the aggregate outstanding principal balance of the Facility A Notes, all determined on such date. "FACILITY B COMMITMENT" shall mean, as to any Bank, the obligation, if any, of such Bank to make Facility B Loans to the Company in an aggregate principal amount at any one time outstanding up to but not exceeding such Bank's Commitment Percentage times the difference between (a) the Available Amount then in effect and (b) the aggregate Letter of Credit Liabilities, which amount shall never exceed the amount set forth opposite such Bank's name on the signature pages hereof under the caption "Facility B Commitment" (as the same may be reduced from time to time pursuant to SECTION 2.2). "FACILITY B LOAN" shall mean a Loan made pursuant to SECTION 2.1(b). "FACILITY B MATURITY DATE" shall mean the earlier of (a) the date the principal amount then outstanding of and accrued interest -19- on the Facility B Loans and all fees and all other amounts payable hereunder and under the Facility B Notes become due and payable pursuant to SECTION 10.1 or (b) December 31, 1996. "FACILITY B NOTES" shall mean the promissory notes of the Company evidencing the Facility B Loans, in the form of EXHIBIT B. "FACILITY B TERMINATION DATE" shall mean the earlier of (a) the Facility B Maturity Date and (b) the date the Facility B Commitments are terminated pursuant to SECTION 2.2. "FACILITY B UNUSED COMMITMENT" shall mean, on any date, the difference of (a) the Available Amount minus (b) the sum of (1) the aggregate outstanding principal balance of the Facility B Notes plus (2) the Letter of Credit Liabilities, all determined on such date. "FDIC" shall mean the Federal Deposit Insurance Corporation or any entity succeeding to any or all of its functions. "FED 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 on the succeeding 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 the day of such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. "FINANCING STATEMENTS" shall mean all such Uniform Commercial Code financing statements as the Agent or any Bank shall reasonably require, in Proper Form, duly executed by the Company or others to give notice of and to perfect or continue perfection of the Agent's security interest in all Collateral. "FIXED CHARGES" shall mean (without duplication) for any period the sum of interest expense in respect of all Debt of the Person for which the determination is made (calculated, in the case of Debt which bears interest at a floating rate, at the rate in effect at the time of calculation), including imputed interest expense in respect of Capitalized Lease Obligations. "FUNDED DEBT" shall mean and include, without duplication, any obligation (including the current maturities thereof) (a) payable more than one year from the date of creation thereof (1) for borrowed money; (2) evidenced by bonds, debentures, -20- notes or reimbursement obligations in respect of letters of credit or other similar instruments (other than letters of credit and surety bonds relating to trade obligations incurred in the ordinary course of business and includable, under GAAP, in current liabilities on a balance sheet or in the notes relating thereto); (3) for the payment of the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business; (4) constituting Capitalized Lease Obligations; (5) in respect of production payments, proceeds production payments or similar financing arrangements; (6) which is, under GAAP, shown on a balance sheet (after giving effect, in the case of the balance sheet of the Company or a Restricted Subsidiary, to the eliminating entries, if any, for the Unrestricted Subsidiaries as a group and the Special Subsidiary) as long-term debt (excluding provisions for deferred income taxes, unfunded pension obligations, unfunded liabilities for other post-employment benefits and other reserves or provisions to the extent that such reserves or provisions do not constitute an obligation), or (7) for any item described in any of the foregoing CLAUSES (1) through (6) which is secured by any Lien on property owned by the Company or any Restricted Subsidiary, whether or not the obligations secured thereby shall have been assumed by the Company or such Restricted Subsidiary; or (b) payable more than one year from the date of creation thereof, which under GAAP is shown on the balance sheet as a long-term liability (EXCLUDING provisions for deferred income taxes, unfunded pension obligations, unfunded liabilities for other post-employment benefits and other reserves or provisions to the extent that such reserves or provisions do not constitute an obligation); or (c) constituting a Guaranty with respect to Funded Debt (of the kind otherwise described in CLAUSES (a) and (b) of this definition) of another Person, including any obligation by the Company or a Restricted Subsidiary for Funded Debt of SFEP or any other Person, regardless of the percentage of equity interest owned therein by the Company or a Restricted Subsidiary, by virtue of its capacity as a general partner of SFEP or such other Person. "GAAP" shall mean, as to a particular Person, such accounting practice as, in the opinion of the independent accountants of recognized national standing regularly retained by such Person and acceptable to the Agent, conforms at the time to generally accepted accounting principles, consistently applied. Generally accepted accounting principles means those principles and practices which are (a) recognized as such by the Financial Accounting Standards Board; (b) applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the financial statements of the relevant -21- Person dated December 31, 1989 and for the period then ended, and (c) consistently applied for all periods after the date hereof so as to reflect properly the financial condition and results of operations of such Person. "GAS PLANT" shall mean the gas treatment and processing plant known as the "Sale Ranch Plant" formerly owned by the Company and located in Martin County, Texas, and all related facilities. "GOVERNMENTAL AUTHORITY" shall mean any sovereign governmental authority, the United States of America, any State of the United States and any political subdivision of any of the foregoing, and any agency, instrumentality, department, commission, board, bureau, central bank, authority, court or other tribunal, in each case whether executive, legislative, judicial, regulatory or administrative, having jurisdiction over the Company, any of the Company's Subsidiaries, any of their respective property, the Agent, the Co-Agent or any Bank. "GUARANTY" shall mean and include, without limitation, any obligation of the Company or a Restricted Subsidiary (a) constituting a guaranty, endorsement (other than an endorsement of a negotiable instrument for collection in the ordinary course of business) or other contingent liability (whether direct or indirect) in connection with the obligations, stock or dividends of any Person (other than the Company or a Restricted Subsidiary); (b) payable under any contract (other than the Tax Indemnification Agreement and any other tax indemnification or sharing agreement) providing for the making of loans, advances or capital contributions to any Person (other than the Company or a Restricted Subsidiary), or for the purchase of any property from any Person, in each case in order primarily to enable such Person to maintain working capital, net worth or any other balance sheet condition or to pay debts, dividends or expenses; (c) payable under any contract for the purchase of materials, supplies or other property or services (other than any natural gas transportation contract or any electrical, water supply, steam purchase or other utility supply contract) if such contract (or any related document) requires that payment for such materials, supplies or other property or services shall be made regardless of whether or not delivery of such materials, supplies or other property or services is ever made or tendered; PROVIDED that the exceptions contained in this CLAUSE (c) shall not apply to any contract for the purchase or transportation of natural gas where payment is required regardless of whether the delivery of such -22- natural gas is ever made or tendered, unless at the time such contract is entered into the aggregate of payments under such contract and all such existing contracts would not exceed $20,000,000 in any calendar year based on existing rates and automatic escalations in such rates under such contracts; (d) payable under any contract to rent or lease (as lessee) any real or personal property (other than any oil and gas leases) if such contract (or any related document) provides that the obligation to make payments thereunder is absolute and unconditional under conditions not customarily found in commercial leases then in general use or requires that the lessee purchase or otherwise acquire securities or obligations of the lessor; or (e) payable under any other contract which, in economic effect, is substantially equivalent to a guarantee for any payment or performance of an obligation of a Person other than the Company or a Restricted Subsidiary. "HADSON" shall mean Hadson Corporation, a Delaware corporation, and any successor corporation thereto. "HADSON STOCK" shall mean, to the extent held continuously by the Company or any of its Restricted Subsidiaries after the merger of SFER Pipeline, Inc. into the Company, (a) any of the 2,080,000 shares of the Senior Cumulative Preferred Stock, Series A, par value $.01 per share, of Hadson and the 10,395,665 shares of the common stock, par value $.01 per share, of Hadson, acquired by the Company or any of its Subsidiaries on or before January 31, 1994, (b) any stock acquired by virtue of one or more stock splits or recapitalizations involving such common stock or Senior Cumulative Preferred Stock and not involving any additional economic consideration on the part of the Company or any of its Subsidiaries, and (c) any dividend paid on such common stock or Senior Cumulative Preferred Stock solely in the capital stock of Hadson. "HIGHEST LAWFUL RATE" shall mean, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal or Texas law permits the higher interest rate, stated as a rate per annum. On each day, if any, that Chapter One establishes the Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" (as defined in Chapter One) for that day. "HYDROCARBONS" shall mean crude oil, condensate, natural gas, natural gas liquids and associated substances. -23- "INDEPENDENT ENGINEERING REPORT" shall mean a report prepared by an Independent Petroleum Engineer which sets forth the gross and net volume of Hydrocarbons projected to be produced from the Petroleum Properties, by calendar years, for the remaining economic life of the Petroleum Properties. The Petroleum Properties of the Special Subsidiary shall be segregated from the Petroleum Properties of the other members of the Combined Group, and the Adobe Properties shall be separately identified. Each Independent Engineering Report shall also contain a list of Petroleum Properties of the members of the Combined Group and indicate the Net Oil and Gas Income for each calendar year attributable thereto, all in reasonable detail. Each such report shall identify which of the Petroleum Properties covered thereby are "proved developed producing", "proved developed non-producing" and "proved undeveloped" (as defined in the "Definitions for Oil and Gas Reserves" as published by the Society of Petroleum Engineers). Each such report shall be prepared in accordance with established criteria generally accepted in the oil and gas industry and standards customarily used by independent petroleum engineers well regarded in the industry in making reserve determinations or appraisals, and shall be based on Approved Assumptions and such other assumptions, estimates and projections as are fully disclosed in such Independent Engineering Report. "INDEPENDENT PETROLEUM ENGINEER" shall mean Ryder Scott Company Petroleum Engineers or another independent petroleum engineer retained by the Company acceptable to the Required Banks. "INTEREST PAYMENT DATE" shall mean with respect to any Eurodollar Loan or Alternate Base Rate Loan, the last day of each Interest Period applicable thereto; PROVIDED that in the case of a Eurodollar Loan with an Interest Period of six months, the Interest Payment Dates shall be the days that would have been the Interest Payment Dates for such Loan had two successive Interest Periods of three months been applicable to such Loan. "INTEREST PERIOD" shall mean: (a) with respect to any Eurodollar Loan, the period commencing on (1) the date such Loan is designated as or converted into or continued as a Eurodollar Loan or (2) in the case of a Rollover to a successive Interest Period, the last day of the immediately preceding Interest Period and ending on the numerically corresponding day in the first, second, third or sixth calendar month thereafter, as the Company may select as provided in SECTION 3.3, except that each such Interest Period which commences on any day for which there is no numerically corresponding day in the appropriate subsequent calendar month shall end on the last Business Day of the appropriate subsequent calendar month; and -24- (b) with respect to any Alternate Base Rate Loan, the period commencing on the date such Loan is made as, or converted into, an Alternate Base Rate Loan and on each Quarterly Date thereafter and ending on each next succeeding Quarterly Date; PROVIDED that (x) if any Interest Period would end on a day which shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, with respect to Eurodollar Loans only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day; (y) no Interest Period may be selected for any Loan that ends later than the Termination Date for Loans of that Class or that causes the aggregate amount of Loans subject to Interest Periods extending beyond the next scheduled reduction in Facility A Maximum Amount or Preliminary Available Amount to exceed the Facility A Maximum Amount or Preliminary Available Amount, as the case may be, scheduled to be in effect after such reduction; and (z) no Interest Period may be selected that ends later than December 31, 1998. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "INTEREST RATE PROTECTION AGREEMENTS" shall mean an interest rate swap agreement, interest rate cap agreement or other similar arrangement which satisfies all of the following requirements: (a) a member of the Combined Group is a party to such agreement; (b) the Company has given evidence (satisfactory to the Agent) of such agreement to the Agent; (c) the terms and parties to such agreement, taking into account all similar agreements to which members of the Combined Group are parties, are satisfactory to the Required Banks; and (d) such agreement is in full force and effect and has not been unwound. "INVESTMENT" shall mean any purchase or other acquisition of the stock, obligations or securities of, or any interest in, or any capital contribution, loan or advance to, or any Guaranty in respect of the obligations of (but excluding the obligations of the Company and the Restricted Subsidiaries arising solely by virtue of their serving as general partner of SFEP) any Person, but in any event shall include as an investment in any Person the amount of all Debt owed by such Person, and all accounts receivable from such Person which are not current assets or did not arise from sales to such Person in the ordinary course of business. As used herein, any capital contribution of assets by the Company or any Restricted Subsidiary shall be valued at the book value of such assets as reflected in the consolidated financial statements of the Company and the Restricted Subsidiaries as at the end of the quarter ending immediately prior to such contribution. -25- "JUNIOR SECURITIES" shall mean (a) equity (including preferred stock but excluding any equity which the holder thereof may have any right to put back to the Company for cash and excluding any equity mandatorily redeemable for cash) of the Company or (b) indebtedness of the Company which in the sole discretion of the Required Banks satisfies all of the following requirements: (1) such indebtedness shall be subordinated by writing in Proper Form in right of payment to all existing and future indebtedness of the Company under the Credit Documents, as renewed, extended, amended, modified, supplemented and increased from time to time; (2) such indebtedness shall be unsecured; (3) no principal of such indebtedness shall be scheduled to be due before January 31, 1999; (4) such indebtedness shall not be governed by any covenant or event of default more restrictive than those set forth in the Credit Documents; (5) the provisions applicable to such indebtedness with respect to a change in the control of the Company and the sale of assets by any member of the Combined Group shall be not more restrictive than those set forth in the Credit Documents; (6) such indebtedness shall be subject to Blockage for periods aggregating up to 180 days within any 365 day period; (7) the holders of such indebtedness shall be required to give the Agent at least five days' prior written notice of any intended acceleration of such indebtedness (which the Agent shall transmit to each Bank promptly upon receipt); and (8) the holders of such indebtedness shall not have the right to declare a default with respect to, or to accelerate, any of such indebtedness in the event of a default on other indebtedness of any member of the Combined Group except (i) at the scheduled maturity of such other indebtedness or (ii) in the event that principal of such other indebtedness in excess of $25,000,000 shall be duly accelerated. For purposes of this definition, "BLOCKAGE" shall mean, upon the occurrence of a default and so long as it is continuing, the prohibition of the payment (including principal of, interest or premium on or sinking fund requirements) of any indebtedness or obligations of the Company consisting of or arising in connection with any Junior Securities. For purposes of this definition, "PAYMENT" and its correlatives shall include any deposit of property to defease any Junior Securities. "LEGAL REQUIREMENT" shall mean any applicable law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation by any Governmental Authority of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, in each case as now or hereafter in effect. "LETTER OF CREDIT" shall have the meaning ascribed to such term in the Letter of Credit Agreement. -26- "LETTER OF CREDIT AGREEMENT" shall mean that certain Letter of Credit Agreement of even date herewith, among the Company, the Agent, the Co-Agents, and the Banks. "LETTER OF CREDIT COMMITMENT" shall have the meaning ascribed to it in the Letter of Credit Agreement. "LETTER OF CREDIT LIABILITIES" shall have the meaning ascribed to such term in the Letter of Credit Agreement. "LIEN" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code of any jurisdiction or any other type of preferential arrangement. "LOANS" shall mean the loans provided for by SECTION 2.1, including Rollovers of Loans. "MATERIAL ADVERSE CHANGE" shall mean an occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding), which after taking into account actual insurance coverage and effective indemnification with respect to such occurrence, (a) has a material adverse effect on the financial condition, business, operations or properties of the Company and its Subsidiaries taken as a whole and (b) impairs in any material respect either (1) the ability of the Company to perform any of its obligations under the Credit Documents or (2) the ability of the Banks to enforce any of such obligations or any of their remedies under the Credit Documents. "MERGER" shall mean the merger of Adobe into the Company which occurred May 19, 1992. "MERGER DEBT", for purposes of the definition of "Existing Priority Debt" used in SECTION 9.7(b)(3) and 9.7(b)(4) of this Agreement, shall mean at any time, with respect to the Debt of the Company incurred as of May 20, 1992, in connection with the Merger, as such Debt may have been or hereafter may be renewed, extended or otherwise modified, the maximum principal amount of such Debt that can be outstanding at such time, but only to the extent that such amount is equal to or less than (a) $90,000,000, at any time during the period from and including December 31, 1993, to and including December 30, 1994, (b) $72,000,000, at any time during the period from and including December 31, 1994, to and including December 30, 1995, (c) $54,000,000, at any time during the period from and including December 31, 1995, to and including December 30, 1996, -27- (d) $36,000,000, at any time during the period from and including December 31, 1996, to and including December 30, 1997, (e) $18,000,000, at any time during the period from and including December 31, 1997, to and including December 30, 1998, and (f) $0.00 at any time thereafter. "MLP INVESTMENT" shall mean, at any time, the lesser of (a) the book value of the Investment of the Company and the Restricted Subsidiaries in the Special Subsidiary, as determined from the most recent consolidated balance sheet of the Company or (b) the product of (1) the average closing price of the publicly traded limited partner interests of the Special Subsidiary for the 30 days immediately preceding the date upon which such determination is made multiplied by (2) the total limited partner interests in the Special Subsidiary owned by the Company and the Restricted Subsidiaries on the date such determination was made. "MORTGAGED PROPERTIES" shall mean all property, whether now existing or hereafter acquired, which is or is to become subject to the Liens of a Mortgage. "MORTGAGES" shall mean, collectively, the Deed of Trust and the mortgages, deeds of trust, assignments, security agreements, collateral mortgages, collateral mortgage notes, pledge agreements and other devices described or referenced on SCHEDULE VIII, executed by the Company in favor of the Agent. "MOST RECENT ENGINEERING REPORT" shall mean, as of any date of determination, (a) until the first Independent Engineering Report is delivered pursuant to SECTION 9.1 or SECTION 2.7, the Independent Engineering Report of Ryder Scott Company Petroleum Engineers dated February 3, 1994; (b) thereafter, the most recent Independent Engineering Report delivered pursuant to either SECTION 9.1 or SECTION 2.7 on or prior to such date of determination. "NET OIL AND GAS INCOME" shall mean, for any calendar year (or portion thereof) and for any Person, (a) an amount (or, with respect to any portion of a calendar year, PRO RATA in accordance with the number of days in such portion of such calendar year) of projected gross revenues (based on the prices set forth in the Approved Assumptions) from the sale of Hydrocarbons produced from the Recognized Proved Reserves to be received, subject to no entitlement of any other Person but including appropriate adjustments for over- and under-produced status, by such Person during such calendar year as set forth in the Most Recent Engineering Report LESS (b) an amount (or, with respect to any portion of a calendar year, PRO RATA in accordance with the number of days in such portion of such calendar year) of projected -28- royalties and windfall profit, production, ad valorem, severance and all other similar taxes and operating and capital expenditures required to be incurred during such calendar year in order to generate such gross revenues (but not including general and administrative expenses or principal and interest payable with respect to Debt), as set forth in the Most Recent Engineering Report. "NOTES" shall mean the Facility A Notes and the Facility B Notes. "NOTICE OF ENTIRE AGREEMENT" shall mean that certain Notice of Entire Agreement, DTPA Waiver and Release of Claims of even date herewith between the Company and the Agent. "OBLIGATIONS" shall mean, as at any date of determination thereof, the sum of (a) the aggregate principal amount of Loans out- standing hereunder PLUS (b) the aggregate amount of the Reimbursement Obligations. "OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the Company by its President, one of its Vice Presidents or its Treasurer. "OPTIONAL RESERVE REPORT" shall mean the Independent Engineering Report permitted by SECTION 2.7. "ORGANIZATIONAL DOCUMENTS" shall mean, with respect to a corporation, the certificate of incorporation, articles of incorporation and bylaws of such corporation; with respect to a partnership or a limited partnership, the partnership agreement establishing such partnership; with respect to a joint venture, the joint venture agreement establishing such joint venture; and with respect to a trust, the instrument establishing such trust; in each case including any and all modifications thereof as of the date of the Credit Document referring to such Organizational Document. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED ENCUMBRANCES" shall have the meaning ascribed to such term in the Deed of Trust. "PERSON" shall mean and include an individual or legal entity in the form of a partnership, a limited liability company, a joint venture, a corporation, a trust, an unincorporated organization or a government or any department or agency thereof. The term "Person" shall not, however, mean and include an arrangement that is not a separate legal entity such as the legal arrangement -29- between two or more parties owning interests in the same property or unit. "PETROLEUM PROPERTIES" shall mean, at any time and with respect to any Person, all Recognized Proved Reserves which are (a) owned by such Person at such time free and clear of any Lien (other than Permitted Encumbrances and Liens permitted by SECTION 9.7) and (b) covered in the Most Recent Engineering Report. "PLAN" shall mean an employee benefit plan which is covered by ERISA which is either (a) maintained by the Company or any ERISA Affiliate for employees of the Company or such ERISA Affiliate or (b) a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which (i) the Company, (ii) any ERISA Affiliate or (iii) any trade or business which was previously under common control with the Company within the meaning of Section 414 of the Code (but only with respect to such period of common control with the Company), has an obligation to make contributions (or with respect to (iii) above, had an obligation to make contributions during any portion of time that the limitations period under Section 4301(f) of ERISA with respect to such obligation has not expired). "POST-DEFAULT RATE" shall mean, in respect of any principal of any Loan or any other amount payable by the Company under any Credit Document which is not paid when due (whether at stated maturity, by acceleration, or otherwise), a rate per annum on each day during the period commencing on the due date until such amount is paid in full equal to the lesser of (a) the Alternate Base Rate as in effect for that day PLUS the Applicable Margin for Alternate Base Rate Loans in effect for that day plus 2% or (b) the Highest Lawful Rate for that day. "PRELIMINARY AVAILABLE AMOUNT" shall mean, on any day occurring during the respective Applicable Periods set forth on EXHIBIT F, the amount set forth for such Applicable Period in the applicable table in EXHIBIT F (as the same may be reduced from time to time pursuant to SECTION 2.2). The applicable table shall be determined according to the aggregate Qualifying Amount of Junior Securities issued by the Company as of the most recent Achievement Date, but to qualify for a particular table (other than Table Five), the Company must have repaid or Defeased, on or before such Achievement Date, all Designated Debt for such aggregate Qualifying Amount set forth on SCHEDULE X. "PRICE PROTECTION AGREEMENT" shall mean a product price protection agreement which satisfies all of the following requirements: (a) a member of the Combined Group is a party to such agreement; (b) the Company has given evidence (satisfactory to the Agent) of such agreement to the Agent; (c) the terms and -30- parties to such agreement, taking into account all similar agreements to which members of the Combined Group are parties, are satisfactory to the Required Banks; and (d) such agreement is in full force and effect and has not been unwound. The agreements described on SCHEDULE III are Price Protection Agreements for purposes of this Agreement as of the date hereof. "PRIME RATE" shall mean, as of a particular date, the prime rate most recently announced by TCB and thereafter entered in the minutes of TCB's Loan and Discount Committee, automatically fluctuating upward and downward with and at the time specified in each such announcement without special notice to the Company or any other Person, which prime rate may not necessarily represent the lowest or best rate actually charged to a customer. "PRINCIPAL OFFICE" shall mean the principal banking building of the Agent, presently located at 712 Main Street, Houston, Harris County, Texas 77002. "PRIORITY DEBT" at any time shall mean an amount equal to the sum of (without duplication) the amount of all Special Debt outstanding at such time and the amount of all Debt of the Company and its Restricted Subsidiaries outstanding at such time that is secured by one or more Liens permitted under CLAUSE (4), (5), (6), (7), (8), (9), (10), (11), (12) or (13) of SECTION 9.7(a). "PROJECTED G & A EXPENSE" shall mean, for any Person, the appropriate projected annual levels of general and administrative expense and district overhead to be used in the calculation of CFADS of such Person, as mutually agreed among the Agent, the Co-Agents and the Company as soon as practical after the delivery of the Most Recent Engineering Report. "PROJECTED INCOME TAX EXPENSE" shall mean, for any Person, the appropriate projected annual levels of income tax expense to be used in the calculation of CFADS of such Person, as determined by the Agent after consultation with the Company and based on such Person's current tax position projected into the future and the Most Recent Engineering Report; the Agent will give written notice of the Projected Income Tax Expense of each such Person to the Company as soon as practical after the delivery of the Most Recent Engineering Report. "PROPER FORM" shall mean in form and substance satisfactory to the Agent. "PROVED RESERVES" shall mean reserves of Hydrocarbons in place which are estimated to be recoverable with reasonable certainty and -31- are consistent with the "Definitions for Oil and Gas Reserves" as published by the Society of Petroleum Engineers. "QUALIFYING AMOUNT" shall mean that amount of Junior Securities which results in gross cash proceeds to the Company of not less than the amounts specified herein. "QUALIFYING DATE" shall mean the first date prior to July 1, 1994, on which the Agent shall have received evidence satisfactory to it in its sole discretion that both (a) Junior Securities in a Qualifying Amount of at least $75,000,000 shall have been issued (such issuance may be in one or more transactions on one or more dates) and cash proceeds thereof shall have been received by the Company and (b) all Designated Debt for the aggregate Qualifying Amount of Junior Securities actually issued, as shown on SCHEDULE X, shall have been repaid or Defeased. The Qualifying Date must occur, if at all, before July 1, 1994. "QUARTERLY DATES" shall mean the last day of each March, June, September and December; PROVIDED that if any such date is not a Business Day, the relevant Quarterly Date shall be the next succeeding Business Day. "RECOGNIZED PROVED RESERVES" shall mean Proved Reserves if (a) the designation of such Proved Reserves was by an Independent Petroleum Engineer; (b) a member of the Combined Group owns such Proved Reserves; (c) the estimates with respect to such Proved Reserves were made on the basis of the most recent Approved Assumptions, and (d) either (1) such Proved Reserves are located onshore or offshore the United States or Canada or (2) the Required Banks have consented to the inclusion of such Proved Reserves in the Recognized Proved Reserves. "REGULATION D" shall mean Regulation D of the Board as the same may be amended or supplemented from time to time and any successor or other regulation relating to reserve requirements. "REGULATORY CHANGE" shall mean, with respect to any Bank, any change on or after the date of this Agreement in any Legal Requirement (including Regulation D) or the adoption or making on or after such date of any official interpretation, directive or request applying to a class of banks including such Bank under any Legal Requirement (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "REIMBURSEMENT OBLIGATIONS" shall have the meaning ascribed to that term in the Letter of Credit Agreement. -32- "REQUEST FOR EXTENSION OF CREDIT" shall mean a request for extension of credit duly executed by the chief executive officer, chief financial officer or treasurer of the Company, or such other officer of the Company as its chief financial officer shall from time to time designate in a writing delivered to the Agent, appropriately completed and substantially in the form of EXHIBIT C. "REQUIRED BANKS" shall mean Banks having equal to or greater than 66-2/3% of the Aggregate Commitment. "REQUIRED RATIOS" shall mean (a) an Annual Debt Service Coverage Ratio of at least 1.15 to 1.00; (b) an Alternate Annual Debt Service Coverage Ratio of at least 1.00 to 1.00; (c) a TLOR Coverage Ratio of at least 1.50 to 1.00, and (d) an SLOR Coverage Ratio of at least 1.75 to 1.00. "REQUIRED RESERVE REPORT" shall mean each Independent Engineering Report required to be provided pursuant to SECTION 9.1(g). "RESERVE VALUE" shall mean, as of any date and with respect to a Person, the net present value (discounted at the discount rate set forth in the most recent Approved Assumptions) of projected Net Oil and Gas Income (calculated on the basis of the Most Recent Engineering Report) attributable to the Petroleum Properties of such Person for the period commencing on such date and ending at the end of the economic life of such Petroleum Properties. "RESTRICTED INVESTMENT" shall mean any Investment other than: (a) Investments in the Company or a Restricted Subsidiary or in an entity which immediately after or concurrently with such Investment will be a Restricted Subsidiary; (b) Investments in the Special Subsidiary; (c) readily marketable direct full faith and credit obligations of the United States of America or any agency thereof or obligations unconditionally guaranteed by the full faith and credit of the United States of America or any agency thereof, due within three years of the making of the Investment; (d) readily marketable direct obligations of any State of the United States of America or any political subdivision of any such State having a credit rating of at least "Aa" by Moody's Investors Service, Inc. ("MOODY'S") or "AA" by Standard & Poor's Corporation ("S&P"), in each case due within three years from the making of the Investment; -33- (e) domestic and eurodollar certificates of deposit maturing within one year from the making of the Investment issued by, deposits in, eurodollar deposits through, and banker's acceptances of, commercial banks incorporated under the laws of the United States or any State thereof, Canada, Japan or any Western European country, and having combined capital, surplus and undivided profits of at least $100,000,000; (f) readily marketable commercial paper of any commercial bank or corporation doing business and incorporated under the laws of the United States of America or any State thereof having a credit rating of at least "A-1" from S&P or at least "P-1" by Moody's, in each case due within 270 days after the making of the Investment; (g) money market investment programs which primarily invest in the types of Investments described in CLAUSES (c) through (f) above and which are classified as a current asset in accordance with GAAP and which are administered by broker-dealers acceptable to the Agent; (h) repurchase agreements with major dealers or banks, pursuant to which physical delivery of the respective securities is required, except for obligations of the U.S. Treasury to be delivered through the Federal Reserve book entry system; (i) travel and other like advances to officers and employees of the Company or a Restricted Subsidiary in the ordinary course of business; (j) Investments in the Hadson Stock; or (k) Investments not described in CLAUSES (a) through (j) of this definition in an aggregate principal amount not to exceed $10,000,000. "RESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company designated as a Restricted Subsidiary on SCHEDULE I, together with any Subsidiary hereafter created or acquired and, at the time of creation or acquisition, not designated by the Board of Directors of the Company as an Unrestricted Subsidiary. Any Subsidiary of the Company designated as an Unrestricted Subsidiary for purposes of this Agreement may thereafter be designated a Restricted Subsidiary upon 30 days' prior written notice to the Banks if, at the time of such designation and after giving effect thereto and to the concurrent retirement of any Debt, (a) no Default shall have occurred and be continuing; (b) such Subsidiary is organized under the laws of the United States or any state thereof; (c) 80% or more of each class of voting stock outstanding -34- of such Subsidiary is owned by the Company or a wholly owned Restricted Subsidiary, and (d) such Subsidiary could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(4). "ROLLOVER" shall mean any reborrowing from a lender of a loan which is prepaid, or by its terms is due, to such lender on the date of such reborrowing if the instrument or agreement governing such Debt specifically contemplates the periodic prepayment or repayment and simultaneous reborrowing of such loan, PROVIDED that such reborrowing results in no net increase in the aggregate outstanding principal balance of such loan; without limiting the generality of the foregoing, "Rollover" shall include specifically the repayment of a Loan at the end of the Interest Period applicable thereto and the simultaneous reborrowing by the Company of a new Loan in the same principal amount. "SALE" shall mean any sale, transfer, exchange, or other disposition for value. "SALE AND LEASEBACK TRANSACTION" shall mean any arrangement in which the Company or a Restricted Subsidiary shall sell its buildings, equipment or surface real properties, which was acquired or occupied by the Company or a Restricted Subsidiary for more than 180 days, and within 180 days from the date of such sale, enter into a lease as lessee of such buildings, equipment or surface real properties having a term (including terms of renewal or extension at the option of the lessor or the lessee, whether or not such option has been exercised) expiring three or more years after the commencement of the initial term. "SECURED DEBT" shall mean all Funded Debt that is secured by a Lien permitted by SECTION 9.7(a)(13) on any property or assets of the Company or any Restricted Subsidiary. "SECURITY AGREEMENT" shall mean the Security Agreement dated May 20, 1992 between the Company and the Agent on behalf of the Banks covering all of the interest of the Company in all accounts, general intangibles, equipment, fixtures, inventory, contract rights, partnerships, joint ventures and other forms of property, of whatever kind and character, at any time comprising, relating to, or evidencing or effectuating ownership of, the Gas Plant, as amended and modified from time to time. "SECURITY DOCUMENTS" shall mean, collectively, the Deed of Trust, the Mortgages, the Amendment to Deed of Trust, the Amendment to Louisiana Security Agreement, the Amendment to Leasehold Deed of Trust, the Amendment to Security Agreement-Contract Rights, the Amendment to Security Agreement -- Stock, the Security Agreement, -35- the Stock Pledge Agreement, all applicable Financing Statements and any and all other agreements, deeds of trust, mortgages, chattel mortgages, security agreements, pledges, guaranties, assignments of production or proceeds of production, assignments of income, assignments of contract rights, assignments of partnership interest, assignments of royalty interests, assignments of performance, completion or surety bonds, standby agreements, subordination agreements, undertakings, stock powers and other instruments and Financing Statements now or hereafter executed and delivered by any Person (other than solely by a Bank and/or any other creditor participating in the Facility A Loans or any collateral or security therefor) in connection with, or as security for the payment or performance of, the Facility A Notes; and, from and after the execution and delivery thereof, shall include any supplemental such document. "SENIOR INDEBTEDNESS" shall mean, without duplication, that part of Covered Debt consisting of (a) all indebtedness and obligations evidenced by, arising under or incurred in connection with the Credit Documents and all renewals, extensions, rearrangements, refundings, and modifications of any thereof; (b) all other indebtedness and obligations of the Company, the Restricted Subsidiaries or the Special Subsidiary, which is PARI PASSU with or senior to the indebtedness and obligations described in CLAUSE (a) above, (c) Capitalized Lease Obligations, and (d) all indebtedness and obligations of the Company, the Restricted Subsidiaries or the Special Subsidiary which is at the time of any determination of Senior Indebtedness secured by any Lien. "SERIAL NOTE AGREEMENT" shall mean that certain Note Agreement dated as of March 31, 1990, evidencing the issuance of Series A, B, C, D, E, F and G Notes by the Company in the aggregate amount of $365,000,000, as amended from time to time. "SFEP" shall mean, collectively, Santa Fe Energy Partners, L.P. and Santa Fe Energy Operating Partners, L.P., each a Delaware limited partnership. "SFP GROUP" shall mean Santa Fe Pacific Corporation and its affiliated group of corporations which together constitute an affiliated group of corporations within the meaning of Section 1504(a) of the Code. "SLOR COVERAGE RATIO" shall mean, as of any date of determination, the ratio of (a) the Combined Reserve Value to (b) all Senior Indebtedness included in Combined Covered Debt, in each case as of such date. -36- "SPECIAL DEBT" shall mean the sum of (a) Attributable Debt; (b) Secured Debt, and (c) Funded Debt of the Restricted Subsidiaries. "SPECIAL SUBSIDIARY" shall mean SFEP until (a) the Company designates SFEP a Restricted Subsidiary pursuant to the terms of the Serial Note Agreement or (b) the Company designates or continues to designate SFEP as an Unrestricted Subsidiary subsequent to the acquisition by the Company and the Restricted Subsidiaries of all of the outstanding limited partnership interests in SFEP. "SPECIAL SUBSIDIARY PERCENTAGE" shall mean, as of any date, the percentage ownership interest of the Company and the Restricted Subsidiaries in the Special Subsidiary on such date. "SPECIAL SUBSIDIARY QUALIFYING CONDITIONS" shall mean all of the following conditions: (a) the Company or a Restricted Subsidiary owns more than 50% of the outstanding indicia of equity rights issued by Santa Fe Energy Partners, L.P. and serves as the sole managing general partner of Santa Fe Energy Partners, L.P.; (b) Santa Fe Energy Partners, L.P. owns more than 50% of the outstanding indicia of equity rights issued by Santa Fe Energy Operating Partners, L.P.; (c) the Company or a Restricted Subsidiary serves as the sole managing general partner of Santa Fe Energy Operating Partners, L.P., and (d) both Santa Fe Energy Partners, L.P. and Santa Fe Energy Operating Partners, L.P. are permitted (by applicable law and applicable contract) to make distributions to their partners. "SPIN-OFF" shall mean (a) the distribution, by dividend to the stockholders of Santa Fe Pacific Corporation of the shares of capital stock of the Company owned by Santa Fe Pacific Corporation, which distribution was commenced on December 4, 1990, and (b) the distribution by SFP Properties, Inc. to Santa Fe Pacific Corporation of the capital stock of the Company that was made on December 27, 1989. "SPRINGING LIEN" shall mean the Liens on real property of SFEP that come into existence at any time SFEP is a Restricted Subsidiary pursuant to section 5.08(b) or 5.11 of the Credit Agreement (the "SPRINGING LIEN AGREEMENT") dated as of June 30, 1987 among Santa Fe Energy Operating Partners, L.P., the lenders listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as the Agent, as the same may be amended, PROVIDED that (a) the Debt under the Springing Lien Agreement is not increased, extended or renewed and (b) the Springing Lien Agreement is not amended in any way which would increase the likelihood or potential circumstances under which such Liens may arise; if either clause of -37- the foregoing proviso is violated, then such Liens shall not be "Springing Liens" for purposes of this Agreement. "STATUTORY RESERVES" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the weighted average of the reserve percentages (including any marginal, special, emergency, or supplemental reserves), expressed as a decimal, actually required to be maintained by any Bank by the Board or any other Governmental Authority to which any of the Banks is subject as required by Regulation D during the applicable Interest Period for "eurocurrency liabilities" (as such term is used in Regulation D) and any other reserves actually required to be maintained by any Bank by reason of any Regulatory Change against (1) any category of liabilities which includes deposits by reference to which the Eurodollar Rate is to be determined as provided in the definition of "Eurodollar Base Rate" or (2) any category of extensions of credit or other assets which include Eurodollar Loans. Such reserve percentages shall include, without limitation, those imposed under Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. Each determination of the Statutory Reserves by the Agent shall be conclusive and binding, absent manifest error, and may be made using any reasonable averaging and attribution method. "STOCK PLEDGE AGREEMENT" shall mean the Security Agreement -- Pledge dated May 20, 1992, from the Company to the Agent, covering all of the issued and outstanding capital stock of Trend, as amended and modified from time to time, including pursuant to the Amendment to Security Agreement -- Stock. "SUBSIDIARY" shall mean, with respect to any Person (the "PARENT"), any corporation or entity, a majority of the shares of voting stock (or in the case of an entity which is not a corporation, of the equity interests that provide the power to manage or direct the management of such entity) of which is at the time any determination is being made, owned, directly or indirectly, by the parent. "TAX ALLOCATION AGREEMENTS" shall mean those nine certain agreements among the SFP Group, dated as of January 1, 1990 unless otherwise specified in this definition and styled as follows: (a) Agreement for the Allocation of the Combined Utah Franchise Tax Liability; (b) Agreement for the Allocation of the Combined Oregon Excise Tax Liability; (c) Agreement for the Allocation of the Consolidated New Mexico Income Tax Liability; (d) Agreement for the Allocation of the Combined Kansas Income Tax Liability; (e) Agreement for the Allocation of the Combined Illinois Income Tax -38- Liability; (f) Agreement for the Allocation of the Combined California Franchise Tax Liability; (g) Agreement for the Allocation of the Combined Arizona Income Tax Liability; (h) Agreement Concerning Taxes, and (i) Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of the Santa Fe Southern Pacific Corporation Affiliated Group, dated as of January 1, 1987. "TAX INDEMNIFICATION AGREEMENT" shall mean any agreement pursuant to which the Company agrees to indemnify Santa Fe Pacific Corporation or any member of the SFP Group from and against any and all federal, state or local taxes, interest, penalties or additions to tax imposed upon or incurred by the SFP Group or any member thereof as a result of the Spin-Off to the extent specified in any such agreement. "TERMINATION DATE" shall mean the Facility A Termination Date or the Facility B Termination Date, as the case may be, and "TERMINATION DATES" means both such dates. "TEXAS CREDIT CODE" shall mean Title 79, Revised Civil Statutes of Texas, 1925, as amended. "TLOR COVERAGE RATIO" shall mean, as of any date of determination, the ratio of (a) the Combined Reserve Value to (b) the Combined Covered Debt, in each case as of such date. "TREND" shall mean Santa Fe Energy Resources (Delaware) Inc. a wholly-owned Subsidiary of the Company. "TYPE" shall have the meaning assigned to such term in SECTION 1.3. "UNAVAILABLE COMMITMENT" shall mean (a) prior to the first Achievement Date, $50,000,000; (b) as of and following any Achievement Date, the difference of (1) $85,000,000 and (2) the Preliminary Available Amount determined for such Achievement Date according to the applicable table in EXHIBIT F; and (c) if no Achievement Date has occurred by July 1, 1994, zero. "UNFUNDED LIABILITIES" shall mean, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan (in accordance with GAAP), but only to the extent that such excess represents a potential liability of the Company or any ERISA Affiliate to the PBGC or a Plan under Title IV of ERISA. -39- "UNIMPAIRED CONSOLIDATED NET EARNINGS" shall mean, for any period, the amount of Consolidated Net Earnings for such period except that with respect to the oil and gas properties impairments taken by the Company and its Restricted Subsidiaries in the fourth quarter of 1993 in the amount of up to $100 million as reflected in the Company's consolidated financial statements for the year ended December 31, 1993: (a) for any calculation of "Unimpaired Consolidated Net Earnings" for any fiscal period of the Company and its Restricted Subsidiaries ending on or after December 31, 1993, the net earnings of the Company and its Restricted Subsidiaries shall not be reduced by the amount of such oil and gas properties impairments; and (b) for any such calculation for any fiscal period of the Company and its Restricted Subsidiaries ending on or after December 31, 1993, the depreciation, depletion and amortization expenses of the Company and its Restricted Subsidiaries shall be calculated on a pro forma basis as if such oil and gas properties impairments had never occurred. "UNRESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company designated as an Unrestricted Subsidiary on SCHEDULE I, together with any Subsidiary of the Company which is hereafter designated by the Board of Directors of the Company as an Unrestricted Subsidiary. Unless designated as a Restricted Subsidiary after the date hereof, SFEP shall be treated hereunder as an Unrestricted Subsidiary except as SFEP is otherwise treated hereunder as a Special Subsidiary. Any Subsidiary may be designated an Unrestricted Subsidiary upon 30 days' prior written notice to the Banks if, at the time of such designation and after giving effect thereto and to the concurrent retirement of any Debt, (a) no Default shall have occurred and be continuing; (b) such Subsidiary does not own, directly or indirectly, any Funded Debt or capital stock of the Company or a Restricted Subsidiary, and (c) the Company could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(3). 1.2. ACCOUNTING TERMS AND DETERMINATIONS. Except where specifically otherwise provided: (a) The symbol "$" and the word "dollars" shall mean lawful money of the United States of America. (b) For purposes of SECTIONS 9.6 and 9.7 and the definitions used solely therein, any accounting term not otherwise defined shall have the meaning ascribed to it under GAAP. For all other purposes any accounting term not otherwise defined shall have the -40- meaning ascribed to it under generally accepted accounting principles. (c) Unless otherwise expressly provided, any accounting concept and all financial covenants shall be determined on a consolidated basis, and financial measurements shall be computed without duplication. (d) Wherever the term "including" or any of its correlatives appears in the Credit Documents, it shall be read as if it were written "including (by way of example and without limiting the generality of the subject or concept referred to)". (e) Wherever the word "herein" or "hereof" is used in any Credit Document, it is a reference to that entire Credit Document and not just to the subdivision of it in which the word is used. (f) References in any Credit Document to Section numbers are references to the Sections of such Credit Document. (g) References in any Credit Document to Exhibits, Schedules, Annexes and Appendices are to the Exhibits, Schedules, Annexes and Appendices to such Credit Document, and they shall be deemed incorporated into such Credit Document by reference. (h) Any term defined in the Credit Documents which refers to a particular agreement, instrument or document shall also mean, refer to and include all modifications, amendments, supplements, restatements, renewals, extensions and substitutions of the same; PROVIDED that nothing in this subsection shall be construed to authorize any such modification, amendment, supplement, restatement, renewal, extension or substitution except as may be permitted by other provisions of the Credit Documents. (i) All times of day used in the Credit Documents mean local time in Houston, Texas. (j) Defined terms may be used in the singular or plural, as the context requires. 1.3. CLASSES AND TYPES OF LOANS. Loans hereunder are distinguished by "Class" and by "Type". The "Class" of a Loan (or of a Commitment to make such a Loan) refers to the determination whether such Loan is a Facility A Loan or a Facility B Loan, each of which constitutes a Class. The "Type" of a Loan refers to the determination whether such Loan is a Eurodollar Loan or an Alternate Base Rate Loan. A Loan may be identified by both Class and Type (E.G., a "Eurodollar Facility B Loan" indicates that such Loan is both a Eurodollar Loan and a Facility B Loan). -41- Section 2. COMMITMENTS. 2.1. LOANS. Each Bank severally agrees, subject to the terms and conditions of this Agreement, to make Loans as follows: (a) FACILITY A LOANS. (1) On the date hereof, each Bank shall make to the Company (and the Company shall borrow from each Bank) a Loan under this SECTION 2.1(a) in an amount not to exceed such Bank's Facility A Commitment then in effect. The aggregate of the Facility A Commitments on the date hereof is $90,000,000. (2) From time to time after the date hereof and prior to the Facility A Termination Date, each Bank shall readvance Facility A Optional Prepayments under this SECTION 2.1(a) to the Company in an aggregate principal amount at any one time outstanding up to but not exceeding such Bank's Commitment Percentage of the Facility A Unused Commitment then in effect. Each Facility A Readvance shall be in an amount that is an integral multiple of $1,000,000. Subject to the conditions herein, any such Facility A Optional Prepayment made prior to the Facility A Termination Date may be reborrowed pursuant to the terms of this Agreement; PROVIDED, that any and all Facility A Loans shall be due and payable in full at the Facility A Maturity Date. (3) Notwithstanding anything in this Agreement to the contrary, (A) no Bank shall be required to make any Facility A Readvance if by virtue thereof the aggregate of the Facility A Readvances of such Bank at any one time outstanding would exceed such Bank's Commitment Percentage of the Facility A Unused Commitment then in effect, and (B) if a Bank fails to make a Facility A Readvance as and when required hereunder and the Company subsequently makes a repayment on the Facility A Notes, such repayment shall be split among the non-defaulting Banks ratably in accordance with their respective Commitment Percentages until each Bank has its Commitment Percentage of all of the outstanding Facility A Loans, and the balance of such repayment shall be divided among all of the Banks in accordance with their respective Commitment Percentages. (4) Notwithstanding anything in this Agreement to the contrary, no Bank shall be required to make a Facility A Readvance (but each Bank shall permit Rollovers) during the existence of an Engineering Shortfall. -42- (b) FACILITY B LOANS. (1) Subject to the conditions herein (including CLAUSE (6) of this section), from time to time on or after the date hereof and prior to the Facility B Termination Date, each Bank shall make Loans under this SECTION 2.1(b) to the Company in an aggregate principal amount at any one time outstanding up to but not exceeding such Bank's Facility B Commitment; PROVIDED HOWEVER, that the foregoing notwithstanding, prior to the Qualifying Date or, if no Qualifying Date occurs, July 1, 1994, the aggregate Facility B Loans shall never exceed the aggregate of the Facility B Commitments of all Banks minus the Unavailable Commitment. Subject to the conditions herein (including CLAUSE (6) of this section), any such Facility B Loan repaid prior to the Facility B Termination Date may be reborrowed pursuant to the terms of this Agreement; PROVIDED, that any and all such Facility B Loans shall be due and payable in full on the Facility B Maturity Date. (2) Concurrently with the delivery of each Independent Engineering Report and related Coverage Report required or permitted hereby, there shall be determined, based on the Most Recent Engineering Report and Approved Assumptions, the total maximum amount of Facility B Loans and Letters of Credit to be available to the Company hereunder and under the Letter of Credit Agreement without violation of any Required Ratio. Upon each such delivery, the Company may by notice to the Co-Agents designate as the Available Amount any amount (not to exceed the Preliminary Available Amount as of the most recent Achievement Date (or, if no Achievement Date occurs, the Preliminary Available Amount then in effect) according to the applicable table in EXHIBIT F) equal to or less than such total maximum amount. The Available Amount so designated shall remain in effect as the Available Amount until the next determination under this SECTION 2.1(b)(2). If no amount lesser than (a) or (b) in this sentence is designated in accordance with this SECTION 2.1(b)(2), the Available Amount shall be the lesser of (a) the Preliminary Available Amount then in effect according to the applicable table in EXHIBIT F or (b) such total maximum amount. (3) Notwithstanding anything in this Agreement to the contrary, (A) no Bank shall be required to make Facility B Loans at any one time outstanding in excess of such Bank's Commitment Percentage of the lesser of (x) the aggregate of the Facility B Commitments of all Banks then in effect (minus, prior to the Qualifying Date or, if no Qualifying Date occurs, July 1, 1994, the Unavailable Commitment) and (y) the difference between (i) the Available Amount and (ii) the aggregate Letter of Credit Liabilities, and (B) if a Bank fails to make a Facility B Loan as and when required hereunder and the Company subsequently makes a -43- repayment on the Facility B Notes, such repayment shall be split among the non-defaulting Banks ratably in accordance with their respective Commitment Percentages until each Bank has its Commitment Percentage of all of the outstanding Facility B Loans, and the balance of such repayment shall be divided among all of the Banks in accordance with their respective Commitment Percentages. (4) Notwithstanding anything in this Agreement to the contrary, no Bank shall be required to make Facility B Loans (but each Bank shall permit Rollovers) during the existence of an Engineering Shortfall. (5) Upon each delivery of the financial statements required by SECTION 9.1(b) and the Independent Engineering Report required by SECTION 9.1(g), the Company may request the Banks to extend the Facility B Termination Date then in effect by a period not to exceed one year (but in no event later than December 31, 1998). Such request shall be made by giving its written request to the Agent specifying the date to which the Facility B Termination Date is to be extended. The Agent, the Co-Agents and the Banks shall consider any such request in a timely fashion and in good faith and in light of all relevant facts and circumstances at the time of such request, but the granting of any such extension shall be at all times within the sole and absolute discretion of the Agent, the Co-Agents and the Banks. The granting of any such extension would require the unanimous consent of the Agent, the Co-Agents and the Banks and may be conditional on such terms and conditions as the Agent, the Co-Agents and the Banks may in their discretion propose. Failure to obtain such an extension shall not IPSO FACTO either constitute or excuse a Default or an Event of Default. (6) Notwithstanding anything contained in this Section, except in the case of a Rollover or a Facility B Loan to satisfy a Reimbursement Obligation pursuant to SECTION 4.1, the Company may not obtain Facility B Loans at any time unless the Facility A Unused Commitment is equal to zero at such time. 2.2. TERMINATIONS, REDUCTIONS AND CHANGES OF COMMITMENTS AND FACILITY A MAXIMUM AMOUNTS. (a) MANDATORY. (1) On the Facility A Termination Date, all Facility A Commitments shall be terminated in their entirety. On the Facility B Termination Date, all Facility B Commitments shall be terminated in their entirety. (2) In the event that the Company is required to make a prepayment of the Facility A Loans pursuant to SECTION 3.2(b)(2)(A) or 3.2(b)(2)(B), the Facility A Maximum Amount for the Applicable -44- Period then in effect shall be reduced by the amount of such prepayment and an amount equal to such prepayment shall be deducted from the Facility A Maximum Amounts for each subsequent Applicable Period PRO RATA according to their respective amounts in effect immediately prior to such reduction; PROVIDED, that if such PRO RATA deduction does not result in compliance by the Company with all Required Ratios, such amount shall be reallocated among such subsequent Applicable Periods (and, if necessary, to the aggregate Facility B Commitments) as the Company shall direct to the extent necessary to bring the Company into compliance with all Required Ratios. (3) The Company shall from time to time reduce the aggregate Facility B Commitments for present and future Applicable Periods (and, if necessary, the Facility A Maximum Amount) to the extent necessary to bring the Company into compliance with all Required Ratios. Any such reduction or termination of Commitments shall be made against the Facility B Commitments; PROVIDED, that if the Company can comply with all Required Ratios only by reducing the Facility A Maximum Amount, the Company may reduce or terminate the Facility A Maximum Amount, but only to the extent necessary to achieve such compliance. Any such reduction shall be accomplished within 10 Business Days after demand therefor by the Agent; PROVIDED, that in the case of any noncompliance with Required Ratios resulting solely from an Engineering Shortfall, the Company shall remedy such noncompliance, but no Event of Default shall occur until the expiration of the cure period provided in SECTION 10.1(e). (4) In addition, in the event the Company is required to make a prepayment of Facility A Loans pursuant to SECTION 3.2(b)(3), an amount equal to such prepayment shall be deducted from the Facility A Maximum Amounts for present and future Applicable Periods (and, if necessary, to the aggregate Facility B Commitments) in such manner as the Company may direct to the extent necessary to bring the Company into compliance with all Required Ratios. (5) Except where reductions in the Facility A Maximum Amounts for the Applicable Periods are made PRO RATA pursuant to SECTION 2.2(a)(2), if at any time the Facility A Maximum Amount is reduced for any future Applicable Period pursuant to SECTION 2.2(a)(2), 2.2(a)(3) or 2.2(a)(4) to bring the Company in compliance with all Required Ratios, the Facility A Maximum Amount for the Applicable Period in effect at such time and each Applicable Period subsequent thereto and prior to such future Applicable Period shall be reduced by a like amount. -45- (b) THE COMPANY'S OPTION. (1) The Company shall have the right to terminate or reduce the unused portion of the Facility B Commitments at any time or from time to time; PROVIDED that (A) the Company shall give notice of each such termination or reduction to the Agent as provided in SECTION 5.5; (B) each such partial reduction shall be in an integral multiple of $5,000,000, and (C) the Company may not cause the Available Amount to be less than the aggregate principal amount of the Facility B Loans then outstanding plus the Letter of Credit Liabilities then outstanding. No voluntary reduction in the Available Amount prior to any scheduled reduction in the Available Amount shall affect the Available Amount after such scheduled reduction date unless such voluntarily reduced Available Amount is less than the amount scheduled to be the Available Amount after such scheduled reduction date, in which case the Available Amount after such scheduled reduction date shall be no greater than such voluntarily reduced Available Amount. Reference is made to SECTION 2.8 for restrictions on the Company's right to increase the Available Amount under certain circumstances. (2) The Company shall have the right to (A) terminate or reduce the Facility A Unused Commitment at any time or from time to time or (B) reduce the Facility A Maximum Amount for any particular Applicable Period at any time or from time to time; PROVIDED that (i) the Company shall give notice of each such termination or reduction to the Agent as provided in SECTION 5.5, (ii) each such partial reduction shall be in an integral multiple of $5,000,000, (iii) the Company may not cause the Facility A Maximum Amount to be less than the aggregate principal amount of the Facility A Loans then outstanding; and (iv) the Company shall not terminate or reduce the Facility A Unused Commitment unless at the same time the aggregate Facility B Commitments are terminated or reduced by the same amount. Reductions in the Facility A Maximum Amount may be applied to any Applicable Period at the option of the Company PROVIDED that after such application the Company is in compliance with all Required Ratios. (c) NO REINSTATEMENT. NO reduction in or termination of the Commitments pursuant to SECTION 2.2 and no reduction in any Facility A Maximum Amount may be reinstated without the written approval of the Agent and all Banks. 2.3. FEES. (a) In consideration of the Commitments, the Company shall pay to the Agent for the account of each Bank in accordance with its Commitment Percentage commitment fees (the "COMMITMENT FEES") for the period from the date of the effectiveness of this Agreement to and including the date the last of the Commitments are terminated at a rate per annum equal to the -46- sum of (a) 1/2% of the unused portion of the Available Commitment and (b) 1/4% of the Unavailable Commitment. The Commitment Fees shall be computed for each day and shall be based on the unused portion of the Available Commitment and the Unavailable Commitment for such day. Accrued Commitment Fees shall be payable in arrears on the date of the initial Loans or Facility A Readvances, within three days after demand therefor on or about the Quarterly Dates, and within three days after demand therefor on or about the relevant Termination Date. (b) In consideration of the Commitments and of the agreement of the Banks to enter into this Agreement, the Company shall pay to the Agent for the account of each Bank in accordance with its Commitment Percentage a facility fee in an amount equal to .125% of such Bank's Commitment Percentage of the Unavailable Commitment. Such facility fee shall be due on the Qualifying Date and will never be due if the Qualifying Date does not occur. (c) All past due fees payable pursuant to this section shall bear interest at the Post-Default Rate. Upon receipt, the Agent shall disburse such fees to the Banks in accordance with their Commitment Percentages. 2.4. AFFILIATES; LENDING OFFICES. (a) Any Bank may, if it so elects, fulfill its Commitment as to any Eurodollar Loan by causing a branch, foreign or otherwise, or Affiliate of such Bank to make such Loan and may transfer and carry such Loan at, to or for the account of any branch office or Affiliate of such Bank; PROVIDED that in such event, for the purposes of this Agreement, such Loan shall be deemed to have been made by such Bank and the obligation of the Company to repay such Loan shall nevertheless be to such Bank and shall be deemed to be held by such Bank, to the extent of such Loan, for the account of such branch or Affiliate. (b) Notwithstanding any provision of this Agreement to the contrary, each Bank shall be entitled to fund and maintain its funding of all or any part of its Loans hereunder in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Bank had actually funded and maintained each Eurodollar Loan during each Interest Period through the purchase of deposits having a maturity corresponding to such Interest Period and bearing an interest rate equal to the applicable Eurodollar Base Rate for such Interest Period. 2.5. SEVERAL OBLIGATIONS. The failure of any Bank to make any Loan to be made by it on the date specified therefor shall not -47- relieve any other Bank of its obligation to make its Loan on such date, but neither the Agent nor any Bank shall be responsible for the failure of any other Bank to make a Loan to be made by such other Bank. 2.6. NOTES. The Loans made by each Bank shall be evidenced by a single Facility A Note or Facility B Note, as the case may be, of the Company (each, together with all renewals, extensions, modifications and replacements thereof and substitutions therefor, a "NOTE") dated the date hereof, payable to the order of such Bank in a principal amount equal to the Commitment of such Class of such Bank as originally in effect and otherwise duly completed. Each Bank is hereby authorized by the Company to endorse on the schedule (or a continuation thereof) attached to each Note of such Bank, to the extent applicable, the date, amount and Type of and the Interest Period for each Loan made by such Bank to the Company hereunder, and the amount of each payment or prepayment of principal of such Loan received by such Bank; PROVIDED that any failure by such Bank to make any such endorsement shall not affect the obligations of the Company under such Note, in respect of such Loan, or hereunder. 2.7. OPTIONAL RESERVE REPORT. The Company may from time to time at its option, exercisable by giving written notice to the Co-Agents not more often than once in any Calculation Period, provide to the Co-Agents an Independent Engineering Report. Upon the receipt of such notice, the Co-Agents shall consult with the Company to determine new Approved Assumptions, which shall be furnished to the Banks by a notice as provided in the definition of "Approved Assumptions" and shall be subject to the approval by Banks with aggregate Commitment Percentages of 75% or more as provided therein. The Optional Reserve Report shall be based on the new Approved Assumptions and shall be accompanied by a Coverage Report as of the date such Optional Reserve Report is furnished. The Annual Debt Service Coverage Ratio, the Alternate Annual Debt Service Coverage Ratio, the TLOR Coverage Ratio and the SLOR Coverage Ratio (and the Applicable Margin) shall each be redetermined in accordance with this Agreement on the basis of each such Optional Reserve Report and Coverage Report, and the Available Amount recalculated as provided in SECTION 2.1(b)(2). 2.8. RELEASE OF MORTGAGES. The Company shall be entitled to a release of the Mortgaged Properties from the liens, assignments and security interests of the Deed of Trust and the other Mortgages, PROVIDED that (a) immediately before and immediately after giving effect to such release, no Default shall have occurred and be continuing; and (b) the Annual Debt Service Coverage Ratio and the SLOR Coverage Ratio (each calculated assuming the Available Amount is fully drawn and that the aggregate unpaid principal -48- balance of the Facility A Notes is equal to the Facility A Maximum Amount) immediately before and immediately after giving effect to any such release shall be at least 1.25 to 1.00 and 2.00 to 1.00, respectively. At any time on or after the Qualifying Date, but prior to July 1, 1994, the Company may choose not more often than once by giving written notice to the Co-Agents to recalculate the Annual Debt Service Coverage Ratio and the SLOR Coverage Ratio to determine if the Company qualifies for release of the Mortgaged Properties pursuant to this section; such recalculation shall be based on new Approved Assumptions to be determined in connection with such recalculation by Banks with Commitment Percentages of 75% or more and using the Independent Engineering Report most recently furnished in accordance with this Agreement. Notwithstanding any other provision of this Agreement to the contrary, should both (x) the Company at any time designate as the Available Amount an amount less than the maximum amount then offered to it as the Available Amount and (y) as a result the Company shall obtain the release of any Mortgaged Properties, the Available Amount may never thereafter exceed the amount so designated by the Company. 2.9. USE OF PROCEEDS. The proceeds of the Loans shall be used by the Company for working capital and for general corporate purposes and may not be utilized (a) to pay dividends other than usual dividends in the ordinary course of business or (b) for the buyout or acquisition of any business unless the board of directors of such Person or any other similar body has first approved such buyout or acquisition. 2.10. ORIGINAL CREDIT DOCUMENTS NOT TERMINATED. The execution and delivery of this Agreement and the other Credit Documents in connection with this Agreement, including the Notes, does not and shall not constitute payment, prepayment or novation of any indebtedness outstanding under the Revolving and Term Credit Agreement dated as of May 20, 1992, by and among the parties hereto, as amended, or the notes outstanding thereunder on the date hereof (the "ORIGINAL NOTES"). The Original Notes have been marked "renewed" rather than "paid". All Liens securing the Original Notes as amended and modified from time to time by the Credit Documents executed and delivered concurrently with this Agreement are hereby ratified, confirmed, extended, renewed and brought forward as security for the Notes and all other Obligations of the Company described therein as being secured thereby. 2.11. SALE OF CERTAIN PROPERTIES. Notwithstanding the provisions of SECTIONS 2.2, 2.8 and 3.2, the sale of the properties by the Company pursuant to the agreement dated December 2, 1993 by and among the Company, Santa Fe Energy Operating Partners, L.P. and Bridge Oil U.S.A. and with respect to the Manila Village properties, Plaquemines Parish, Louisiana, pursuant to the -49- agreement dated October 26, 1993, by and among the Company, Santa Fe Energy Operating Partners, L.P., Santa Fe Oil Company and Vintage Petroleum, Inc. shall be made with a release from the Liens of the Security Documents, without any required prepayment and without reducing either any Facility A Maximum Amount or any Preliminary Available Amount. Section 3. BORROWINGS, PREPAYMENTS AND SELECTION OF INTEREST RATES. 3.1. BORROWINGS. The Company shall give the Agent notice of each borrowing to be made hereunder as provided in SECTION 5.5. Each borrowing shall be in an amount of $1,000,000 or any integral multiple thereof. Not later than 1:00 p.m. on the date specified for each such borrowing hereunder, each Bank shall make available the amount of the Loan, if any, to be made by it on such date to the Agent, at its Principal Office, in immediately available funds, for the account of the Company. The amount so received by the Agent shall, subject to the terms and conditions of this Agreement, be made available to the Company by depositing the same, in immediately available funds, in an account designated by the Company and maintained with the Agent at its Principal Office. 3.2. PREPAYMENTS. (a) OPTIONAL PREPAYMENTS. Except as provided in SECTIONS 3, 4.2(c), 5 and 6, the Company shall have the right to prepay, on any Business Day, in whole or in part, without the payment of any penalty or fee, Loans at any time or from time to time; PROVIDED that the Company shall give the Agent notice of each such prepayment as provided in SECTION 5.5. Eurodollar Loans may be prepaid on the last day of an Interest Period applicable thereto. Eurodollar Loans may not be otherwise prepaid unless prepayment is accompanied by payment of all compensation required by SECTION 6.5. All optional prepayments shall be applied to Facility B Loans and Reimbursement Obligations until all such Facility B Loans and Reimbursement Obligations have been repaid, then to Facility A Loans. (b) MANDATORY PREPAYMENTS. (1) The Company shall from time to time on demand by the Agent prepay the Facility B Loans in such amounts as shall be necessary (A) so that at all times the aggregate outstanding principal amount of the Facility B Loans and Letter of Credit Liabilities shall not be in excess of the Available Amount or (B) to comply with SECTION 9.9. Any such payment shall be allocated between Facility B Loans and Letter of Credit Liabilities and, if to Letter of Credit Liabilities, first to Reimbursement Obligations and then to other obligations as the Company may elect. -50- In addition, the Company shall from time to time on demand by the Agent prepay the Facility A Loans in such amounts as shall be necessary (A) so that at all times the aggregate outstanding principal amount of the Facility A Loans (including Facility A Readvances) shall not be in excess of the Facility A Maximum Amount or (B) to comply with SECTION 9.9. (2) (A) Upon any sale for cash or cash equivalent consideration of any Proved Reserves included in the Adobe Properties in excess of $1,000,000 in any one transaction or $5,000,000 for all transactions, the Company shall prepay on the Business Day following the date of such sale for application to the unpaid principal balance of the Facility A Notes an amount equal to the greater of (i) 100% of the total proceeds of such sale or (ii) 58% of the present worth assigned to the property sold in the Most Recent Engineering Report. (B) Except as otherwise permitted by the Mortgages, Mortgaged Properties cannot be sold for consideration other than cash without the approval of all Banks. Upon any sale of any Proved Reserves included in the Adobe Properties (other than Mortgaged Properties) for consideration other than cash which causes the aggregate net present value (at the discount rate included in the Approved Assumptions on the date of each such sale) of all Adobe Properties sold for consideration other than cash (determined in accordance with the applicable Most Recent Engineering Report) in any one Calculation Period to exceed $5,000,000, the Company shall prepay on the Business Day following the date of such sale for application to the unpaid principal balance of the Facility A Notes an amount equal to 100% of the net present value (at the discount rate included in the Approved Assumptions in effect on the date of such sale) of the Adobe Properties so sold (determined in accordance with the Most Recent Engineering Report). (C) All amounts prepaid pursuant to SECTION 3.2(b)(2)(A) or (B) shall be applied to the unpaid principal balance of the Facility A Notes. The Company may in its discretion defer making the prepayment required by SECTION 3.2(b)(2) (A) or (B) until the earlier of (i) the time the aggregate amount of such prepayments so deferred equals or exceeds $1,000,000 or (ii) one month after the date the first such prepayment would otherwise be due. (3) Concurrently with any sale of any Proved Reserves (whether or not included in the Adobe Properties) which would cause the aggregate amount of such sales since the effective date of the last calculation of compliance with the Required Ratios to exceed -51- $20,000,000 in the aggregate, each of the Annual Debt Service Coverage Ratio and the Alternate Annual Debt Service Coverage Ratio shall be redetermined for the Calculation Period in which such sales occur and for each Calculation Period thereafter to and including December 31, 1998 and the SLOR Coverage Ratio and the TLOR Coverage Ratio shall be redetermined, in each case to the effective date of the sale on the basis of the most recent Approved Assumptions and the Most Recent Engineering Report and the most recent Coverage Report delivered to the Agent pursuant to SECTION 9.1. In making such redeterminations, (a) the Proved Reserves (whether or not included in the Adobe Properties) described in the Most Recent Engineering Report which are no longer owned by members of the Combined Group (the "SOLD PROPERTIES") shall be identified; (b) there shall be determined the gross and net volumes of Hydrocarbons projected in the Most Recent Engineering Report to be produced from the Petroleum Properties (including the Sold Properties) minus the gross and net volumes of Hydrocarbons projected in the Most Recent Engineering Report to be produced from the Sold Properties; (c) there shall be determined by calendar years the Net Oil and Gas Income shown in the Most Recent Engineering Report as attributable to the Petroleum Properties (including the Sold Properties) of members of the Combined Group minus the Net Oil and Gas Income shown in the Most Recent Engineering Report as attributable to the Sold Properties; and (d) the discount rate and other factors set forth in the most recent Approved Assumptions shall be used. In addition to any prepayments required by SECTION 3.2(b)(2)(A) and (B), if the Company upon any such redetermination shall not be in compliance with all Required Ratios, the Company shall prepay on the Business Day following the date of such sale an amount of the proceeds of all sales of any Adobe Properties not previously prepaid for application to the unpaid principal balance of the Facility A Notes. The Company may in its discretion defer making the prepayments required by the preceding sentence until the earlier of (a) the time the aggregate amount of such prepayments so deferred equals or exceeds $1,000,000 or (b) one month after the date the first such prepayment would otherwise be due. (4) The Company shall maintain records of all sales of Proved Reserves, shall clearly designate each such sale as a sale of an Adobe Property or other property, and shall otherwise maintain books and records which enable it to comply, and to demonstrate to the Agent on request compliance, with the obligations of the Company in this SECTION 3.2(b). 3.3. SELECTION OF INTEREST RATES. Subject to SECTIONS 5, 6 and 12.8, the Company shall have the right, by giving written notice to the Agent as provided in SECTION 5.5, either to convert any Loan (in whole or in part) into a Loan of another Type or to -52- continue such Loan (in whole or in part) as a Loan of the same Type. Any such notice of conversion of a Loan into, or continuation of a Loan as, a Eurodollar Loan shall specify the new Interest Period. In the event the Company fails to so give such notice prior to the end of any Interest Period for any Eurodollar Loan, such Loan shall become an Alternate Base Rate Loan on the last day of such Interest Period. No more than 10 Eurodollar Interest Periods shall be in effect at any time. Except as otherwise provided herein, each designation of an interest rate with respect to the Facility A Notes or Facility B Notes shall apply to all Facility A Notes and Facility B Notes ratably in accordance with their respective outstanding principal balances. If any Bank assigns an interest in any of its Notes when any Eurodollar Loan is outstanding with respect thereto, the assignee shall have its ratable interest in such Eurodollar Loan. Section 4. PAYMENTS OF PRINCIPAL AND INTEREST. 4.1. REPAYMENT OF LOANS. (a) The Company will pay to the Agent for the account of each Bank the principal of each Loan made by such Bank on the dates provided in the respective Notes and herein and the amount of each Reimbursement Obligation forthwith upon its incurrence. The amount of any Reimbursement Obligation may, if the applicable conditions precedent specified in SECTION 7 (other than any Default resulting solely from the nonpayment of such Reimbursement Obligation) have been satisfied, be paid with the proceeds of Loans. (b) Subject to SECTIONS 3.2 and 10.1, the Company shall pay the outstanding principal amount of all Facility A Loans on the Facility A Maturity Date and the outstanding principal amount of all Facility B Loans on the Facility B Maturity Date. 4.2. INTEREST. (a) Subject to SECTION 12.8, the Company will pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Loan made by such Bank for the period commencing on the date of such Loan to but excluding the date such Loan shall be paid in full, at the lesser of (1) the following rates per annum: (A) if such Loan is an Alternate Base Rate Loan, the Alternate Base Rate PLUS the Applicable Margin for Alternate Base Rate Loans; or (B) if such Loan is a Eurodollar Loan, the applicable Eurodollar Rate PLUS the Applicable Margin for Eurodollar Loans; or (2) the Highest Lawful Rate. -53- (b) Notwithstanding any of the foregoing but subject to SECTION 12.8, the Company will pay to the Agent for the account of each Bank interest at the applicable Post-Default Rate on any principal of any Loan made by such Bank and on any other amount payable by the Company hereunder to or for the account of such Bank (but, if such amount is interest, only to the extent legally enforceable), which shall not be paid in full when due (whether at stated maturity, by acceleration or otherwise), for the period commencing on the due date thereof through and including the date the same is paid in full. (c) Accrued interest shall be due and payable on the applicable Interest Payment Dates, except that (1) accrued interest payable at the Post-Default Rate shall be due and payable from time to time on demand of the Agent or the Required Banks (through the Agent), (2) accrued interest on any amount converted from one Type of Loan to another Type of Loan shall be paid on the amount so converted at the time of such conversion, and (3) accrued interest on any Eurodollar Loan paid or prepaid shall be due at the time of such payment or prepayment. Section 5. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC. 5.1. PAYMENTS. (a) Except to the extent otherwise provided herein, all payments of principal of or interest on the Loans and other amounts to be made by the Company hereunder and under the Notes and the Security Documents shall be made in dollars, in immediately available funds, to the Agent at its Principal Office (or in the case of a successor Agent, at the principal office of such successor Agent in the United States), not later than 11:00 a.m. on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). (b) The Company shall, at the time of making each payment hereunder or under any Note or any Security Document, specify to the Agent the Loans or other amounts payable by the Company hereunder or thereunder to which such payment is to be applied (and in the event that it fails so to specify, such payment shall be applied as the Agent may designate to the Loans or other amounts then due and payable); PROVIDED that if no Loans are then due and payable or an Event of Default has occurred and is continuing, the Agent may apply such payment to the Obligations in such order as it may elect in its sole discretion, but subject to the other terms and conditions of this Agreement, including SECTION 5.2). Each payment received by the Agent hereunder or under any Note or any Security Document for the account of a Bank shall be paid promptly to such Bank, in immediately available funds for the account of such Bank's Applicable Lending Office. -54- (c) If the due date of any payment hereunder or under any Note or Security Document falls on a day which is not a Business Day, the due date for such payment (subject to the definition of Interest Period) shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. 5.2. PRO RATA TREATMENT. Except to the extent otherwise provided herein, (a) each borrowing from the Banks hereunder, each payment of Commitment Fees and other fees and each termination or reduction of the Commitments of the Banks under SECTION 2.3 shall be made PRO RATA according to the Banks' respective Commitments, and (b) each payment by the Company of principal of or interest on Loans of a particular Type shall be made to the Agent for the account of the Banks PRO RATA in accordance with the respective unpaid principal amounts of such Loans held by the Banks (subject to SECTION 6.4). 5.3. COMPUTATIONS. Interest based on the Alternate Base Rate (to the extent determined by reference to the Prime Rate), and fees hereunder, will be computed on the basis of 365 (or 366) days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. All other interest shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable, unless the effect of so computing shall be to cause the rate of interest to exceed the Highest Lawful Rate (in which event interest shall be calculated on the basis of the actual number of days elapsed in a year composed of 365 or 366 days, as the case may be). 5.4. MINIMUM AND MAXIMUM AMOUNTS. Except for prepayments made pursuant to SECTION 3.2(b), each borrowing and repayment of principal of Loans, each optional prepayment and each conversion of Type shall be in an aggregate principal amount equal to $1,000,000, or an integral multiple thereof (borrowings or prepayments of Loans of different Types or, in the case of Eurodollar Loans, having different Interest Periods at the same time hereunder, to be deemed separate borrowings and prepayments for purposes of the foregoing, one for each Type or Interest Period), and each termination or reduction of Commitments shall be in an aggregate principal amount equal to $5,000,000 or an integral multiple thereof. Upon any mandatory prepayment that would reduce Eurodollar Loans having the same Interest Period to less than $1,000,000, such Loans shall automatically be converted into Alternate Base Rate Loans. 5.5. CERTAIN ACTIONS, NOTICES, ETC. Notices to the Agent of any termination or reduction of Commitments, prepayments of Loans and of the duration of Interest Periods and Requests for Extension -55- of Credit shall be irrevocable and shall be effective only if received by the Agent not later than 11:00 a.m. on the number of Business Days prior to the date of the relevant termination, reduction, borrowing and/or prepayment specified below: Number of Business Days Prior Notice Termination or reduction of Commitments 10 Borrowing or prepayment of or conversion into Alternate Base Rate Loans same day Borrowing or prepayment of or conversion into or continuance of Eurodollar Loans 3 Prepayments required pursuant to SECTION 3.2 1 Each such notice of termination or reduction shall specify the amount of the Commitment to be terminated or reduced. Each such notice of prepayment or Request for Extension of Credit shall specify the amount, Class and Type of the Loans to be borrowed or prepaid (subject to SECTIONS 3.2(a) and 5.4), the date of borrowing or prepayment (which shall be a Business Day) and, in the case of Eurodollar Loans, the duration of the Interest Period therefor (subject to the definition of Interest Period). Any such notice of conversion of a Loan into a Loan of another Type shall identify such Loan (or portion thereof) being converted and specify the Type of Loan into which such Loan is being converted (subject to SECTION 5.4) and the date for conversion (which shall be a Business Day) and, unless such Loan is being converted into an Alternate Base Rate Loan, the duration (subject to the definition of Interest Period) of the Interest Period therefor which is to commence as of the last day of the then current Interest Period therefor (or the date of conversion, if such Loan is being converted from an Alternate Base Rate Loan). Each such notice of continuation of a Loan (or portion thereof) as the same Type of Loan shall identify such Loan (or portion thereof) being continued (subject to SECTION 5.4) and the duration (subject to the definition of Interest Period) of the Interest Period therefor which is to commence as of the last day of the then current Interest Period therefor. The Agent shall promptly notify the Banks of the contents of each such notice or Request for Extension of Credit. -56- Notice of any prepayment having been given, the principal amount specified in such notice, together with interest thereon to the date of prepayment, shall be due and payable on such prepayment date. 5.6. NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been notified by a Bank prior to noon on the date on which such Bank is to make payment to the Agent of the proceeds of a Loan to be made by it hereunder or by the Company prior to the date on which the Company is to make a payment to the Agent for the account of one or more of the Banks, as the case may be (such Bank or the Company being herein called the "PAYOR" and such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on the date that such Required Payment is to be made. If the Payor is the Company and the Company has not in fact made the Required Payment to the Agent on or before such date, the recipient of such payment shall, on demand, pay to the Agent the amount made available by the Agent, together with interest thereon from the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Fed Funds Rate for the first three days after demand and thereafter at the Fed Funds Rate plus 2%. If the Payor is a Bank and such Bank has not in fact made the Required Payment to the Agent on or before such date, then such Bank shall pay to the Agent the amount made available by the Agent on behalf of such Bank, together with interest thereon from the date such amount was so made available by the Agent until the Agent recovers such amount at a rate per annum equal to the Fed Funds Rate for the first three days and thereafter at the Fed Funds Rate plus 2%. 5.7. SHARING OF PAYMENTS, ETC. If a Bank or any participant of a Bank shall obtain payment of any obligation to it under this Agreement, through the exercise of any right of set-off, banker's lien, counterclaim or similar right, or otherwise, then such Bank or participant shall promptly purchase from the other Banks participa- tions in the Loans made or other obligations held by the other Banks in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Banks and participants shall share the benefit of such payment (net of any expenses which may be incurred by such Bank or its participant in obtaining or preserving such benefit) PRO RATA in accordance with the unpaid principal and interest then due to each of them. To such end all the Banks and their participants shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or -57- must otherwise be restored. The Company agrees, to the fullest extent it may effectively do so under applicable law, that any Person so purchasing a participation in the Loans made or other obligations held by other Banks may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Bank were a direct holder of Loans or other obligations in the amount of such participation. Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. Section 6. YIELD PROTECTION AND ILLEGALITY. 6.1. ADDITIONAL COSTS. (a) Subject to SECTION 12.8, the Company shall pay to the Agent, on demand for the account of such Bank, from time to time such amounts as any Bank may reasonably determine to be necessary to compensate it for any costs incurred by such Bank which such Bank reasonably determines are attributable to its making or maintaining of any Eurodollar Loan hereunder or its obligation to make or maintain any such Loan hereunder, or any reduction in any amount receivable by such Bank hereunder in respect of any of such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "ADDITIONAL COSTS"), in each case resulting from any Regulatory Change which: (1) subjects such Bank (or makes it apparent that such Bank is subject) to any tax (including any United States interest equali- zation tax), levy, impost, duty, charge or fee (collectively, "TAXES"), or any deduction or withholding for any Taxes on or from the payment due under any Eurodollar Loan or other amounts due hereunder, other than income and franchise taxes of the jurisdiction (or any subdivision thereof) in which such Bank has an office or its Applicable Lending Office; or (2) changes the basis of taxation of any amounts payable to such Bank under this Agreement or its Notes in respect of any of such Loans, other than changes which affect taxes measured by or imposed on the overall net income or franchise taxes of such Bank or of its Applicable Lending Office for any of such Loans by the jurisdiction (or any subdivision thereof) in which such Bank has an office or such Applicable Lending Office; or (3) imposes or modifies or increases or deems applicable any reserve, special deposit or similar requirement (including any such requirement imposed by the Board) relating to any extensions of credit or other assets of, or any deposits with or other -58- liabilities of, such Bank or loans made by such Bank, or against any other funds, obligations or other property owned or held by such Bank; or (4) imposes any other condition affecting this Agreement (or any of such extensions of credit or liabilities). Each Bank will notify the Company through the Agent of any event occurring after the date of this Agreement which will entitle such Bank to compensation pursuant to this section as promptly as practicable after it obtains knowledge thereof and determines to request such compensation, and (if so requested by the Company through the Agent) will designate a different available Applicable Lending Office for the Eurodollar Loans of such Bank or take such other action as the Company may reasonably request if such designation or action is consistent with the internal policy of such Bank and legal and regulatory restrictions, can be undertaken at no additional cost, will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of such Bank, be disadvantageous to such Bank (PROVIDED that such Bank shall have no obligation so to designate an Applicable Lending Office located in the United States of America). Each Bank will furnish the Company with a statement setting forth the basis and amount of each request by such Bank for compensation under this section, with each such statement to cover amounts accruing under this section with respect to a period beginning not earlier than 120 days from the date thereof and using any reasonable averaging and attribution methods. (b) Without limiting the effect of the foregoing provisions of this section, in the event that, by reason of any Regulatory Change, any Bank either (1) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Bank which includes deposits by reference to which the interest rate on Eurodollar Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Bank which includes Eurodollar Loans or (2) becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold, then, if such Bank so elects by notice to the Company (with a copy to the Agent), the obligation of such Bank to make Eurodollar Loans hereunder shall be suspended until the date such Regulatory Change ceases to be in effect (in which case the provisions of SECTION 6.4 shall be applicable). (c) Determinations and allocations by any Bank for purposes of this section of the effect of any Regulatory Change on its costs of maintaining its obligations to make Loans or of making or maintaining Loans or on amounts receivable by it in respect of -59- Loans, and of the additional amounts required to compensate such Bank in respect of any Additional Costs, shall be conclusive, absent manifest error, and may be prepared using any reasonable averaging and attribution methods. (d) In the event any Bank shall seek compensation pursuant to this SECTION 6.1, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to purchase and assume the Commitments, Loans, Notes and Letter of Credit Liabilities of such Bank. Each Bank requesting compensation pursuant to this SECTION 6.1 agrees to sell its Commitments, Loans, Notes, Letter of Credit Liabilities and interests in this Agreement and in the Letter of Credit Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to the sum of the outstanding unpaid principal of and accrued interest on such Loans, Notes and Letter of Credit Liabilities plus all other fees and amounts (including any compensation claimed by such Bank under this SECTION 6.1) owing to such Bank hereunder and under the Letter of Credit Agreement calculated, in each case, to the date such Commitments, Loans, Notes, Letter of Credit Liabilities and interests are purchased, whereupon such Bank shall have no further Commitment or other obligation to the Company hereunder or under any Note or under the Letter of Credit Agreement. 6.2. LIMITATION ON TYPES OF LOANS. Anything herein to the contrary notwithstanding, if, with respect to any Eurodollar Loans: (a) the Agent determines (which determination shall be conclusive absent manifest error) that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Base Rate" in SECTION 1.1 are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rate of interest for such Loans for Interest Periods therefor as provided in this Agreement; or (b) the Required Banks determine (which determination shall be conclusive absent manifest error) and notify the Agent that the relevant rates of interest referred to in the definition of "Eurodol- lar Base Rate" in SECTION 1.1 upon the basis of which the rates of interest for such Loans are to be determined do not accurately reflect the cost to such Banks of making or maintaining such Loans for any proposed Interest Periods therefor; or (c) the Agent determines (which determination shall be conclusive absent manifest error) that by reason of circumstances affecting the Eurodollar interbank market generally, deposits in dollars in the relevant Eurodollar interbank market are not being -60- offered for the applicable Interest Period and in an amount equal to the amount of the Eurodollar Loan requested by the Company; then the Agent shall promptly notify the Company and each Bank thereof, and, so long as such condition remains in effect, the Banks shall be under no obligation to make Eurodollar Loans (but shall maintain until the end of the Interest Period then in effect the Eurodollar Loans then outstanding). 6.3. ILLEGALITY. Notwithstanding any other provision of this Agreement to the contrary, if by reason of (x) the adoption of any applicable Legal Requirement or any change in any applicable Legal Requirement or in the interpretation or administration thereof by any Governmental Authority or compliance by any Bank with any request or directive (whether or not having the force of law) of any central bank or other Governmental Authority or (y) circumstances affecting the relevant Eurodollar interbank market or the position of a Bank therein, it shall at any time be unlawful or impracticable in the sole discretion of a Bank for such Bank or its Applicable Lending Office to (a) honor its obligation to permit the establishment of Eurodollar Loans hereunder or (b) maintain Eurodollar Loans hereunder, then such Bank through the Agent shall promptly notify the Company thereof and the obligation of such Bank to establish or maintain Eurodollar Loans hereunder shall be suspended until such time as such Bank may again establish and maintain Eurodollar Loans, in which case the provisions of SECTION 6.4 shall be applicable. Before giving such notice pursuant to this section, such Bank will designate a different available Applicable Lending Office for the Eurodollar Loans of such Bank or take such other action as the Company may reasonably request if such designation or action is consistent with the internal policy of such Bank and legal and regulatory restrictions, can be undertaken at no additional cost, will avoid the need to suspend such Bank's obligation to make Eurodollar Loans hereunder and will not, in the sole opinion of such Bank, be disadvantageous to such Bank (PROVIDED that such Bank shall have no obligation so to designate an Applicable Lending Office located in the United States of America). In the event any Bank shall seek to invoke the benefits of this section, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to purchase and assume the Commitments, Loans, Notes and Letter of Credit Liabilities of such Bank. Each Bank requesting to invoke the benefits of this SECTION 6.3 agrees to sell its Commitments, Loans, Notes, Letter of Credit Liabilities and interests in this Agreement and in the Letter of Credit Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to the sum of the outstanding unpaid principal of and -61- accrued interest on such Loans, Notes and Letter of Credit Liabilities plus all other fees and amounts owing to such Bank hereunder and under the Letter of Credit Agreement calculated, in each case, to the date such Commitments, Loans, Notes, Letter of Credit Liabilities and interests are purchased, whereupon such Bank shall have no further Commitment or other obligation to the Company hereunder or under any Note or under the Letter of Credit Agreement. 6.4. SUBSTITUTE ALTERNATE BASE RATE LOANS. If the obligation of any Bank to make or maintain Eurodollar Loans shall be suspended pursuant to SECTION 6.1, 6.2 or 6.3, all Loans which would otherwise be made by such Bank as Eurodollar Loans shall be made instead as Alternate Base Rate Loans (and, if an event referred to in SECTION 6.1(b) or 6.3 has occurred and such Bank so requests by notice to the Company with a copy to the Agent, each Eurodollar Loan of such Bank then outstanding shall be automatically converted into an Alternate Base Rate Loan on the date specified by such Bank in such notice) and, to the extent that such Loans are so made as (or converted into) Alternate Base Rate Loans, all payments of principal which would otherwise be applied to such Loans shall be applied instead to such Alternate Base Rate Loans. 6.5. COMPENSATION. Subject to SECTION 12.8, the Company shall pay to the Agent for the account of each Bank, within two Business Days after demand therefor by such Bank through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Bank) to compensate it for any loss, cost or expense incurred by it as a result of: (a) any payment, prepayment or conversion of a Eurodollar Loan made by such Bank on a date other than the last day of an Interest Period for such Loan; or (b) any failure by the Company to borrow a Eurodollar Loan to be made by such Bank on the date for such borrowing specified in the relevant notice of borrowing under SECTION 5.5 or to convert an Alternate Base Rate Loan into a Eurodollar Loan on such date after giving notice of such conversion or to continue a Eurodollar Loan after giving notice of such continuance; or (c) any cessation of the Eurodollar Rate to apply to any Loan or any part thereof; such compensation to include, without limitation, an amount equal to the excess, if any, as reasonably determined by each Bank, of (1) its cost of obtaining the funds for the Loan being paid, prepaid or converted or not borrowed, converted or continued (assumed to be the applicable Eurodollar Base Rate) for the period -62- from the date of such payment, prepayment or conversion or failure to borrow convert or continue to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue the Interest Period for the Loan which would have commenced on the date of such failure to borrow convert or continue) over (2) the amount of interest (as reasonably determined by such Bank) that would be realized by such Bank in reemploying the funds so paid, prepaid or converted or not borrowed, converted or continued for such period or Interest Period, as the case may be. Each determination of the amount of such compensation by a Bank shall be conclusive and binding, absent manifest error, and may be computed using any reasonable averaging and attribution method. 6.6. CAPITAL ADEQUACY. If any Bank shall have determined that the adoption after the date hereof or effectiveness after the date hereof (regardless of whether previously announced) of any applicable Legal Requirement or treaty regarding capital adequacy, or any change after the date hereof in any existing or future Legal Requirement or treaty regarding capital adequacy, or any change in the interpretation or administration thereof after the date hereof by any Governmental Authority or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive after the date hereof regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority or comparable agency has or would have the effect of reducing the rate of return on the capital of such Bank (or any holding company of which such Bank is a part) as a consequence of its obligations hereunder and under or in respect of the Notes held by it to a level below that which such Bank or holding company could have achieved but for such adoption, change or compliance by an amount deemed by such Bank to be material, then from time to time, upon demand by such Bank (with a copy to the Agent), the Company (subject to SECTION 12.8) shall pay to such Bank such additional amount or amounts as will compensate such Bank or holding company for such reduction. The certificate of any Bank setting forth such amount or amounts as shall be necessary to compensate it and the basis therefor shall cover amounts accruing under this section with respect to a period beginning not earlier than 120 days from the date thereof and shall be conclusive and binding, absent manifest error. The Company shall pay the amount shown as due on any such certificate upon delivery of such certificate. In preparing such certificate, a Bank may employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable and may use any reasonable averaging and attribution method. In the event any Bank shall seek compensation pursuant to this section, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be -63- one or more of the Banks) to purchase and assume the Commitments, Loans, Notes and Letter of Credit Liabilities of such Bank. Each Bank requesting compensation pursuant to this section agrees to sell its Commitments, Loans, Notes, Letter of Credit Liabilities and interests in this Agreement and in the Letter of Credit Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to the sum of the outstanding unpaid principal of and accrued interest on such Loans, Notes and Letter of Credit Liabilities plus all other fees and amounts (including any compensation claimed by such Bank under this section owing to such Bank hereunder and under the Letter of Credit Agreement calculated, in each case, to the date such Commitments, Loans, Notes, Letter of Credit Liabilities and interests are purchased, whereupon such Bank shall have no further Commitment or other obligation to the Company hereunder or under any Note or the Letter of Credit Agreement. Section 7. CONDITIONS PRECEDENT. 7.1. CLOSING CONDITIONS. The effectiveness of this Agreement is subject to the following conditions precedent, each of which shall have been fulfilled or waived to the satisfaction of the Agent: (a) CORPORATE ACTION AND STATUS. The Agent shall have received copies of the Organizational Documents of the Company certified by the Secretary of the Company, and resolutions of the Board of Directors of the Company, certified by the Secretary of the Company, for all corpo- rate action taken by the Company authorizing the execution, delivery and performance of the Credit Documents and all other documents related to this Agreement, together with such certificates as may be appropriate to demonstrate the qualification and good standing of and payment of taxes by each member of the Combined Group in each jurisdiction set forth on SCHEDULE IX. (b) INCUMBENCY. The Company shall have delivered to the Agent a certificate in respect of the name and signature of each officer who (1) is authorized to sign on its behalf the applicable Credit Documents related to any Loan and (2) will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with any Loan. The Agent and each Bank may conclusively rely on such certificates until they receive notice in writing from the Company to the contrary. -64- (c) NOTES. The Agent shall have received the appropriate Notes of the Company for each Bank, duly completed and executed. (d) SECURITY MATTERS. The Security Documents, including the Amendment to Security Agreement -- Contract Rights, the Amendment to Security Agreement -- Stock and the Amendment to Louisiana Security Agreement, shall have been duly executed and delivered by the respective parties thereto, and such other action (including the endorsement and/or pledge of the property covered thereby, notice to and any necessary consent by the obligor on or issuer of pledged instruments or assigned contracts) as may be necessary or as the Agent shall have requested (other than any filing and recording required in connection with the amendment of the Security Documents) to perfect the security interests created pursuant thereto shall have been taken. The Agent shall have received evidence satisfactory to it that the Liens created by the Security Documents will constitute first priority Liens, except for Permitted Encumbrances. The Agent shall have received such opinions of local counsel in the States of Alabama, Louisiana and Oklahoma as the Agent may reasonably request. (e) CREDIT DOCUMENTS. The Company shall have duly executed and delivered the other Credit Documents to which it is a party and each such Credit Document shall be in Proper Form. Each such Credit Document shall be in substantially the form furnished to the Banks prior to their execution of this Agreement, together with such changes therein as the Agent and the Banks may approve. (f) SECURITY DOCUMENTS. The Mortgages and the Amendment to Deed of Trust and the Amendment to Leasehold Deed of Trust shall have been duly executed and delivered by the Company and the Agent in recordable form (in such number of copies as the Agent shall have requested), and to the extent permitted by applicable law the Company shall have paid to the Agent in immediately available funds all expenses (including mortgage recording and other similar taxes) and premiums reasonably expected to be incurred by it in connection with recording the Mortgages and all related documents in the appropriate offices (with the Agent to repay to the Company any such sums not expended for that purpose). (g) FEES AND EXPENSES. The Company shall have paid to the Agent for the account of each Bank (1) an extension fee equal to .25% of each Bank's Commitment Percentage of the Available Commitment and (2) a facility fee equal to .125% of each Bank's Commitment Percentage of the Unavailable Commitment, and shall have paid to the Agent all fees then due in the amounts previously agreed upon in writing among the Company and the Agent. -65- (h) OPINION OF COUNSEL TO THE COMPANY. The Agent shall have received the opinions of Andrews & Kurth L.L.P. and of David L. Hicks, counsel to the Company, substantially in the forms of SCHEDULES VI and VII, respectively. (i) COUNTERPARTS. The Agent shall have received counterparts of each of the Credit Documents duly executed and delivered by or on behalf of each of the parties thereto (or, in the case of any Bank as to which the Agent shall not have received such a counterpart, the Agent shall have received evidence satisfactory to it of the execution and delivery by such Bank of a counterpart hereof). (j) CONSENTS. The Agent shall have received evidence satisfactory to it that all consents of each Governmental Authority and of each other Person, if any, required in connection with (1) the Loans, (2) the execution, delivery and performance of the Credit Documents, and (3) the transfer effected by the Security Documents of the Company's rights in and to those agreements in which a security interest or lien is granted or which are assigned under the Security Documents have been received and remain in full force and effect. (k) LETTER OF CREDIT AGREEMENT. The Letter of Credit Agreement shall have been executed and delivered by all parties thereto and shall be in full force and effect. (l) OTHER DOCUMENTS. The Agent shall have received such other documents consistent with the terms of this Agreement and relating to the transactions contemplated hereby as the Agent may reasonably request. All provisions and payments required by this SECTION 7.1 are subject to the provisions of SECTION 12.8. 7.2. ALL LOANS. The obligation of each Bank to make any Loan (including its initial Loan) to be made by it hereunder is subject to the additional conditions precedent that, as of the date of such Loan, and after giving effect thereto: (a) no Default shall have occurred and be continuing (PROVIDED, that a Default resulting solely from an Engineering Shortfall shall not bar a Rollover), and no "Default", as that term is defined in the Letter of Credit Agreement, shall have occurred and be continuing under the Letter of Credit Agreement; (b) if the Loan is not a Rollover, there has been no Material Adverse Change since December 31, 1993; -66- (c) if the Loan is not a Rollover, all representations and warranties made in each Credit Document shall be true and correct in all material respects on and as of the date of the making of such Loan, with the same force and effect as if made on and as of such date; if the Loan is a Rollover, all representations and warranties made in each Credit Document (other than and except for the representations and warranties set forth in SECTION 8.2(a)(2), 8.2(b), 8.3, 8.8 and 8.13) shall be true and correct in all material respects on and as of the date of the making of such Loan, with the same force and effect as if made on and as of such date; (d) except for Loans on the date hereof, the Company shall have delivered to the Agent a Request for Extension of Credit within the time specified in SECTION 5.5; (e) if such Loan is not a Rollover and after giving effect to such Loan and the Loans of the other Banks to be made contemporaneously therewith, the Company shall be in compliance with all Required Ratios and no Engineering Shortfall shall exist; and (f) the making of such Loan shall not be prohibited by, or subject any Bank to any penalty under, any Legal Requirement applicable to any Bank. Each Request for Extension of Credit by the Company hereunder shall include a representation and warranty by the Company to the effect set forth in SUBSECTIONS (a) through (e) (if applicable) of this SECTION 7.2 (both as of the date of such notice and, unless the Company otherwise notifies the Agent prior to the date of such borrowing, as of the date of such borrowing). Except in the case of Loans on the date hereof, such representation and warranty shall be accompanied by a certificate of the President or chief financial officer of the Company setting forth in reasonable detail the calculations of the Company in making such representation and warranty. Section 8. REPRESENTATIONS AND WARRANTIES. To induce the Banks to enter into this Agreement and to make the Loans, the Company represents and warrants (such representations and warranties to survive any investigation and the making of the Loans) to the Banks and the Agent as follows: 8.1. CORPORATE EXISTENCE. Each member of the Combined Group (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite power, and has all licenses, permits, authorizations, consents and approvals necessary, to own its property and carry on its business as now being conducted, and (c) is qualified to do -67- business, and is in good standing, in (1) all jurisdictions in which any of the Recognized Proved Reserves which it owns are located and (2) any other jurisdiction in which the nature of the business conducted by it makes such qualification necessary or advisable, unless (for purposes only of this CLAUSE (2)) the failure to be so qualified or in good standing would not individually or in the aggregate have a material adverse effect on the business, financial condition or results of operations of the Combined Group taken as a whole. 8.2. INFORMATION. (a) (1) The most recent consolidated balance sheet of the Company and its Subsidiaries and the related consolidated statements of operations, changes in financial position and cash flows for the period then ended, together with the respective notes thereto, delivered to each of the Banks prior to the execution of this Agreement (which financial statements are dated December 31, 1993), or in accordance with the provisions of SECTION 9.1(a) or (b), as the case may be (the latest of such financial statements and the notes thereto being referred to herein as the "MOST RECENT FINANCIAL STATEMENTS"), fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of such date and their consolidated results of operations for the period then ended in conformity with generally accepted accounting principles. (2) The Company and its Subsidiaries did not on the date of the Most Recent Financial Statements, and do not on the date as of which this representation is made in accordance with the terms of this Agreement, have any material contingent liabilities, material liabilities for taxes, unusual and material forward or long-term commitments or material unrealized or anticipated losses from any commitments, except (A) as referred to or reflected or provided for in the Most Recent Financial Statements; (B) as otherwise hereafter disclosed to the Banks in writing in accordance with the terms of this Agreement, or (C) in connection with the obligations of the Company under this Agreement and the Letter of Credit Agreement. (b) Since December 31, 1993, there has been no Material Adverse Change. 8.3. LITIGATION; COMPLIANCE. Except as disclosed in writing to the Banks prior to the date hereof, or as hereafter disclosed to the Banks in accordance with the provisions of SECTION 9.1(E), there are no legal or arbitral proceedings or any proceedings by or before any Governmental Authority now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any -68- of its Subsidiaries which, if adversely determined, would cause a Material Adverse Change. The Company and its Subsidiaries comply in all material respects with all applicable material (based on the Company and its Subsidiaries taken as a whole) Legal Requirements (other than the Applicable Environmental Laws, representations regarding which are subject to SECTION 8.13). Neither the Company nor any of its Subsidiaries is in default in any material respect under or violation of any material (based on the Company and its Subsidiaries taken as a whole) judgment, order or decree of any Governmental Authority. 8.4. NO BREACH. None of the execution and delivery of the Credit Documents, the consummation of the transactions therein contemplated or compliance with the terms and provisions thereof will conflict with or result in a breach of, or require any consent that has not been obtained under, the Serial Note Agreement, the Organizational Documents of the Company or any of its Subsidiaries or any material Legal Requirement (including any securities law, rule or regulation) applicable to the Company or any of its Subsidiaries or (except for the Liens required or permitted by this Agreement and the Security Documents) result in the creation or imposition of any Lien upon any of the revenues or property of the Company or any of its Subsidiaries. Such execution, delivery, consummation and compliance do not and will not conflict with or result in a breach of any material agreement or instrument to which the Company is a party or by which the Company is bound or to which it is subject, or constitute a default under any such agreement or instrument. 8.5. CORPORATE ACTION. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under the Credit Documents. The execution, delivery and performance of the Credit Documents by the Company have been duly authorized by all necessary corporate action. The Credit Documents have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general equitable principles. 8.6. APPROVALS. All authorizations, approvals and consents of, and all filings and registrations with, all Governmental Authorities and each other Person necessary for the execution, delivery or performance of any Credit Document or for the validity or enforceability thereof, except for the filings and recordings of the Liens created pursuant to the Security Documents, have been obtained by the Company and are in full force and effect. -69- 8.7. REGULATIONS G, U AND X. 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 of purchasing or carrying margin stock (within the meaning of Regulation G, U or X of the Board) and no part of the proceeds of any extension of credit hereunder will be used to acquire or carry, directly or indirectly, any such margin stock. 8.8. ERISA. The Company and each ERISA Affiliate have fulfilled their contribution obligations under each Plan subject to Title IV of ERISA and have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan subject to Title IV of ERISA, and in all other regards with respect to each Plan are in material compliance with the applicable provisions of ERISA, the Code, and all other applicable laws, regulations and rules, to the extent that noncompliance with such provisions would result in a Material Adverse Change. The Company has no knowledge of any event with respect to each Plan which could result in a Material Adverse Change. 8.9. TAXES. Each of the Company and its Subsidiaries has filed all United States federal income tax returns and all other material tax returns which are required to be filed by it and has paid all taxes due pursuant to such returns or pursuant to any assessment received by it, except to the extent the same may be contested in good faith by appropriate proceedings diligently conducted for which adequate reserves have been established in accordance with generally accepted accounting principles. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges, as made on a periodic basis, are adequate. 8.10. SUBSIDIARIES. SCHEDULE I is a complete and correct list, as of the date of this Agreement, of all Subsidiaries of the Company. All shares or other indicia of equity interest of the Restricted Subsidiaries and the Special Subsidiary directly or indirectly owned by the Company are free and clear of Liens, and all such shares are validly issued, fully paid and non-assessable. 8.11. INVESTMENT COMPANY ACT. No member of the Combined Group is an investment company within the meaning of the Investment Company Act of 1940, as amended, or directly or indirectly controlled by or acting on behalf of any Person which is an investment company, within the meaning of said Act. 8.12. PUBLIC UTILITY HOLDING COMPANY ACT. No member of the Combined Group is a "public utility company", or, to the knowledge of the Company, an "affiliate" or a "subsidiary company" of a "public utility company", or a "holding company", or an "affiliate" -70- or a "subsidiary company" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 8.13. ENVIRONMENTAL MATTERS. Except as disclosed in writing to the Agent prior to the date hereof, the Company and its Subsidiaries, and the plants and sites of each, have complied with all Applicable Environmental Laws, except, in any such case, where such failure to so comply would not result in a Material Adverse Change. Without limiting the generality of the preceding sentence, neither the Company nor any of its Subsidiaries has received notice of or has actual knowledge of any actual or claimed or asserted failure so to comply with Applicable Environmental Laws or of any other Environmental Claim which alone or together with all other such failures or Environmental Claims is material and would result in a Material Adverse Change. Except as disclosed in writing to the Agent prior to the date hereof, neither the Company nor any of its Subsidiaries nor their plants or other sites manage, generate or dispose of, or during their respective period of use, ownership, occupancy or operation by the Company or its Subsidiaries have managed, generated, released or disposed of, any hazardous wastes, hazardous substances, hazardous materials, toxic substances or toxic pollutants, as those terms are used or defined in the Applicable Environmental Laws, in material violation of or in a manner which would result in liability under the Applicable Environmental Laws or any other applicable Legal Requirement, or in a manner which would result in an Environmental Claim except where such noncompliance or liability or Environmental Claim would not result in a Material Adverse Change. The representation and warranty contained in this section is based in its entirety upon (a) current interpretations and enforcement policies that have been publicly disseminated and are used by Governmental Authorities charged with the enforcement of the Applicable Environmental Laws or which apply to the Company or any of its Subsidiaries with respect to any property or sites in a particular jurisdiction and (b) current levels of publicly disseminated scientific knowledge concerning the detection of, and the health and environmental risks associated with the discharge of, substances and pollutants regulated pursuant to the Applicable Environmental Laws. 8.14. TITLE. (a) The Company has good and defensible title to the oil, gas and mineral properties included in the Adobe Properties in the Most Recent Engineering Report furnished to the Banks. (b) Such properties and facilities are free and clear of all Liens, except Permitted Encumbrances and other Liens permitted hereby. -71- (c) The Company has full right, power and authority to execute, deliver and perform the Security Documents with respect to all such properties and to convey, assign and mortgage the same, without the necessity of any consent, approval or other action of any kind of or by any other Person, failure to obtain which could cause a Material Adverse Change, and such execution, delivery and performance will not result in the breach of or constitute a default under any agreement, instrument, judgment, license, order or permit to which the Company is a party or by which the Company or any of its property may be bound, which together with all other such breaches and defaults could cause a Material Adverse Change. (d) All oil, gas and mineral leases and leasehold estates, gas purchase and sales contracts, and other agreements comprising or relating to any of such properties are valid and subsisting and in full force and effect, except for those leases, estates, contracts, easements, rights-of-way and agreements which are in the aggregate not material to oil, gas and mineral properties included in the Adobe Properties in the Most Recent Engineering Report furnished to the Banks, taken as a whole. (e) All rights, permits, easements, servitudes and rights-of-way, failure to have or maintain which would materially interfere with the development, maintenance and operation of such properties so as to cause a Material Adverse Change, have been obtained by the Company and are in full force and effect. (f) Each of the Security Documents creates or will create, when executed and delivered, a valid Lien upon the Property therein described. Section 9. COVENANTS. The Company agrees with the Banks and the Agent that until the termination of this Agreement: 9.1. FINANCIAL STATEMENTS AND CERTIFICATES. The Company will deliver in duplicate: (a) to each Bank, as soon as practicable and in any event within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated and consolidating statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such quarterly period, setting forth (1) as to each account affected thereby, all eliminating entries for the Unrestricted Subsidiaries as a group and for the Special Subsidiary, respectively, and (2) the resulting consolidated and consolidating figures for the -72- Company and the Restricted Subsidiaries, and setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and unaudited but certified by an authorized financial officer of the Company as fairly presenting the financial position and results of operations of the Company and its Subsidiaries as of the date thereof and the period then ended, subject to changes resulting from year-end adjustments; (b) to each Bank, as soon as practicable and in any event within 90 days after the end of each fiscal year, consolidated and consolidating statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for such year, and a consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such fiscal year, setting forth (1) as to each account affected thereby, all eliminating entries for the Unrestricted Subsidiaries as a group and for the Special Subsidiary, respectively, and (2) the resulting consolidating figures for the Company and the Restricted Subsidiaries, and setting forth in each case in comparative form corresponding consolidating figures from the preceding annual audit, all in reasonable detail and which shall be reported on by Price Waterhouse & Co. or other independent public accountants of recognized national standing selected by the Company whose report shall (A) contain an opinion that shall be unqualified as to the scope or limitations imposed by the Company and shall not be subject to any other material qualification and (B) state that such financial statements present fairly, in all material respects, the financial position of the Company and its Subsidiaries at the dates indicated and their cash flows and the results of their operations and the changes in their financial position for the periods indicated in conformity with generally accepted accounting principles, and shall be accompanied by a report of such independent public accountants stating that (W) such audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole; (X) the consolidating information set forth therein is presented for purposes of additional analysis rather than to present the financial position, results of operations and cash flows of the individual companies; (Y) such consolidating information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and (Z) in such independent public accountants' opinion, such consolidating information is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole, with such changes thereto as such accountants reasonably determine to be appropriate under the circumstances; (c) to each Bank, promptly upon transmission thereof, copies of all financial statements, proxy statements, notices and reports -73- as it shall send to its public stockholders and copies of all registration statements (without exhibits, and other than registration statements and reports relating to employee benefit or compensation plans) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); (d) to each Bank, promptly upon receipt thereof, a copy of each other report submitted to the Company or any of its Subsidiaries by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any such Subsidiary; (e) to each Bank, as soon as practicable and in any event within 15 days after any executive officer of the Company obtains knowledge (1) of any Default or any condition or event which, in the opinion of management of the Company, would have a Material Adverse Change (to the extent affecting the Company and its Subsidiaries in a materially different manner or extent than the oil and gas industry generally); (2) that any Person has given any notice to the Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in SECTION 10.1(b) or (m); (3) of the institution of any litigation involving claims against the Company or any of its Subsidiaries equal to or greater than $5,000,000 with respect to any single cause of action or of any adverse determination in any court proceeding in any litigation involving a potential liability to the Company or any of its Subsidiaries equal to or greater than $5,000,000 with respect to any single cause of action which makes the likelihood of an adverse determination in such litigation against the Company or such Sub- sidiary substantially more probable, or (4) of any regulatory proceeding which, if determined adversely to the Company, would have a Material Adverse Change (to the extent affecting the Company and its Subsidiaries in a materially different manner or extent than the oil and gas industry generally), an Officer's Certificate specifying the nature and period of existence of any such Default, condition or event, or specifying the notice given or action taken by such Person and the nature of any such claimed Default, event or condition, or specifying the details of such proceeding, litigation or dispute and, in each case, what action the Company or any of its Subsidiaries has taken, is taking or proposes to take with respect thereto; (f) to each Bank, (1) promptly after the filing or receiving thereof, copies of all annual reports and such other material reports and notices which the Company or any ERISA Affiliate files under ERISA with the Internal Revenue Service, the PBGC or the U.S. -74- Department of Labor with respect to a Plan that is subject to Title IV of ERISA; (2) promptly upon acquiring knowledge of any "reportable event" (as defined in Section 4043 of ERISA) or of any "prohibited transaction," as such term is defined in the Code or ERISA, in connection with any Plan which may result in a Material Adverse Change, a statement executed by the president or chief financial officer of the Company or the applicable ERISA Affiliate, setting forth the details thereof and the action which the Company or the ERISA Affiliate proposes to take with respect thereto and, when known, any action taken by the PBGC, the Internal Revenue Service or the U.S. Department of Labor with respect thereto; (3) promptly after the filing or receiving thereof by the Company or any ERISA Affiliate, any notice of the institution of any proceedings or other actions which may result in the termination of any Plan or notice of complete or partial withdrawal liability under Title IV of ERISA, and (4) each request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted by the Company or any ERISA Affiliate, to the Secretary of the Treasury, the U.S. Department of Labor or the Internal Revenue Service, as the case may be; (g) to each Bank, as soon as available but in no event later than February 28 of each year, an Independent Engineering Report reflecting data as of December 31 of the prior year; and (h) to each Bank, with reasonable promptness, such other information respecting the business, financial condition or results of operations of the Company or any of its Subsidiaries as such Bank may reasonably request. Additionally, the Company will deliver to each Bank: (x) Together with each delivery of financial statements required by SUBSECTION (a) above, each Required Reserve Report and each Optional Reserve Report, an Officer's Certificate and a Coverage Report demonstrating (with computations in reasonable detail) compliance by the Company and the Restricted Subsidiaries with the provisions of SECTIONS 9.6, 9.7(b)(3), (4) and (6), 9.7(c)(2) and (3), 9.7(d), 9.7(e), 9.7(f), 9.7(g) and 9.9 (and in the case of each Coverage Report accompanying a Required Reserve Report or an Optional Reserve Report, calculating the SLOR Coverage Ratio and the Annual Debt Service Coverage Ratio for purposes of and as provided in SECTION 2.7 or SECTION 2.8 and, in the case of each Coverage Report furnished pursuant to CLAUSE (d) of the definition of "Applicable Margin", such CLAUSE (d)), demonstrating that no Default exists under SECTION 10.1(i) and stating that there then exists no Default, or, if any Default exists, specifying the -75- nature and period of existence thereof and what action the Company proposes to take with respect thereto. (y) Together with each delivery of financial statements required by SUBSECTION (b) above, a certificate of such accountants stating that, in conducting the audit of the Company's consolidated financial statements in accordance with generally accepted auditing standards they have obtained no knowledge of any Default arising under SECTION 10.1(a), (b) or (i) or any Default arising under SECTION 10.1(d) that occurs as result of the breach or violation by the Company or the Restricted Subsidiaries of SECTIONS 9.6, 9.7(b), (c), (d), (e), (f), (g), (h), (i) or 9.8, or, if they have obtained knowledge of any such Default, specifying the nature and period of existence thereof. Such accountants, however, shall not be liable to the Agent or any Bank by reason of their failure to obtain knowledge of any such Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards. The Company also covenants that forthwith upon the chief executive officer, principal financial officer or principal accounting officer of the Company obtaining knowledge of a Default, it will deliver to each Bank an Officer's Certificate specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. (z) Together with each delivery of financial statements required by SUBSECTIONS (a) or (b) above, the Company will deliver to each Bank a pro forma statement of operations of the Company and its Restricted Subsidiaries for the same fiscal period as such financial statements that assumes that the impairments of oil and gas properties taken by the Company and its Restricted Subsidiaries in the fourth quarter of 1993 in the amount of up to $100 million as reflected in the Company's consolidated financial statements for the year ended December 31, 1993, shall not have occurred and a calculation in reasonable detail showing the determination of Consolidated Net Earnings and Unimpaired Consolidated Net Earnings for such fiscal period. 9.2. INSPECTION OF PROPERTY. The Company covenants that it will permit any Person designated in writing by any Bank, at such Bank's expense and risk, to visit and inspect any of the properties of the Company and its Subsidiaries; and also to examine the corporate books and financial records of the Company and its Subsidiaries and to make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of such Persons with the executive officers of the Company, the petroleum reserve engineers employed by the Company and its Subsidiaries and the Company's independent public accountants, all at such reasonable times, with a representative of the Company present and as often as -76- such Bank may reasonably request, and will assist such Person or Persons in all such activities. 9.3. COMPLIANCE WITH ENVIRONMENTAL LAWS. The Company will, and will cause each of its Subsidiaries and each of its Affiliates that are controlled by the Company or its Subsidiaries to, comply in a timely fashion with, or operate pursuant to valid waivers of the provisions of, all Applicable Environmental Laws, except where non-compliance would neither (a) result in a Material Adverse Change nor (b) subject the Agent or any Bank to any liability for such non-compliance (PROVIDED that the Company shall not be in default of this SUBSECTION (b) if the Company indemnifies each of the Agent, Banks or any of them subjected to such liability and provides collateral to secure such indemnification, all to the extent required by the Person subjected to such liability in its sole and unfettered discretion). THE COMPANY AGREES TO INDEMNIFY AND HOLD THE AGENT AND EACH BANK, AND THEIR RESPECTIVE OFFICERS, AGENTS AND EMPLOYEES HARMLESS FROM ANY LOSS, LIABILITY, CLAIM OR EXPENSE WHICH ANY SUCH PERSON MAY INCUR OR SUFFER AS A RESULT OF A BREACH BY THE COMPANY OR ITS SUBSIDIARIES OR AFFILIATES, AS THE CASE MAY BE, OF THIS COVENANT. The Company shall not be deemed to have breached or violated this section if the Company or its Subsidiary or Affiliate, as the case may be, is challenging in good faith by appropriate proceedings diligently pursued the application or enforcement of any such Applicable Environmental Laws for which adequate reserves have been established in accordance with generally accepted accounting principles. 9.4. PAYMENT OF TAXES. The Company will, and will cause each of its Subsidiaries to, pay, or have paid on its behalf, before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property, except to the extent contested in good faith by appropriate proceedings diligently conducted for which adequate reserves have been established in accordance with generally accepted accounting principles. 9.5. MAINTENANCE OF INSURANCE. The Company covenants that it and each of its Subsidiaries will carry and maintain insurance (subject to self-insurance in the maximum amount of $10,000,000, customary deductibles and retentions) in at least such amounts and against such liabilities and hazards and by such methods as customarily maintained by other companies operating similar businesses and, together with each delivery of financial statements required by SECTION 9.1(b) will deliver to the Agent for each Bank an Officer's Certificate specifying the details of such insurance in effect. Upon the request of the Agent or any Bank, the Company shall promptly deliver to the Agent one or more current certificates of the insurer or insurers providing the insurance required by this SECTION 9.5 to the effect that such insurance may -77- not be canceled, reduced or affected in any manner without 30 days' prior written notice to the Agent. 9.6. RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS. The Company will not and will not permit any Restricted Subsidiary to (a) make any Restricted Investment; (b) pay or declare any dividend on any class of its stock or make any other distribution on account of any class of its stock, or redeem, purchase or otherwise acquire, directly or indirectly, any shares of its stock, or (c) make any additional Investment in the Special Subsidiary (all of the foregoing described in SUBSECTIONS (b) and (c) above being herein called "RESTRICTED PAYMENTS") (1) except out of Consolidated Net Earnings Available for Restricted Payments and Restricted Investments; PROVIDED that the Company or any wholly owned Restricted Subsidiary may, without violation of this clause, in a single transaction or a series of publicly announced related transactions to be completed within six months, make an Investment in the Special Subsidiary which results in the ownership by the Company and the wholly owned Restricted Subsidiaries of 100% of the outstanding general and limited partner interests in the Special Subsidiary; PROVIDED FURTHER that the amount of such Investment shall be included in any subsequent computations of Restricted Payments and of Consolidated Net Earnings Available for Restricted Payments and Restricted Investments under this Section unless immediately after giving effect to such Investment in the Special Subsidiary, the Special Subsidiary is designated as a Restricted Subsidiary; (2) unless, after giving effect to any such Restricted Investment or Restricted Payment, as the case may be, (A) no Default shall have occurred and be continuing and (B) the Company could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(3), and (3) unless, in the case of Investments in the Special Subsidiary, such Investment shall otherwise be permitted by SECTION 9.7(g). "CONSOLIDATED NET EARNINGS AVAILABLE FOR RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS" shall mean an amount equal to (a) the sum of (1) $45,000,000; (2) 100% (or minus 100% in case of a deficit) of Unimpaired Consolidated Net Earnings for the period (taken as one accounting period) commencing on April 1, 1990 (the "COMMENCEMENT DATE") and terminating at the end of the last fiscal quarter preceding the date of any proposed Restricted Investment or Restricted Payment, as the case may be; (3) the net cash proceeds received by the Company or any Restricted Subsidiary from the sale of any shares of its stock on or after the Commencement Date, except (A) any such proceeds used as a basis for a prepayment in respect of the then-outstanding notes issued under the Serial Note Agreement pursuant to Paragraphs 4A, 4B or 4C thereof and (B) any proceeds from the sale of stock to the Company -78- or any of its Subsidiaries on or after the Commencement Date; (4) the net cash proceeds received by the Company or any Restricted Subsidiary from the sale, on or after the Commencement Date, of any convertible debt security which has been converted into stock of the Company or a Restricted Subsidiary, except (A) any such proceeds used as a basis for a prepayment in respect of the then-outstanding notes issued under the Serial Note Agreement pursuant to Paragraphs 4A, 4B or 4C thereof and (B) any proceeds from the sale of such convertible debt security to the Company or any of its Subsidiaries; (5) any cash distributions from the Special Subsidiary received by the Company or any Restricted Subsidiary on or after the Commencement Date, and (6) any return of capital from Unrestricted Subsidiaries or Restricted Investments received by the Company or any Restricted Subsidiary on or after the Commencement Date, less (b) the sum of all Restricted Investments and all Restricted Payments made on or after the Commencement Date. There shall not be included in Restricted Payments or in any computation of Consolidated Net Earnings Available for Restricted Payments and Restricted Investments (w) dividends paid or declared in respect of stock held by any Person, or distributions made to any Person, in stock of the Company or any Restricted Subsidiary; (x) exchanges of stock of one or more classes of the Company or any Restricted Subsidiary for common stock of the Company or such Restricted Subsidiary, as the case may be, or for stock of the Company or such Restricted Subsidiary, as the case may be, of the same class, except to the extent that cash or other value is involved in such exchange; (y) dividends paid or declared in respect of stock held by, or distributions made to, or redemptions, purchases or other acquisitions of stock made from, the Company or a wholly owned Restricted Subsidiary, or (z) any advances to the Special Subsidiary not in excess of $20,000,000 in the aggregate at any one time outstanding that are repaid in full within 60 days pursuant to customary cash management services provided to the Special Subsidiary. The term "stock" as used in this Section shall include warrants, options to purchase stock and redeemable rights. 9.7. LIEN, DEBT AND OTHER RESTRICTIONS. The Company will not and will not permit any Restricted Subsidiary to: (a) LIENS. Create, assume or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired except (1) Liens for taxes or assessments or other governmental charges or levies not yet due or which are being actively contested in good faith by appropriate proceedings; -79- (2) Liens (including mechanics' and materialmen's liens, landlord liens, easements, rights-of-way or the like) incidental to the conduct of its business or the ownership of its property and assets which are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (3) Liens for lessor's royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other similar burdens, production sales contracts, division orders, contracts for the sale, purchase, exchange, or processing of hydrocarbons, unitization and pooling designations, declarations, orders and agreements, operating agreements, agreements of development, area of mutual interest agreements, gas balancing or deferred production agreements, processing agreements, plant agreements, pipeline gathering and transportation agreements, injection, repressuring and recycling agreements, salt water or other disposal agreements, seismic or geophysical permits or agreements, and other agreements which are customary in the oil, gas and mineral exploration and development business or in the business of processing gas and gas condensate production for the extraction of products therefrom, if the net cumulative effect of such burdens does not operate to reduce the net revenue interest of any oil and gas properties to less than (A) the "Net Revenue Interest" set forth in the Most Recent Engineering Report for those oil and gas properties included in the Most Recent Engineering Report or (B) the net revenue interest so acquired for those oil and gas properties acquired after the date of the Most Recent Engineering Report; PROVIDED that such Liens are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person; (4) Liens described in SCHEDULE II securing Debt of the Company or a Restricted Subsidiary set forth in SCHEDULE II; (5) the Springing Lien, Liens existing on any real property of any Person at the time such Person becomes a Restricted Subsidiary, or any Liens existing prior to the time of acquisition upon any real property acquired by the Company or any Restricted -80- Subsidiary through purchase, merger or consolidation or otherwise, whether or not the obligation secured by such Lien is assumed by the Company or such Restricted Subsidiary; PROVIDED that except as otherwise permitted by SECTION 9.7(a), any such Springing Lien or Lien (A) shall not encumber any other property of the Company or any Restricted Subsidiary and (B) shall not have been created in anticipation of such Person becoming a Restricted Subsidiary or in anticipation of the acquisition by the Company or any Restricted Subsidiary of the real property secured thereby; (6) Liens placed on property at the time of acquisition, construction, development or improvement thereof, or created in respect of such property within six months after the time of acquisition thereof or the commencement of construction, development or improvement thereof, as the case may be, to secure all or a portion of (or to secure Debt incurred to pay all or a portion of) the purchase price of such acquisition, or the cost of such construction, development or improvement, as the case may be; PROVIDED that (A) such property is not and shall not thereby become encumbered in an amount in excess of the lesser of the cost or fair market value thereof; (B) except as otherwise permitted in SECTION 9.7(a), any such Lien shall not encumber any other property of the Company or a Restricted Subsidiary, and (C) any such Lien shall not encumber property of the Company or a Restricted Subsidiary for the purpose of securing an obligation of the Company or a Restricted Subsidiary or securing a Guaranty by the Company or any Restricted Subsidiary in connection with the sale, exchange, transfer or other disposition by the Company or a Restricted Subsidiary of net profits interests; PROVIDED that the Company or a Restricted Subsidiary may assign all or part of the proceeds of production of property in which a net profits interest has been granted to secure its obligation to make net profits interests payments therefrom; and PROVIDED FURTHER that any such Lien shall not encumber any other property of the Company or any Restricted Subsid- iary. (7) Liens on the capital stock of a Restricted Subsidiary acquired after April 11, 1990 by the Company or a Restricted Subsidiary and created or assumed contemporaneously with such acquisition, to secure Debt assumed or incurred to finance all or a part of the purchase price of such acquisition; (8) Liens on the capital stock of an Unrestricted Subsid- iary other than the Special Subsidiary; (9) from and after the time that the Company and the wholly owned Restricted Subsidiaries shall have become the owners of all of the outstanding general and limited partner interests in the Special Subsidiary, (A) Liens on all or any portion of the -81- limited partner interests in SFEP, at such times as SFEP shall be an Unrestricted Subsidiary or (B) at such times as SFEP shall be a Restricted Subsidiary, Liens securing Debt incurred to finance all or a part of the purchase price of limited partner interests in the Special Subsidiary acquired by the Company and the wholly owned Restricted Subsidiaries from Persons other than the Special Subsidiary in a single transaction or a series of publicly announced related transactions that were completed within six months and that result in the ownership by the Company and the wholly owned Restricted Subsidiaries of 100% of the general and limited partner interests therein; PROVIDED that the Liens described in this CLAUSE (B) shall extend only to the limited partner interests so acquired; (10) Liens on property of the Company or a Restricted Subsidiary to secure Debt assumed or incurred in the form of Capitalized Lease Obligations or industrial revenue bonds, pollution control bonds or similar tax-exempt financings; PROVIDED that any such Lien shall not encumber any property of the Company or a Restricted Subsidiary other than the property the acquisition or construction of which is financed or refinanced, in whole or in part, with proceeds from such Debt; (11) Liens created pursuant to the Security Documents; (12) any Lien renewing or extending any Lien permitted by CLAUSES (4), (5), (6), (7), (8), (9), (10) or (11) above; PROVIDED that the principal amount of the Debt secured thereby is not increased and such Lien is not extended to other property; and (13) other Liens on any property of the Company or a Restricted Subsidiary securing any Funded Debt of the Company or a Restricted Subsidiary permitted by SECTION 9.7(b)(3)(C) or (4)(C). (b) DEBT. Create, incur, assume or suffer to exist any Debt, except (1) Funded Debt of the Company hereunder or represented by the notes issued pursuant to the Serial Note Agreement; (2) Funded Debt of the Company or any Restricted Subsidiary set forth in SCHEDULE II, which may not be renewed, extended, refunded or permitted to remain outstanding after the stated maturities thereof except by the Person primarily liable thereon and unless, after giving effect to such renewal, extension or refunding, neither the principal amount thereof nor the aggregate Funded Debt of the Company and the Restricted Subsidiaries is increased thereby; -82- (3) Funded Debt of the Company if at the time it is created, incurred or assumed and after giving effect thereto, to the receipt of the proceeds thereof, and to the concurrent retirement of any Debt, (A) the aggregate amount of all Funded Debt of the Company and the Restricted Subsidiaries shall not exceed 65% of Consolidated Net Tangible Assets; (B) Consolidated Net Earnings Available for Fixed Charges for the four fiscal quarters of the Company (taken as a single period) most recently ended shall equal at least 225% of Fixed Charges for the four fiscal quarters of the Company (taken as a single period) commencing with and including the fiscal quarter during which such Funded Debt is created, incurred or assumed, and (C) (1) for any such creation, incurrence or assumption occurring prior to December 31, 1998, Priority Debt (other than Existing Priority Debt) shall not exceed the lesser of (y)(I) 40% of Consolidated Net Tangible Assets minus (II) Existing Priority Debt and (z) 33% of Consolidated Net Tangible Assets, and (2) for any such creation, incurrence or assumption occurring on or after December 31, 1998, Priority Debt shall not exceed 33% of Consolidated Net Tangible Assets, and (3) if such Funded Debt is Secured Debt, Special Debt shall not exceed 10% of Consolidated Net Tangible Assets; (4) Funded Debt of a Restricted Subsidiary if at the time it is created, incurred or assumed and after giving effect thereto, to the receipt of the proceeds thereof, and to the concurrent retirement of any Debt, (A) the aggregate amount of all Funded Debt of the Company and the Restricted Subsidiaries shall not exceed 65% of Consolidated Net Tangible Assets; (B) Consolidated Net Earnings Available for Fixed Charges for the four fiscal quarters of the Company (taken as a single period) most recently ended shall equal at least 225% of Fixed Charges for the four fiscal quarters of the Company (taken as a single period) commencing with and including the fiscal quarter during which such Funded Debt is created, incurred or assumed, and (C) (1) for any such creation, incurrence or assumption occurring prior to December 31, 1998, Priority Debt (other than Existing Priority Debt) shall not exceed the lesser of (y)(I) 40% of Consolidated Net Tangible Assets minus (II) Existing Priority Debt and (z) 33% of Consolidated Net Tangible Assets, and (2) for any such creation, incurrence or assumption occurring on or after December 31, 1998, Priority Debt shall not exceed 33% of Consolidated Net Tangible Assets, and (3) Special Debt shall not exceed 10% of Consolidated Net Tangible Assets; (5) Debt of the Company owing to a wholly owned Restricted Subsidiary which is subordinated to the Obligations upon terms set forth on SCHEDULE V, and Debt of a Restricted Subsidiary owing to the Company or any other wholly owned Restricted Subsidiary; and -83- (6) Current Debt of the Company not secured by any Lien on any property owned by the Company or the Restricted Subsidiaries; PROVIDED that for a period of at least 45 consecutive days in each period of 18 consecutive months commencing April 1, 1990, the amount of Current Debt (other than Current Debt existing pursuant to customary cash management services provided to the Special Subsidiary which is repaid in full within 60 days) permitted by this clause shall at no time exceed the maximum amount of Funded Debt that the Company could then incur under SECTION 9.7(b)(3) without violation thereof. For purposes of this SECTION 9.7(b), any Debt (i) which is extended, renewed or refunded shall be deemed to have been incurred when extended, renewed or refunded (except as provided pursuant to CLAUSE (2) above); (ii) of a Person when it becomes, or is merged into, or is consolidated with a Restricted Subsidiary or the Company shall be deemed to have been incurred at that time; (iii) which is permitted by CLAUSE (5) above and which is owing to a wholly owned Restricted Subsidiary when it ceases to be a wholly owned Restricted Subsidiary shall be deemed to have been incurred at that time; (iv) of a Restricted Subsidiary which is owing to the Company or any other Restricted Subsidiary shall be deemed to have been incurred at the time the Company or such other Restricted Subsidiary disposes of such Debt to any Person other than the Company or a wholly owned Restricted Subsidiary; (v) which is Funded Debt of the Company or a Restricted Subsidiary consisting of a reimbursement obligation in respect of a letter of credit or similar instrument shall be deemed to be incurred when such letter of credit or similar instrument is issued, or (vi) which is Funded Debt of the type described in CLAUSE (b) of the definition of Funded Debt, or any Guaranty of such Funded Debt, shall not be deemed to have been created, incurred or assumed, as the case may be, at the time it becomes Funded Debt, but shall be included in all subsequent calculations of Funded Debt for all purposes of this Agreement. (c) SALE OF LESS THAN SUBSTANTIALLY ALL ASSETS. Sell, exchange, transfer or otherwise dispose of part, but less than all or substantially all, of their respective assets, unless (1) such sale, exchange, transfer or other disposition is made in the ordinary course of business (including abandonments, farm-ins, farm-outs, leases and subleases of developed or undeveloped properties owned or held by the Company or any Restricted Subsidiary that are made or entered into in the ordinary course of business, but EXCLUDING, however, any sale of net profits interests in developed oil and gas properties); or -84- (2) after giving effect to such sale, exchange, transfer or other disposition, (A) the aggregate net book value of (i) all assets of the Company and the Restricted Subsidiaries (including the sale of net profits interests in developed oil and gas properties) sold, ex- changed, transferred or otherwise disposed of (on a consolidated basis) (but excluding assets sold, exchanged, transferred or otherwise disposed of in the ordinary course of business pursuant to SECTION 9.7(c)(1)) during the period of 12 consecutive months immediately preceding such sale, exchange, transfer or other disposition and (ii) the assets of all Restricted Subsidiaries, the stock of which have been sold or otherwise disposed of pursuant to SECTION 9.7(d)(2)(A) during such 12-month period shall not exceed 10% of Consolidated Net Tangible Assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition, and (B) the assets described in the foregoing CLAUSE (A) shall not have contributed more than 10% of EBITD of the Company and the Restricted Subsidiaries for the four most recently completed fiscal quarters taken as a single accounting period; or (3) after giving effect to such sale, exchange, transfer or other disposition, (A) the aggregate net book value of (i) all assets of the Company and the Restricted Subsidiaries (including the sale of net profits interests in developed oil and gas properties) sold, ex- changed, transferred or otherwise disposed of (on a consolidated basis) (but excluding assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(1) and (2)) during the period of 12 consecutive months immediately preceding such sale, exchange, transfer or other disposition and (ii) the assets of all Restricted Subsidiaries, the stock of which has been sold or otherwise disposed of pursuant to SECTION 9.7(d)(2)(B) during such 12-month period, shall not exceed 10% of Consolidated Net Tangible Assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition; (B) the assets described in the foregoing CLAUSE (A) shall not have contributed more than 10% of EBITD for the four most recently completed fiscal quarters taken as a single accounting period, and (C) within six months after such sale, exchange, transfer or other disposition, the net proceeds thereof are applied toward, or the exchange results in, (1) the acquisition by the Company or a Restricted Subsidiary of (i) assets which have an aggregate fair market value at least equal to the net proceeds received by the Company and its Restricted Subsidiaries from such sale, exchange, transfer or other disposition; (ii) if the assets so sold, exchanged, transferred or otherwise disposed of were located in the United States of America or Canada, the assets acquired are located in the United States of America or Canada, and -85- (iii) the assets so acquired are of a type usual and customary in the oil and gas business; PROVIDED that no Liens shall at any time exist on the assets so acquired which secure any Debt except as permitted by SECTION 9.7(a)(13) or (2) the prepayment of an aggregate principal amount of all Obligations plus accrued interest and premium, if any, thereon in accordance with this Agreement and the Letter of Credit Agreement, or the payment of an aggregate principal amount of other Funded Debt (other than Funded Debt subordinate in right of payment to the Obligations) plus accrued interest and premium, if any, in either case in an amount at least equal to the aggregate net proceeds that the Company or a Restricted Subsidiary receives from the sale, exchange, transfer or other disposition of such assets. (d) SALE OF STOCK OF RESTRICTED SUBSIDIARIES. Sell or otherwise dispose of, or part with control of, any shares of stock of any Restricted Subsidiary, except (1) to the Company or another wholly owned Restricted Subsidiary and (2) that all shares of stock of any Restricted Subsidiary at the time owned by the Company and all Restricted Subsidiaries may be sold as an entirety for a cash consideration which represents the fair market value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock so sold; PROVIDED that for purposes of this exception: (A) (i) the net book value of the assets of such Restricted Subsidiary together with (x) the net book value of the assets of any other Restricted Subsidiary the stock of which was sold during the preceding 12-month period and (y) the net book value of the assets of the Company and all Restricted Subsidiaries sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(2) during the preceding 12-month period, does not represent more than 10% of Consolidated Net Tangible Assets as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition and (ii) the earnings of such Restricted Subsidiary together with (x) the earnings of any other Restricted Subsidiary the stock of which was sold or otherwise disposed of pursuant to the exception described in this CLAUSE (A) during the preceding 12-month period and (y) the earnings attributable to the assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(2) during such 12-month period, do not represent more than 10% of EBITD for the four most recently completed fiscal quarters taken as a single accounting period; and PROVIDED FURTHER that, at the time of such sale, such Restricted Subsidiary shall not own, directly or indirectly, any shares of stock of the Company or any other Restricted Subsidiary unless all of the shares of stock of such other Restricted Subsidiary owned, directly or indirectly, by the -86- Company and all Restricted Subsidiaries are simultaneously being sold as permitted by the exception described in this CLAUSE (A); or (B) (i) the net book value of the assets of such Restricted Subsidiary together with (x) the net book value of the assets of any other Restricted Subsidiary the stock of which was sold during the preceding 12-month period and (y) the net book value of the assets of the Company and any Restricted Subsidiary sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(3) during the preceding 12-month period, does not represent more than 10% of the Consolidated Net Tangible Assets as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition; (ii) the earnings of such Restricted Subsidiary together with (x) the earnings of any other Restricted Subsidiary the stock of which was sold or otherwise disposed of pursuant to the exception described in this CLAUSE (B) during the preceding 12-month period and (y) the earnings attributable to the assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(3) during such 12-month period, do not represent more than 10% of EBITD for the four most recently completed fiscal quarters taken as a single accounting period, and (iii) within six months after such sale or other disposition, the proceeds thereof are applied toward (i) the acquisition by the Company or a Restricted Subsidiary of (1) assets which have an aggregate fair market value at least equal to the net proceeds received by the Company and the Restricted Subsidiaries from such sale or other disposition and (2) the assets so acquired are of a type usual and customary in the oil and gas business; PROVIDED that no Liens shall at any time exist on the assets so acquired which secure any Debt except as permitted by SECTION 9.7(a)(13), or (ii) the prepayment of an aggregate principal amount of all Obligations in accordance with this Agreement and the Letter of Credit Agreement, or the payment of an aggregate principal amount of other Funded Debt (other than Funded Debt subordinate in right of payment to the Obligations) plus accrued interest and premium, if any, in either case in an amount at least equal to the aggregate net proceeds that the Company or a Restricted Subsidiary receives from the sale or other disposition; and PROVIDED FURTHER that, at the time of such sale or other disposition, such Restricted Subsidiary shall not own, directly or indirectly, (y) any shares of stock of the Company or any other Restricted Subsidiary unless all of the shares of stock of such other Restricted Subsidiary owned, directly or indirectly, by the Company and all Restricted Subsidiaries are simultaneously being sold as permitted by the exception described in this CLAUSE (B). (e) MERGER AND SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. Merge or consolidate with or into any other Person or convey, exchange, transfer or otherwise dispose of all or a substantial -87- part of its assets (I.E., assets which could not otherwise be disposed of pursuant to SECTION 9.7(c)(2) or (3)) to any Person except that (1) any wholly owned Restricted Subsidiary may merge with the Company (PROVIDED that the Company shall be the continuing or surviving corporation) or with any one or more other wholly owned Restricted Subsidiaries; (2) any Restricted Subsidiary may sell, exchange, transfer or otherwise dispose of any of its assets to the Company or to a wholly owned Restricted Subsidiary; (3) any Restricted Subsidiary may sell, exchange, transfer or otherwise dispose of all or substantially all of its assets subject to the conditions and provisions specified in SECTIONS 9.7(c)(2) and (3); (4) any Restricted Subsidiary may merge into or consolidate with any Person which does not thereupon become a Restricted Subsidiary, subject to the conditions and provisions specified in SECTION 9.7(d) with respect to a sale or other disposition of the stock of such Restricted Subsidiary; (5) any Restricted Subsidiary may permit any Person to be merged into such Restricted Subsidiary or may consolidate with or merge into a Person which thereupon becomes a Restricted Subsidiary; PROVIDED that immediately after any such merger or consolidation, no Default shall have occurred and be continuing; (6) the Company may permit any Person to be merged into the Company (such that the Company shall be the continuing or surviving corporation); and (7) the Company may permit any corporation to consolidate with the Company and the Company may merge into or otherwise dispose of its assets as an entirety or substantially as an entirety to any solvent corporation organized under the laws of the United States of America or any state thereof and having at least 80% of its consolidated assets located in the United States of America and Canada which expressly assumes in writing the due and punctual performance of the obligations of the Company under the Credit Documents, to the same extent as if such successor or transferee corporation had originally executed the Credit Documents in the place of the Company (it being agreed that such assumption shall, upon the request of any Bank and at the expense of such successor or transferee corporation, be evidenced by the exchange of such Note for another Note executed by such successor or transferee corporation, with such changes in phraseology and form -88- as may be appropriate but in substance of like terms as the Note surrendered for such exchange and of like unpaid principal amount, and that each Note executed pursuant to this Agreement after such assump- tion shall be executed by and in the name of such successor or transferee corporation); PROVIDED that for purposes of SECTIONS 9.7(e)(6) and (7) immediately after such merger, consolidation, sale or other disposition, and after giving effect thereto, (x) such successor or transferee Person could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(3) and (y) no Default shall have occurred and be continuing. As soon as practicable, and in any event at least 75 days prior to the proposed consummation date of any merger, consolidation, sale or other disposition described in SECTION 9.7(e)(7), the Company shall give written notice thereof to each Bank describing in reasonable detail the proposed transaction, the date on which it is proposed to be consummated and the identity, jurisdiction of organization, and geographic composition of assets of the proposed successor or transferee corporation. No disposition by the Company of its assets as an entirety or substantially as an entirety under SECTION 9.7(e)(7) shall release the Company as the maker of the Notes from its liability as obligor thereon. (f) SALE AND LEASEBACK. Enter into any Sale and Leaseback Transaction unless: (1) immediately after giving effect thereto and to the application of any sales proceeds received in connection therewith, Special Debt shall not exceed 10% of the Consolidated Net Tangible Assets; or (2) the net sales proceeds received by the Company or a Restricted Subsidiary in respect of the assets sold pursuant to such Sale and Leaseback Transaction are greater than or equal to the fair market value of the assets sold (which determination shall be based upon a written opinion (the cost of which shall be borne exclusively by the Company) as to valuation from an independent valuation expert selected by the Company) and such proceeds are concurrently applied to (A) the purchase, acquisition, development or construction of assets having a value at least equal to such net proceeds, and to be used in the Company's or such Restricted Subsidiary's business; PROVIDED that no Liens shall at any time exist on such assets which secure any Debt except as permitted by SECTION 9.7(a)(13); (B) the prepayment in accordance with this Agreement of any aggregate principal amount of all the Obligations (plus accrued interest and premium, if any) at least equal to the amount of such net proceeds; or (C) the payment of other Funded Debt (other than Funded Debt subordinate in right of payment to the -89- Obligations) in an aggregate principal amount at least equal to the amount of such net sales proceeds; or (3) the Sale and Leaseback Transaction involves the sale of assets by the Company to a wholly owned Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another wholly owned Restricted Subsidiary; PROVIDED that if the Company is the seller under any such Sale and Leaseback Transaction, its lease obligations thereunder shall be subordinated to the Funded Debt represented by the Notes upon terms set forth on SCHEDULE V. (g) INVESTMENTS IN THE SPECIAL SUBSIDIARY. Directly or indirectly make an Investment in the Special Subsidiary after March 31, 1990, unless (1) the aggregate amount of all other Investments in the Special Subsidiary made, directly or indirectly, by the Company and the Restricted Subsidiaries after March 31, 1990 shall not exceed the aggregate amount of cash distributions received by the Company and the Restricted Subsidiaries from the Special Subsidiary after March 31, 1990 or (2) in the opinion of the Board of Directors of the Company, the Investment would not impair the ability of the Company to make when due any payment (including any prepayment required by SECTION 3.2(b)) of principal of or interest on the Notes. (h) TRANSACTIONS WITH AFFILIATES. Directly or indirectly purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise deal with, in the ordinary course of business or otherwise, (1) any Affiliate (except any employee compensation benefit plan or any Restricted Subsidiary) or (2) any Person (other than a Restricted Subsidiary) in which an Affiliate or the Company (directly or indirectly) owns, beneficially or of record, 5% or more of the outstanding voting stock or similar equity interest, except that (A) any Affiliate may be a director, officer or employee of the Company or any Restricted Subsidiary and may be paid reasonable compensation in connection therewith and (B) subject to applicable fiduciary standards with respect to the Special Subsidiary, acts and transactions that would otherwise be prohibited by this Subsection may be performed or engaged in if upon terms not less favorable to the Company or any Restricted Subsidiary than if no relationship described in CLAUSES (1) and (2) above existed. (i) TAX CONSOLIDATION. Except for the Tax Allocation Agreements, the Company will not, and will not permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person unless such other Person shall have agreed in writing with the Company that the Company's or such Subsidiary's liability with respect to taxes as a result of the filing of any such consolidated income tax return with such Person -90- shall not be materially greater, nor the receipt of any tax benefits materially less, than they would have been had the Company and its Subsidiaries continued to file a consolidated income tax return with the Company as the parent corporation. 9.8. ISSUANCE OF STOCK BY RESTRICTED SUBSIDIARIES. The Company covenants that it will not permit any Restricted Subsidiary (either directly or indirectly, by the issuance of rights or options for, or securities convertible into, such shares) to issue, sell or otherwise dispose of any shares of any authorized but unissued or treasury class of such Restricted Subsidiary's stock (other than directors' qualifying shares) except to the Company or another Restricted Subsidiary. 9.9. COVERAGE RATIOS. As of the end of each fiscal quarter of the Company, and each delivery of a Required Reserve Report or Optional Reserve Report, the Company shall be in compliance with all Required Ratios (except for any noncompliance resulting solely from an Engineering Shortfall, and then only prior to the cure thereof permitted by SECTION 10.1(e)). 9.10. PREPAYMENT OF JUNIOR SECURITIES. Without the prior written consent of the Required Banks, the Company shall not prepay (or deposit any property to defease) any indebtedness consisting of Junior Securities before the payment in full of all indebtedness under the Credit Documents. Section 10. DEFAULTS. 10.1. EVENTS OF DEFAULT. If one or more of the following events (herein called "EVENTS OF DEFAULT") shall occur and be continuing: (a) the Company shall fail to pay any principal of any Loan or any fee or other principal amount payable hereunder or under any other Credit Document when due, or shall fail to pay any interest on any amount hereunder or under any other Credit Document for more than three days after the date due; or (b) any member of the Combined Group shall default in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafted accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or any member of the Combined Group shall fail to perform or observe any other agreement, term or condition contained -91- in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due prior to any stated maturity, or any member of the Combined Group shall fail to pay any Guaranty relating to Debt for borrowed money in accordance with its terms, PROVIDED that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration shall occur and be continuing shall exceed $10,000,000; or (c) any representation or warranty by the Company or any of its officers in any Credit Document or in any writing furnished to the Agent or the Banks in connection herewith shall prove to have been false or misleading in any material respect as of the date as of which it was made; or (d) the Company shall default in the performance of any of its obligations under SECTIONS 9.6 through 9.8 or under SECTION 9.9 (other than a Default resulting solely from an Engineering Shortfall) or under SECTION 9.10; or (e) the Company shall deliver any Independent Engineering Report and related Coverage Report to the Banks in accordance with SECTION 9.1 or SECTION 2.7 reflecting noncompliance with any Required Ratio and such noncompliance shall result solely from an Engineering Shortfall and shall not be cured (such cure to be evidenced by a new Coverage Report demonstrating compliance with all Required Ratios) on or before the date 180 days after the Company delivers such Independent Engineering Report and related Coverage Report; or (f) the Company shall default in the performance of any of its obligations in any Credit Document other than those specified elsewhere in this SECTION 10.1 and such default shall not be remedied within 30 days after any executive officer of the Company obtains actual knowledge thereof; or (g) any member of the Combined Group shall (1) make an assignment for the benefit of creditors; (2) generally fail to pay its debts as such debts become due, or (3) admit in writing its inability to generally pay its debts as such debts become due; or (h) a Governmental Authority shall enter any decree or order for relief in respect of any member of the Combined Group under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, -92- whether now or hereafter in effect (herein called the "BANKRUPTCY Law"), of any jurisdiction; or (i) any member of the Combined Group shall petition or apply to any Governmental Authority for, or consent to, the appointment of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of such member of the Combined Group, or of any substantial part of the assets of such member of the Combined Group, or shall commence a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Restricted Subsidiary) relating to any member of the Combined Group under the Bankruptcy Law of any other jurisdiction; or (j) any such petition or application referred to in SECTION 10.1(i) shall be filed, or any such proceedings referred to in SECTION 10.1(i) shall be commenced, against any member of the Combined Group and such member of the Combined Group by any act shall indicate its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree shall be entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree shall remain unstayed and in effect for more than 60 consecutive days; or (k) any order, judgment or decree shall be entered in any proceedings against any member of the Combined Group decreeing the dissolution of any member of the Combined Group and such order, judgment or decree shall remain unstayed and in effect for more than the appeal time provided by law; or (l) any order, judgment or decree shall be entered in any proceedings against any member of the Combined Group decreeing a split-up of such member of the Combined Group which requires (1) the divestiture of assets which exceed, or the divestiture of partnership interest in the Special Subsidiary or of the stock of a Restricted Subsidiary whose assets exceed, 10% of Consolidated Net Tangible Assets as of the end of the fiscal quarter immediately preceding or coinciding with such divestiture or (2) the divestiture of assets or stock of a Restricted Subsidiary or assets of or partnership interest in the Special Subsidiary, which shall have contributed more than 10% of EBITD for the four most recently completed fiscal quarters, and such order, judgment or decree shall remain unstayed and in effect for more than 60 consecutive days; or (m) any judgment or order, or series of judgments or orders, for the payment of money in an amount in excess of $5,000,000 shall be rendered against any member of the Combined Group and the same shall not be discharged (or provision shall not be made for such -93- discharge), or a stay of execution thereof shall not be procured, within the appeal time provided by law from the date of entry thereof, or such member of the Combined Group shall not, within said appeal time, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or (n) so long as any of the Mortgages is in effect, the making of any levy, seizure or attachment on or of any substantial portion of the Collateral which is not stayed or lifted within the appeal time provided by applicable law; or the loss, theft, substantial damage, or destruction of any such Collateral which is not replaced if the amount of such loss, theft, damage or destruction not covered by insurance together with the dollar value of all other previous such loss, theft, damage, or destruction during the term of this Agreement and not covered by insurance exceeds $10,000,000; or (o) so long as the Stock Pledge Agreement is in effect, the making of any levy, seizure or attachment on or of, or the seizure, nationalization, expropriation or forfeiture of, any properties of Trend or any of its Subsidiaries which net of insurance results in a diminution of value equaling or exceeding the greater of (i) any substantial portion of the properties of Trend and its Subsidiaries taken as a whole, or (ii) a loan value (based on the Most Recent Engineering Report) which equals or exceeds $5,000,000 as of the most recent determination thereof; or (p) the Company or any ERISA Affiliate shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall have become liable to pay with respect to any Plan; or notice of intent to terminate a Plan or Plans (other than a multiemployer plan under Section 4001(a)(3) of ERISA) having aggregate Unfunded Liabilities in excess of $5,000,000 shall be filed under Title IV of ERISA by the Company or any ERISA Affiliate, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Plan or Plans (other than a multiemployer plan under Section 4001(a)(3) of ERISA) having aggregate Unfunded Liabilities in -94- excess of $5,000,000 or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Company or any ERISA Affiliate to enforce Section 515 or 4219(c)(5) of ERISA; or the Company or any ERISA Affiliate shall incur a complete or partial withdrawal liability under Title IV of ERISA in an annual amount in excess of $2,000,000 (and in the aggregate $5,000,000) in connection with any Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan or Plans having aggregate Unfunded Liabilities in excess of $5,000,000 must be terminated; or there shall occur any event or condition that might reasonably constitute grounds for the termination of any Plan or Plans having aggregate Unfunded Liabilities in excess of $5,000,000 or with respect to such Plan or Plans either the imposition of any liability in excess of $5,000,000 (other than contributions in the ordinary course) or any Lien provided under Section 4068 of ERISA securing an amount in excess of $5,000,000 on any property of the Company or any ERISA Affiliate; PROVIDED, however, any amounts owing by Santa Fe Pacific Corporation pursuant to the ERISA Indemnification Agreement between Santa Fe Pacific Corporation and the Company shall first be offset against the dollar threshold amounts set forth above before any such condition or event constitutes an event of default under this paragraph; or (q) one or more demands for payment is made upon the Company by Santa Fe Pacific Corporation or any other Person pursuant to the Tax Indemnification Agreement and such demands would exceed $5,000,000 in the aggregate; or (r) any Change of Control shall occur; or (s) any Event of Default shall occur and be continuing under the Letter of Credit Agreement, THEREUPON: (I) the Agent may (and, if directed by the Required Banks, shall) do any or all of the following: (a) declare the Commitments terminated (whereupon the Commitments shall be terminated); and (b) declare the principal amount then outstanding of and the accrued interest on the Loans and all fees and all other amounts payable hereunder and under the Notes to be forthwith due and payable, where- upon such amounts shall be and become immediately due and payable, without notice (including notice of acceleration and notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly WAIVED by the Company; PROVIDED that in the case of the occurrence of an Event of Default with respect to the Company referred to in SECTION 10.1(g) through (l), the Commitments shall be automatically terminated and the prin- cipal amount then outstanding of and the accrued interest on the Loans and fees and all other amounts payable hereunder and under the Notes shall be and become automatically and immediately due and payable, without notice (including notice of intent to accelerate and notice of acceleration) and without presentment, demand, protest or other for- malities of any kind, all of which are hereby expressly WAIVED by the Company; (II) each Bank may exercise its rights of offset against each account and all other property of the Company in the possession of such Bank, which right is hereby granted by the Company to the Banks; -95- and (III) the Agent and each Bank may exercise any and all other rights pursuant to the Credit Documents, at law and in equity. Section 11. THE AGENT. 11.1. APPOINTMENT, POWERS AND IMMUNITIES. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its Agent under the Credit Documents with such powers as are specifically delegated to the Agent by the terms thereof, together with such other powers as are reasonably incidental thereto, including the execution and delivery of the First Amendment to Deed of Trust. The Agent (which term as used in this section shall include reference to its Affiliates and its own and its Affiliates' officers, directors, employees and agents) shall (a) have no duties or responsibilities except those expressly set forth in the Credit Documents, and shall not by reason of any Credit Document be a trustee or fiduciary for any Bank; (b) not be responsible to any Bank for any recitals, statements, representations or warranties contained in any Credit Document, or in any certificate or other document referred to or provided for in, or received by any of them under, any Credit Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any Credit Document or any other document referred to or provided for therein or any property covered thereby or for any failure by the Company or any other Person to perform any of its obligations thereunder; (c) not be required to initiate or conduct any litigation or collection proceedings hereunder or under any Credit Document except to the extent requested by the Required Banks (and SECTION 11.7 shall apply), and (d) not be responsible for any action taken or omitted to be taken by it under any Credit Document or any other document or instrument referred to or provided for therein or in connection therewith, including pursuant to its own negligence, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. In any foreclosure proceeding concerning any collateral for the Notes or other obligations of the Company hereunder, each holder of a Note or other obligations of the Company hereunder if bidding for its own account or for its own account and the accounts of other Banks is prohibited from including in the amount of its bid an amount to be applied as a credit against its Notes or the Notes of the other Banks; instead, such holder must bid in cash only. 11.2. RELIANCE BY AGENT. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon -96- advice and statements of legal counsel (which may be counsel for the Company), independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by any Credit Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions of the Required Banks, and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. Pursuant to instructions of all Banks or the Required Banks, as appropriate, the Agent shall have the authority to execute releases of the Security Documents on behalf of the Banks without the joinder of any Bank. 11.3. DEFAULTS. The Agent shall not be deemed to have know- ledge of the occurrence of a Default (other than the non-payment of principal of or interest on Loans) unless it has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to SECTIONS 11.7 and 12.5) take such action with respect to such Default as shall be directed by all Banks or the Required Banks, as appropriate, and within its rights under the Credit Documents and at law or in equity; PROVIDED that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, permitted hereby with respect to such Default as it shall deem advisable in the best interests of the Banks and within its rights under the Credit Documents, at law or in equity. 11.4. RIGHTS AS A BANK. With respect to their Commitments and Loans, TCB and NationsBank in their capacities as Banks hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though they were not acting as the Agent or the Co-Agents, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent and the Co-Agents in their individual capacity. The Agent and the Co-Agents may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust, letter of credit, agency or other business with the Company (and any of its Affiliates) as if they were not acting as the Agent and the Co-Agents, and the Agent and the Co-Agents may accept fees and other considera- tion from the Company and its Affiliates (in addition to the fees heretofore agreed to between the Company and the Agent or the Co-Agents) for services in connection with this Agreement or otherwise without having to account for the same to the Banks. -97- 11.5. INDEMNIFICATION. THE BANKS AGREE TO INDEMNIFY THE AGENT (TO THE EXTENT NOT REIMBURSED UNDER SECTION 12.3 OR 12.4, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE COMPANY UNDER SAID SECTIONS 12.3 AND 12.4), RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE COMMITMENTS, FOR ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER (INCLUDING THE CONSEQUENCES OF THE NEGLIGENCE OF THE AGENT) WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF ANY CREDIT DOCUMENT (AS DEFINED HEREIN) OR ANY OTHER DOCUMENTS CONTEMPLATED BY OR REFERRED TO THEREIN OR THE TRANSACTIONS CONTEMPLATED THEREBY (INCLUDING THE COSTS AND EXPENSES WHICH THE COMPANY IS OBLIGATED TO PAY UNDER SECTIONS 12.3 AND 12.4 BUT EXCLUDING, UNLESS A DEFAULT HAS OCCURRED AND IS CONTINUING, NORMAL ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE PERFORMANCE OF ITS AGENCY DUTIES HEREUNDER) OR THE ENFORCEMENT OF ANY OF THE TERMS HEREOF OR THEREOF OR OF ANY SUCH OTHER DOCUMENTS, INCLUDING THE NEGLIGENCE OF THE AGENT; PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY TO BE INDEMNIFIED. The obligations of the Banks under this SECTION 11.5 shall survive the termination of this Agreement. 11.6. NON-RELIANCE ON THE AGENT AND OTHER BANKS. Each Bank agrees that it has received current financial information with respect to the Company and that it has, independently and without reliance on the Agent, the Co-Agents or any other Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent, the Co-Agents or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under the Credit Documents. The Agent and the Co-Agents shall not be required to keep themselves informed as to the performance or observance by the Company of any Credit Document or any other document referred to or provided for therein or to inspect the property or books of the Company or any other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent and the Co-Agents under the Credit Documents, the Agent and the Co-Agents shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company (or any of its Affiliates) which may come into the possession of the Agent or either Co-Agent. 11.7. FAILURE TO ACT. Except for action expressly required of the Agent under the Credit Documents, the Agent shall -98- in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction by the Banks of their indemnification obligations under SECTION 11.5 against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 11.8. RESIGNATION OR REMOVAL OF THE AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Company, and the Agent may be removed at any time with or without cause by the Required Banks. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Required Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which has an office in the United States and a combined capital and surplus of at least $250,000,000 and with its deposits insured by the FDIC. Upon the acceptance of any appointment as the 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 hereunder. Such successor Agent shall promptly specify its Principal Office referred to in SECTIONS 3.1 and 5.1 by notice to the Company. After any retiring Agent's resignation or removal hereunder as the Agent, the provisions of this SECTION 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. Section 12. MISCELLANEOUS. 12.1. WAIVER. No waiver of any Default shall be a waiver of any other Default. No failure on the part of the Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Credit Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided in the Credit Documents are cumulative and not exclusive of any remedies provided by law or in equity. 12.2. NOTICES. All notices and other communications provided for herein (including any modifications of, or waivers or consents under, this Agreement) shall be given or made by telex, telegraph, -99- telecopy (confirmed by mail), cable or other writing and telexed, telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to the Company and the Agent given in accordance with this section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 12.3. EXPENSES, ETC. Whether or not any Loan is ever made, the Company shall pay or reimburse on demand each of the Banks, the Agent and the Co-Agents for paying: (a) the reasonable fees and expenses of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., special counsel to the Agent, and of local counsel to the Agent in the States of Louisiana, Oklahoma and Alabama in connection with (1) the preparation, execution and delivery of the Credit Documents (including the exhibits and schedules hereto), the making of the Loans hereunder and (2) any modification, supplement or waiver of any of the terms of any Credit Document; (b) all reasonable out-of-pocket costs and expen- ses of the Banks, the Agent and the Co-Agents (including costs of preparing an Independent Engineering Report and reasonable counsels' fees) in connection with any Event of Default under or the enforcement of any Credit Document; (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of any Credit Document or any other document referred to therein; (d) all costs, expenses, taxes, assessments and other charges incurred in connection with any filing, registration, recording or perfection of any security interest contemplated by this Agreement, any Security Document or any document referred to herein or therein; and (e) reasonable expenses of due diligence and syndication, and mutually agreed advertising and marketing costs. 12.4. INDEMNIFICATION. THE COMPANY SHALL INDEMNIFY THE AGENT, THE CO-AGENTS, THE BANKS, AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND COUNSEL FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, REGARDLESS OF AND INCLUDING LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS AND DAMAGES ARISING FROM THE NEGLIGENCE OF THE AGENT OR THE CO-AGENTS OR THE BANKS OR ANY OTHER INDEMNITEE, INSOFAR AS SUCH LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM ANY (A) ACTUAL OR PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF ANY EXTENSION OF CREDIT BY ANY BANK HEREUNDER; (B) BREACH BY THE COMPANY OF ANY CREDIT DOCUMENT (AS DEFINED HEREIN); (C) VIOLATION BY THE COMPANY -100- OR ANY OF ITS SUBSIDIARIES OF ANY LEGAL REQUIREMENT INCLUDING, WITHOUT LIMITATION, APPLICABLE ENVIRONMENTAL LAWS; (D) ANY BANK'S OR THE AGENT'S OR ANY CO-AGENT'S BEING DEEMED AN OWNER OR OPERATOR OF ANY ASSETS OF THE COMPANY OR ITS SUBSIDIARIES BY A COURT OR OTHER REGULATORY OR ADMINISTRATIVE AGENCY OR TRIBUNAL IN CIRCUMSTANCES IN WHICH NEITHER THE AGENT, EITHER CO-AGENT NOR ANY OF THE BANKS IS GENERALLY OPERATING OR GENERALLY EXERCISING CONTROL OVER SUCH ASSETS, TO THE EXTENT SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM ANY LEGAL REQUIREMENT INCLUDING, WITHOUT LIMITATION, APPLICABLE ENVIRONMENTAL LAWS PERTAINING TO THE CONDITION OF SUCH ASSETS, (E) ENVIRONMENTAL CLAIMS OR (F) ANY INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO ANY OF THE FOREGOING, and the Company shall reimburse the Agent, each Co-Agent, each Bank, and each Affiliate thereof and their respective directors, officers, employees, agents and counsel, upon demand, for any expenses (including legal fees) incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages, costs or expenses incurred by a Person or any Affiliate thereof or their respective directors, officers, employees, agents or counsel by reason of the gross negligence or willful misconduct of such Person, Affiliate, director, officer, employee, agent or counsel. The obligation of the Company to provide indemnification under this section for fees and expenses of counsel shall be limited to the fees and expenses of one counsel in each jurisdiction representing all of the Persons entitled to such indemnification, except to the extent that, in the reasonable judgment of any such indemnified Person, the existence of actual or potential conflicts of interest make representation of all of such indemnified Persons by the same counsel inappropriate; in such a case, the Person exercising such judgment shall be indemnified for the reasonable fees and expenses of its separate counsel to the extent provided in this Section without giving effect to the first clause of this sentence. Nothing in this SECTION 12.4 is intended to limit the obligations of the Company under any other provision of this Agreement. 12.5. AMENDMENTS, ETC. No amendment or waiver of any provision of any Credit Document, nor any consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Required Banks and the Company, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; PROVIDED that no amendment, waiver or consent shall, unless in writing and signed by each Bank affected thereby, (a) increase any Commitment of any of the Banks or subject the Banks to any additional obliga- tions; (b) reduce the principal of, or interest on, any Loan, fee or other sum to be paid under any Credit Document; (c) postpone any scheduled date fixed for any payment of -101- principal of, or interest on, any Loan, fee or other sum to be paid under any Credit Document; (d) change the percentage of any of the Commitments, or of the aggregate unpaid principal amount of any of the Loans, or the number of Banks which shall be required for the Banks or any of them to take any action under this Agreement; (e) change any provision contained in SECTIONS 2.5, 5.2, 5.7, 6, 12.3 or 12.4 or this SECTION 12.5, or in the definition of "Required Ratios", or (f) except as provided in the Credit Documents, release any material part of the security for the obligations of the Company under any Credit Document. Except as permitted by the Mortgages, Mortgaged Properties cannot be sold for consideration other than cash without the approval of all Banks. Anything in this SECTION 12.5 to the contrary, no amendment, waiver or consent shall be made with respect to SECTION 11 without the consent of the Agent and the Co-Agents. 12.6. SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and inure to the benefit of the Company, the Agent, the Co-Agents and the Banks and their respective successors and assigns. The Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of all of the Banks. (b) Each Bank may sell participations to any Person in all or part of any Loan, or all or part of its Notes or Commitments, in which event, without limiting the foregoing, the provisions of SECTION 6 shall inure to the benefit of each purchaser of a participation and the PRO RATA treatment of payments, as described in SECTION 5.2, shall be determined as if such Bank had not sold such participation. In the event any Bank shall sell any participation, (1) the Company, the Agent, the Co-Agents and the other Banks shall continue to deal solely and directly with such selling Bank in connection with such selling Bank's rights and obligations under the Credit Documents (including the Notes held by such selling Bank); (2) such Bank shall retain the sole right and responsibility to enforce the obligations of the Company relating to the Loans, including the right to approve any amendment, modification or waiver of any provision of this Agreement other than amendments, modifications or waivers with respect to (A) any fees payable hereunder to the Banks, (B) the amount of principal or the rate of interest payable on, or the dates fixed for the scheduled repayment of principal of, the Loans and other sums to be paid to the Banks hereunder, and (C) the release or termination of all or substantially all of the security for the Loans, and (3) the Company agrees, to the fullest extent it may effectively do so under applicable law, that any participant of a Bank may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such -102- participant were a direct holder of Loans if such Bank has previously given notice of such participation to the Company. (c) Each Bank may assign to one or more Banks or Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitments and the same portion of the related Loans at the time owing to it and the related Note held by it); PROVIDED (1) other than in the case of an assignment to a Person at least 50% owned by the assignor Bank, or by a common parent of both, or to another Bank, the Agent and the Company must give their respective prior written consent, which consent will not be unreasonably withheld; (2) the aggregate amount of the Commitments and/or Loans of the assigning Bank subject to each such assignment (determined as of the date the Assignment Agreement with respect to such assignment is delivered to the Agent) shall in no event be less $10,000,000 (or $1,000,000 in the case of an assignment between Banks) (except for certain exceptions approved by the Company and the Agent or where all of a Bank's Commitments and Loans are being assigned) and shall be in an amount that is an integral multiple of $1,000,000 (except for certain exceptions approved by the Company and the Agent or where all of a Bank's Commitments and Loans are being assigned); (3) the assigning Bank shall contemporaneously assign to such assignee Bank or Eligible Assignee an equal percentage of the assigning Bank's Letter of Credit Commitment and all of the assigning Bank's other rights and obligations under the Letter of Credit Agreement; and (4) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in its records, an Assignment Agreement with blanks appropriately completed, together with the Notes subject to such assignment and a processing and recordation fee of $2,000 (for which the Company shall have no liability except in the case of assignments required by the Company pursuant to SECTION 6.1, 6.3 or 6.6, in which case such fee shall be paid by the Company). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment Agreement, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment Agreement, have the rights and obligations of a Bank hereunder, and (B) the Bank making such assignment shall, to the extent provided in such assignment, be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (d) By executing and delivering an Assignment Agreement, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby, such -103- assignor Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Credit Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Credit Document; (2) such assignor Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the performance or observance by the Company of any of its obligations under any Credit Document; (3) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements of the Company previously delivered in accordance herewith and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment Agreement; (4) such assignee will, independently and without reliance upon the Agent, such assignor Bank or any other Bank and based on such documents and information as it shall deem appropri- ate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Documents; (5) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Documents as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of the Credit Documents are required to be performed by it as a Bank. (e) The Agent shall maintain at its office a copy of each Assignment Agreement delivered to it and a record of the names and addresses of the Banks and the Commitments of, and principal amount of the Loans owing to, each Bank from time to time. The entries in such record shall be conclusive, in the absence of manifest error, and the Company, the Agent and the Banks may treat each Person the name of which is recorded therein as a Bank hereunder for all purposes of the Credit Documents. Such records shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice. (f) Upon its receipt of an Assignment Agreement executed by an assigning Bank and the assignee thereunder together with the Note subject to such assignment, the written consent to such assignment and the fee payable in respect thereto, the Agent shall, if such Assignment Agreement has been completed with blanks appropriately filled, (1) accept such Assignment Agreement; (2) record the information contained therein in its records, and (3) give prompt notice thereof to the Company. Contemporaneously with the receipt by the Agent of an Assignment Agreement, the Company, at its own expense, shall execute and deliver to the Agent in exchange for each surrendered Note a new Note payable to the order -104- of such assignee in an amount equal to the Commitments and/or Loans assumed by it pursuant to such Assignment Agreement and, if the assignor Bank has retained Commitments and/or Loans hereunder, new Notes payable to the order of the assignor Bank in an amount equal to the Commitments and/or Loans retained by it. Such new Notes shall be in an aggregate principal amount equal to the principal amount of each surrendered Note, shall be dated the effective date of such Assignment Agreement and shall otherwise be in substantially the form of the surrendered Notes. Thereafter, each surrendered Note shall be marked cancelled and returned to the Company. (g) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant any information relating to the Company furnished to such Bank by or on behalf of the Company. (h) Any assignment by a Bank pursuant to this SECTION 12.6 shall not result in any single Bank holding in excess of 25% of the Aggregate Commitment at any one time. (i) Notwithstanding any other provision of this SECTION 12.6, TCB and its Affiliates may not assign their rights hereunder unless, after giving effect to such assignment, TCB and its Affiliates would have an aggregate Commitment Percentage of at least 10%. (j) Notwithstanding anything herein to the contrary, each Bank may pledge and assign all or any portion of its rights and interests under the Credit Documents to any Federal Reserve Bank. 12.7. SURVIVAL; TERM; REINSTATEMENT. In addition to the other provisions of this Agreement expressly stated to survive the termination of this Agreement, the obligations of the Company under SECTIONS 6, 12.3 and 12.4 and the last sentence of this SECTION 12.7 and the obligations of the Banks under SECTION 12.8 shall survive the termination of this Agreement. The term of this Agreement shall be until (a) the full and final payment of all Notes, (b) the termination of all Commitments and (c) the payment of all amounts due under the Credit Documents. The Company agrees that if at any time all or any part of any payment previously applied by any Bank to any Loan or other sum hereunder is or must be returned by or recovered from such Bank for any reason (including the order of any bankruptcy court), the Credit Documents shall automatically be reinstated to the same effect as if the prior application had not been made, and the Company hereby agrees to indemnify such Bank against, and to save and hold such Bank harmless from, any required return by or recovery from such Bank of -105- any such payment because of its being deemed preferential under applicable Legal Requirements, or for any other reason. 12.8. LIMITATION OF INTEREST. The parties to this Agreement intend to strictly comply with all applicable laws, including applicable usury laws. Accordingly, the provisions of this SECTION 12.8 shall govern and control over every other provision of any Credit Document which conflicts or is inconsistent with this Section, even if such provision declares that it controls. As used in this Section, the term "interest" includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law; PROVIDED that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money, and not as interest and (b) all interest at any time contracted for, taken, reserved, retained, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of the Loans and the Commitments. In no event shall the Company or any other Person be obligated to pay, or the Agent or any Bank have any right or privilege to reserve, receive or retain, (x) any interest in excess of the maximum amount of nonusurious interest permitted under the laws of the State of Texas or the applicable laws (if any) of the United States or of any other state or (y) total interest in excess of the amount which the Agent or such Bank could lawfully have contracted for, taken, reserved, received, retained or charged had the interest been calculated for the full term of the Loans at the Highest Lawful Rate. On each day, if any, that the interest rate (the "STATED RATE") called for under any Credit Document exceeds the Highest Lawful Rate, the rate at which interest shall accrue shall automatically be fixed by operation of this sentence at the Highest Lawful Rate for that day, and shall remain fixed at the Highest Lawful Rate for each day thereafter until the total amount of interest accrued equals the total amount of interest which would have accrued if there were no such ceiling rate as is imposed by this sentence. Thereafter, interest shall accrue at the Stated Rate unless and until the Stated Rate again exceeds the Highest Lawful Rate when the provisions of the immediately preceding sentence shall again automatically operate to limit the interest accrual rate. The daily interest rates to be used in calculating interest at the Highest Lawful Rate shall be determined by dividing the applicable Highest Lawful Rate per annum by the number of days in the calendar year for which such calculation is being made. None of the terms and provisions contained in any Credit Document which directly or indirectly relate to interest shall ever be construed without reference to this Section, or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the Highest Lawful Rate. If -106- the term of any of the Notes is shortened by reason of acceleration of maturity as a result of any Default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason the Agent or any Bank at any time, including the stated maturity, is owed or receives (and/or has received) interest in excess of interest calculated at the Highest Lawful Rate, then and in any such event all of any such excess interest shall be cancelled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to the Agent or such Bank, it shall be credited PRO TANTO against the then-outstanding principal balance of the Company's obligations to the Agent or such Bank, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor. 12.9. CAPTIONS. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 12.10. COUNTERPARTS. Each Credit Document may be executed in any number of counterparts, all of which taken together shall consti- tute one and the same agreement and any of the parties hereto may execute such Credit Document by signing any such counterpart. 12.11. GOVERNING LAW. EXCEPT TO THE EXTENT OTHERWISE SPECIFIED THEREIN, EACH CREDIT DOCUMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA. THE COMPANY HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS AND OF ANY TEXAS STATE COURT SITTING IN HARRIS COUNTY, TEXAS FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 12.12. SEVERABILITY. Whenever possible, each provision of the Credit Documents shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of any Credit Document shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and -107- enforceability of the remaining provisions of such Credit Document shall not be affected or impaired thereby. 12.13. CHAPTER 15 NOT APPLICABLE. Chapter 15 of the Texas Credit Code shall not apply to any Credit Document or to any Commitment or Loan, nor shall any Credit Document be governed by or be subject to the provisions of such Chapter 15 in any manner whatsoever. -108- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered effective as of the day and year first above written. SANTA FE ENERGY RESOURCES, INC., a Delaware corporation By:M. J. ROSINSKI M. J. Rosinski Vice President and Chief Financial Officer Address for Notices: Santa Fe Energy Resources, Inc. 1616 South Voss, Suite 1000 Houston, Texas 77057 Telecopy: (713) 268-5341 Attention: Vice President and Chief Financial Officer Telex: 794-567 (Answerback: SFEPROD HOU) TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually, as Administrative Agent and as Co-Agent By:JAMES R. MCBRIDE James R. McBride Senior Vice President Address for Notices: Domestic and Eurodollar Texas Commerce Bank National Lending Offices: Association 712 Main Street Texas Commerce Bank National Houston, Texas 77002 Association Attention: Manager, Energy Group ABA #113000609 Telecopy: (713) 236-4117 For Credit To: Acct. #10967 Telex: 166-053 (Answerback:TCB HOU) Attention: Investment Operations/Norma Benzon with copies to: Reference: Santa Fe Energy Resources, Inc. Texas Commerce Bank National Association Facility A P. O. Box 2558 COMMITMENT: $11,828,571.41 Houston, Texas 77252 Attention: Manager, Capital Facility B Markets Division COMMITMENT: $11,171,428.59 and Texas Commerce Bank National Association P. O. Box 2558 Houston, Texas 77252 Attention: Manager, Loan Agreements Division NATIONSBANK OF TEXAS, N.A., individually and as Co-Agent By:H. GENE SHIELS Name:H. Gene Shiels Title:Vice President Domestic and Eurodollar Address for Notices: Lending Offices: NationsBank of Texas, N.A. NationsBank of Texas, N.A. ABA #111000025 700 Louisiana For Credit to: Acct. # P.O. Box 2518 0180019828 Houston, Texas 77252-2518 Attention: Loan Funds Attention: H. Gene Shiels Transfer Telecopy: (713) 247-6432 Reference: Santa Fe Energy Resources, Inc. Facility A COMMITMENT: $11,314,285.71 Facility B COMMITMENT: $10,685,714.29 THE BANK OF NEW YORK By:DANIEL T. GATES Name:Daniel T. Gates Title:Vice President Domestic Lending Office: Address for Notices: The Bank of New York ABA #021000018 The Bank of New York For Credit To: Commercial One Wall Street, 19th Floor Loan Servicing Department New York, New York 10286 GLA #111-556 Attention: Daniel Gates Reference: Santa Fe Energy Telecopy: (212) 635-7923 Resources, Inc. Telex: 232-060 (Answerback:BONY UR) Eurodollar Lending Office: with a copy to: The Bank of New York Ms. Ann Marie Schron ABA #021000018 The Bank of New York For Credit To: Eurodollar/ One Wall Street, 19th Floor Cayman Funding Area New York, New York 10286 LIBOR Account No.: Telecopy: (212) 635-7923 803-3140-992 Telex: 232-060 (Answerback:BONY UR) Reference: Santa Fe Energy Resources, Inc. Facility A COMMITMENT: $9,257,142.86 Facility B COMMITMENT: $8,742,857.14 THE BANK OF NOVA SCOTIA By:A. S. NORSWORTHY Name:A. S. Norsworthy Title:Assistant Agent Domestic and Eurodollar Address for Notices: Lending Offices: Bank of Nova Scotia, New The Bank of Nova Scotia York Agency 600 Peachtree Street, Suite 2700 ABA #026002532 Atlanta, Georgia 30308 For Credit To: Atlanta Attention: Claude Ashby Agency Telecopy: (404) 888-8998 Reference: Santa Fe Energy Telex: 00542319 Resources, Inc. (Answerback: SCOTIABANK ATL) Facility A COMMITMENT: $9,257,142.86 with a copy to: Facility B COMMITMENT: $8,742,857.14 The Bank of Nova Scotia 1100 Louisiana, Suite 3000 Houston, Texas 77002 Attention: Mark Ammerman Telecopy: (713) 752-2425 BANK OF MONTREAL By:MARK GREEN Name:Mark Green Title:Director Domestic and Eurodollar Address for Notices: Lending Offices: Harris Bank Bank of Montreal ABA #071000288 700 Louisiana, Suite 4400 For Credit To: Bank of Houston, Texas 77002 Montreal, Chicago Branch Attention: Dennis Spencer Attention: E. Rios Telecopy: (713) 223-4007 Reference: Santa Fe Energy Telex: 77-5640 Resources, Inc. (Answerback: BKMONTREAL HOU) Facility A COMMITMENT: $10,285,714.29 Facility B COMMITMENT: $9,714,285.71 CIBC, INC. By:J. D. WESTLAND Name:J. D. Westland Title:Vice President Domestic and Eurodollar Address for Notices: Lending Offices: Morgan Guaranty Trust CIBC, Inc. Company of New York Two Paces West, 2727 Paces Ferry Road ABA #021-000-238 Suite 1200 For Credit To: CIBC, Atlanta, Georgia 30339 Atlanta Acct. #630-00-480 Attention: Vice President Telephone No: (404) 319-4999 Telecopier No.: (404) 319-4950 Attention: Loan Operations Telex: 54-2413 Reference: Santa Fe Energy answer back: CANBANK ATL Resources, Inc. Facility A COMMITMENT: $9,257,142.86 with a copy to: Facility B COMMITMENT: $8,742,857.14 Canadian Imperial Bank of Commerce 2 Houston Center, Suite 1200 Houston, Texas 77010 Attention: Brian R. Swinford Telecopy: (713) 658-9922 BANQUE PARIBAS HOUSTON AGENCY By:BRIAN MALONE Name:Brian Malone Title:Vice President By:PATRICK J. MILOR Name:Patrick J. Milor Title:SVP-Deputy General Manager Domestic and Eurodollar Address for Notices: Lending Offices: Bankers Trust Co. Banque Paribas Houston Agency ABA #02-100-1033 1200 Smith Street, Suite 3100 Houston, Texas 77002 For Credit To: Banque Attention: Barton D. Schouest Paribas New York Telecopy: (713) 659-3832 #04202195 Final Credit 2144-001545 Banque Paribas Houston Agency Reference: Santa Fe Energy Resources, Inc. Facility A COMMITMENT: $9,257,142.86 Facility B COMMITMENT: $8,742,857.14 THE FIRST NATIONAL BANK OF BOSTON By:FRANK T. SMITH Name:Frank T. Smith Title:Director Domestic and Eurodollar Address for Notices: Lending Offices: Bank of Boston The First National Bank of Boston ABA #011000390 100 Federal Street Boston, Massachusetts 02110 For Credit To: Attention: George W. Passela not applicable Telecopy: (617) 434-3652 Reference: Santa Fe Energy Resources, Inc. Facility A COMMITMENT: $9,257,142.86 Facility B COMMITMENT: $8,742,857.14 ABN AMRO Bank N.V., HOUSTON AGENCY By:W. BRYAN CHAPMAN Name:W. Bryan Chapman Title:Vice President By:CHARLES W. RANDALL Name:Charles W. Randall Title:Group Vice President Domestic and Eurodollar Address for Notices: Lending Offices: ABN AMRO New York ABN AMRO Bank N.V., Houston Agency ABA #026009580 Three Riverway, Suite 1600 Houston, Texas 77056 For Credit To: ABN AMRO Attention: Mr. Bryan Chapman Houston Agency Telecopy: (713) 629-7533 Acct. #651001071541 Reference: Santa Fe Energy Resources, Inc. Facility A COMMITMENT: $10,285,714.29 Facility B COMMITMENT: $9,714,285.71 EXHIBITS: A - Form of Facility A Note B - Form of Facility B Note C - Request for Extension of Credit D - Assignment Agreement E - Facility A Maximum Amount F - Preliminary Available Amount SCHEDULES: I - Restricted and Unrestricted Subsidiaries II - Liens and Funded Debt III - Initial Approved Assumptions and Price Protection Agreements IV - Coverage Report V - Subordination Provisions VI - Opinion of Andrews & Kurth, L.L.P. VII - Opinion of David L. Hicks VIII- Mortgages IX - Jurisdictions for Which Certificates Are to Be Provided X - Designated Debt EX-10.W 10 LETTER OF CREDIT AGREEMENT EXHIBIT 10(W) LETTER OF CREDIT AGREEMENT dated as of March 16, 1994 among SANTA FE ENERGY RESOURCES, INC.; the Banks signatory hereto, and TEXAS COMMERCE BANK NATIONAL ASSOCIATION as Co-Agent and Administrative Agent and NATIONSBANK OF TEXAS, N.A. as Co-Agent TABLE OF CONTENTS Section 1. Definitions and Accounting Matters . . . . . . . . . 1 1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . 1 1.2 Accounting Terms and Determinations . . . . . . . . . . 31 Section 2. Commitments . . . . . . . . . . . . . . . . . . . . . 32 2.1 Letters of Credit . . . . . . . . . . . . . . . . . . . 32 2.3 Reductions and Changes of Commitments . . . . . . . . . 37 2.4 Several Obligations . . . . . . . . . . . . . . . . . . 38 2.5 Fees . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 3. Prepayments . . . . . . . . . . . . . . . . . . . . . 38 3.1 (a) Commitment Amount . . . . . . . . . . . . . . . 38 Section 4. Payments of Principal and Interest . . . . . . . . . 39 4.1 Repayment of Reimbursement Obligations . . . . . . . . 39 4.2 Interest . . . . . . . . . . . . . . . . . . . . . . . 39 Section 5. Payments; Pro Rata Treatment; Computations, Etc. . . 39 5.1 Payments . . . . . . . . . . . . . . . . . . . . . . . 39 5.2 Pro Rata Treatment . . . . . . . . . . . . . . . . . . 40 5.3 Computations . . . . . . . . . . . . . . . . . . . . . 40 5.4 Minimum and Maximum Amounts . . . . . . . . . . . . . . 40 5.5 Certain Actions, Notices, Etc . . . . . . . . . . . . . 40 5.6 Non-Receipt of Funds by the Agent . . . . . . . . . . . 41 5.7 Sharing of Payments, Etc. . . . . . . . . . . . . . . . 42 5.8 Other Expenses . . . . . . . . . . . . . . . . . . . . 42 Section 6. Yield Protection and Illegality . . . . . . . . . . . 42 6.1 Additional Costs in Respect of Letters of Credit . . . 42 6.2 Capital Adequacy . . . . . . . . . . . . . . . . . . . 43 Section 7. Conditions Precedent . . . . . . . . . . . . . . . . 44 7.1 Closing Conditions . . . . . . . . . . . . . . . . . . 44 7.2 All Letters of Credit . . . . . . . . . . . . . . . . . 46 Section 8. Representations and Warranties . . . . . . . . . . . 46 8.1 Corporate Existence . . . . . . . . . . . . . . . . . . 47 8.2 Information . . . . . . . . . . . . . . . . . . . . . . 47 8.3 Litigation; Compliance . . . . . . . . . . . . . . . . 47 8.4 No Breach . . . . . . . . . . . . . . . . . . . . . . . 48 8.5 Corporate Action . . . . . . . . . . . . . . . . . . . 48 8.6 Approvals . . . . . . . . . . . . . . . . . . . . . . . 48 8.7 Regulations G, U and X . . . . . . . . . . . . . . . . 49 8.8 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . 49 8.9 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 49 8.10 Subsidiaries . . . . . . . . . . . . . . . . . . . . . 49 8.11 Investment Company Act . . . . . . . . . . . . . . . . 49 8.12 Public Utility Holding Company Act . . . . . . . . . . 49 -i- 8.13 Environmental Matters . . . . . . . . . . . . . . . . . 50 Section 9. Covenants . . . . . . . . . . . . . . . . . . . . . . 50 9.1 Financial Statements and Certificates . . . . . . . . 50 9.2 Inspection of Property . . . . . . . . . . . . . . . . 54 9.3 Compliance with Environmental Laws . . . . . . . . . . 54 9.4 Payment of Taxes . . . . . . . . . . . . . . . . . . . 55 9.5 Maintenance of Insurance . . . . . . . . . . . . . . . 55 9.6 Restricted Payments and Restricted Investments . . . . 55 9.7 Lien, Debt and Other Restrictions. . . . . . . . . . . 57 9.8 Issuance of Stock by Restricted Subsidiaries . . . . . 68 9.10 Prepayment of Junior Securities . . . . . . . . . . . 68 Section 10. Defaults. . . . . . . . . . . . . . . . . . . . . . 68 10.1 Events of Default. . . . . . . . . . . . . . . . . . . 68 Section 11. The Agent . . . . . . . . . . . . . . . . . . . . . 72 11.1 Appointment, Powers and Immunities . . . . . . . . . . 72 11.2 Reliance by Agent . . . . . . . . . . . . . . . . . . 73 11.3 Defaults . . . . . . . . . . . . . . . . . . . . . . . 73 11.4 Rights as a Bank . . . . . . . . . . . . . . . . . . . 73 11.5 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . 74 11.6 Non-Reliance on the Agent and Other Banks . . . . . . 74 11.7 Failure to Act . . . . . . . . . . . . . . . . . . . . 75 11.8 Resignation or Removal of the Agent . . . . . . . . . 75 Section 12. Miscellaneous . . . . . . . . . . . . . . . . . . . 75 12.1 Waiver . . . . . . . . . . . . . . . . . . . . . . . . 75 12.2 Notices . . . . . . . . . . . . . . . . . . . . . . . 76 12.3 Expenses, Etc. . . . . . . . . . . . . . . . . . . . . 76 12.4 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . 76 12.5 Amendments, Etc. . . . . . . . . . . . . . . . . . . . 77 12.6 Successors and Assigns . . . . . . . . . . . . . . . . 78 12.7 Survival; Term; Reinstatement . . . . . . . . . . . . 81 12.8 Limitation of Interest . . . . . . . . . . . . . . . . 81 12.9 Captions . . . . . . . . . . . . . . . . . . . . . . . 82 12.10 Counterparts . . . . . . . . . . . . . . . . . . . . . 82 12.11 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . 83 12.12 Severability . . . . . . . . . . . . . . . . . . . . . 83 12.13 Chapter 15 Not Applicable . . . . . . . . . . . . . . 83 -ii- LETTER OF CREDIT AGREEMENT This Letter of Credit Agreement (as amended, modified, supplemented and restated from time to time, this "AGREEMENT") dated as of March 16, 1994, is by and among SANTA FE ENERGY RESOURCES, INC. (the "COMPANY"), a Delaware corporation; each of the lenders which is or which may from time to time become a signatory hereto (individually a "BANK" and collectively the "BANKS"); TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), a national banking association, as Administrative Agent for the Banks (in such capacity, together with its successors in such capacity, the "AGENT"); and TCB and NATIONSBANK OF TEXAS, N.A., a national banking association, as Co-Agents (in such capacity, the "CO- AGENTS"). The parties agree as follows: Section 1. DEFINITIONS AND ACCOUNTING MATTERS. 1.1 CERTAIN DEFINED TERMS. As used herein, the following terms shall have the following meanings: "ACHIEVEMENT DATE" shall mean the first date on which both (a) the aggregate minimum Qualifying Amount of Junior Securities to be used in determining the applicable table on EXHIBIT C for the Preliminary Available Amount has been issued and the gross proceeds thereof received by the Company and (b) all Designated Debt for the aggregate Qualifying Amount of Junior Securities actually issued, as shown on SCHEDULE X, shall have been repaid or Defeased. In determining any Achievement Date, the Qualifying Amounts of Junior Securities issued on such date, on the Qualifying Date and on each additional date, if any, on which Junior Securities have been issued shall be aggregated. For example, if there is only one issuance of Junior Securities and such issuance is in a Qualifying Amount of $75,000,000, the Preliminary Available Amount will thereafter be determined according to Table Four of EXHIBIT C, and the Qualifying Date and the Achievement Date will be the same. For example, if there are two issuances of Junior Securities, one in the amount of $75,000,000 and a later one in the amount of $50,000,000, the Qualifying Date will be the date of the first issuance, which will also be the Achievement Date for the $75,000,000 level in EXHIBIT C, and the Preliminary Available Amount will be determined according to Table Four of EXHIBIT C until the date of the second issuance; the date of the second issuance will be the Achievement Date for the $125,000,000 level EXHIBIT C, and the Preliminary Available Amount will thereafter be determined according to Table Two of EXHIBIT F. An Achievement Date must occur, if at all, prior to July 1, 1994. "ADDITIONAL COSTS" shall have the meaning ascribed to such term in SECTION 6.1. "ADOBE" shall mean Adobe Resources Corporation, formerly a Delaware corporation. "ADOBE PROPERTIES" shall mean oil, gas and mineral properties and other assets owned by Adobe at the time of the Merger. "AFFILIATE" shall mean, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person; and with respect to an individual, "AFFILIATE" shall also mean any individual related to such individual by blood or marriage. As used in this definition, "CONTROLS", "CONTROLLED BY" and "UNDER COMMON CONTROL WITH" shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "AGGREGATE COMMITMENT" shall mean the total of all Commitments of all Banks. "ALTERNATE ANNUAL DEBT SERVICE COVERAGE RATIO" shall mean, as of any date of determination and for the Calculation Period in which such date occurs and for each Calculation Period thereafter to and including the Calculation Period including the Termination Date, the lowest of the ratios obtained by dividing (a) Combined CFADS (calculated on the basis of the Most Recent Engineering Report) for such Calculation Period by (b) the sum of (1) the Alternate Debt Service of the Company and the Restricted Subsidiaries for such Calculation Period PLUS (2), at all times and to the extent the Special Subsidiary Qualifying Conditions are met, the Special Subsidiary Percentage times the Alternate Debt Service of the Special Subsidiary for such Calculation Period (in each case calculated on the basis set forth in the most recent Coverage Report delivered to the Agent pursuant to SECTION 9.1 and taking into account any incurrence or prepayment of Covered Debt by the Company or any of the Restricted Subsidiaries or the Special Subsidiary since the date of such Coverage Report). "ALTERNATE BASE RATE" shall mean, for any date, a rate per annum (rounded upwards, if necessary, to the next higher 1/100%) equal to the greater of (a) the Prime Rate in effect on such day or (b) the Fed Funds Rate in effect for such day plus 1/2%. Any change in the Alternate Base Rate due to a change in the Fed Funds Rate shall be effective on the effective date of such change in the Fed Funds Rate. If for any reason the Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Fed Funds Rate for any reason, including the inability or failure of the Agent to obtain sufficient bids or publications in accordance with the terms -2- hereof, the Alternate Base Rate shall be the Prime Rate until the circumstances giving rise to such inability no longer exist. "ALTERNATE DEBT SERVICE" shall mean, for any Calculation Period and with respect to any Person, the total of principal payments in respect of Covered Debt of such Person and the total of interest payments (using, with respect to interest to accrue, the interest rates set forth in the most recent Approved Assumptions for such Covered Debt not bearing interest at a fixed rate; if some or all of such Covered Debt bears interest at one or more fixed rates as of the date of determination of Alternate Debt Service but such Covered Debt will not bear interest at such fixed rate or rates to the end of such Calculation Period, then interest payments in respect of Alternate Debt Service with respect to such Covered Debt shall be calculated on the basis of such fixed rate or rates for such time as the same shall be applicable to such Covered Debt, and then at the interest rates set forth in the most recent Approved Assumptions) in respect of Covered Debt of such Person, in each case paid and scheduled to be paid during such Calculation Period; PROVIDED that the principal amount of any Covered Debt of such Person which by its terms matures on a date within such Calculation Period but which may reasonably be expected to be reborrowed in a Rollover on such date shall not be deemed, for purposes of this definition, to be scheduled to be paid on such date; and PROVIDED FURTHER that for purposes of this definition it shall be assumed that (a) surety bonds for environmental purposes and letters of credit issued for the account of a Person will be fully drawn upon their respective expiry dates, (b) the reimbursement obligations of a Person with respect to all surety bonds for environmental purposes and letters of credit issued for its account shall be satisfied immediately and considered as a "principal payment" for purposes of this definition. "AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT" shall mean that certain Amended and Restated Revolving Credit Agreement dated as of March 16, 1994, among the Company, the Agent, the Co-Agents, and the Banks. "ANNUAL DEBT SERVICE COVERAGE RATIO" shall mean, as of any date of determination and for the Calculation Period in which such date occurs and for each Calculation Period thereafter to and including the Calculation Period including the Termination Date, the lowest of the ratios obtained by dividing (a) Combined CFADS (calculated on the basis of the Most Recent Engineering Report) for such Calculation Period by (b) the sum of (1) the Debt Service of the Company and the Restricted Subsidiaries for such Calculation Period PLUS (2), at all times and to the extent the Special Subsidiary Qualifying Conditions are met, the Special Subsidiary Percentage times the Debt Service of the Special Subsidiary for such Calculation Period (in each case calculated on the basis set forth in the most recent Coverage Report delivered to the Agent pursuant to SECTION 9.1 and taking into account any incurrence or -3- prepayment of Covered Debt by the Company or the Restricted Subsidiaries or the Special Subsidiary since the date of such Coverage Report). "APPLICABLE ENVIRONMENTAL LAWS" shall mean all applicable environmental or pollution-control Legal Requirements governing, without limitation, wastewater effluent, solid and hazardous waste or substances and air emissions, together with any other applicable requirements for conducting, on a timely basis, reporting, record- keeping, periodic tests and monitoring for contamination of ground water, surface water, air and land and for biological toxicity of the aforesaid, including, without limitation, the Resource Conservation and Recovery Act of 1976, the Comprehensive Environmental Response Compensation and Liability Act of 1980 (as amended by the Superfund Amendments and Reauthorization Act), the Toxic Substances Control Act, the Safe Drinking Water Act, the Hazardous Materials Transportation Act, the Clean Air Act, the Clean Water Act, the Oil Pollution Act, the Texas Water Code, the Texas Health and Safety Code, the Texas Natural Resources Code, the Louisiana Environmental Quality Act, the Louisiana Air Control Law, the Louisiana Water Control Law, the Louisiana Solid Waste Management and Resource Recovery Law, the Louisiana Hazardous Waste Control Law, the Louisiana Oil Spill Prevention and Response Act, the Louisiana Resource Recovery and Development Act, the Louisiana Waste Reduction Law, the Louisiana Hazardous Material Information Development, Preparedness, and Response Act, the Louisiana State and Local Coastal Resources Management Act of 1978, the Louisiana Coastal Wetlands Conservation and Restoration Act, the Louisiana Abandoned Oilfield Waste Site Law, and the Louisiana Mineral Code, in each case as amended from time to time. "APPLICABLE LENDING OFFICE" shall mean, for each Bank the office of such Bank (or of an Affiliate of such Bank) designated below its name on the signature pages hereof or such other office of such Bank (or of an Affiliate of such Bank) as such Bank may from time to time specify to the Agent and the Company as the office by which its Letters of Credit are to be issued and maintained. "APPLICABLE MARGIN" for Letters of Credit shall mean 1.00% per annum. "APPLICABLE PERIODS" shall mean the Applicable Periods identified on EXHIBIT C. "APPLICATION" shall mean each application and agreement for a Letter of Credit, or similar instrument or agreement, substantially in the form of EXHIBIT A, now or hereafter executed by the Company in connection with any Letter of Credit at any time issued or to be issued hereunder; to the extent that an Application is inconsistent with this Agreement, this Agreement shall control. -4- "APPROVED ASSUMPTIONS" shall mean: (a) until the first delivery of an Independent Engineering Report hereunder, those assumptions set forth on SCHEDULE III; and (b) thereafter, for each Independent Engineering Report hereunder, assumptions as to product prices, interest rates, escalation rates, discount rates and future levels of production curtailment, which assumptions shall be determined by the Co-Agents after consultation with the Company and set forth (x) in the case of each Required Reserve Report, in a notice sent to the Banks on or before January 21 of each such year and in a notice from the Agent to the Company on or prior to the next succeeding February 1 or (y) in the case of each Optional Reserve Report, in a notice sent to the Banks within 30 days of the delivery of the notice to the Co-Agents required by SECTION 2.2(d) and in a notice from the Agent to the Company on or prior to a date 10 days after the date of such notice to the Banks; PROVIDED that, in the case of CLAUSE (b) preceding such assumptions are, within ten days after any such notice is sent to the Banks, approved (as indicated in one or more notices received by the Agent within such ten-day period) by Banks with aggregate Commitment Percentages of 75% or more. If the assumptions proposed by the Co- Agents are not approved, the Banks will work to determine and approve alternative assumptions in good faith in accordance with their customary oil and gas lending practices. Approved Assumptions set forth in a notice to the Company shall govern until new Approved Assumptions are set forth in a notice to the Company as provided herein, and shall be used, without limitation, in preparation of the next Independent Engineering Report required to be delivered pursuant to SECTION 9.1 or permitted to be delivered pursuant to SECTION 2.2(d). "ASSIGNMENT AGREEMENT" shall mean an Assumption and Assignment Agreement substantially in the form of EXHIBIT B. "ATTRIBUTABLE DEBT" shall mean the lesser of (a) the fair market value of the assets sold pursuant to any Sale and Leaseback Transaction (which determination shall be based upon a written opinion (the cost of which shall be borne exclusively by the Company) as to valuation from an independent valuation expert selected by the Company) or (b) the present value (discounted according to GAAP at the interest rate implicit in the lease) of the obligations of the lessee for rental payments during the term of any lease constituting a part of such Sale and Leaseback Transaction. -5- "AVAILABLE AMOUNT" shall mean subject always to the limitation set forth in SECTION 2.2(e), the Preliminary Available Amount from time to time in effect, as the same may be adjusted upward and downward in accordance with SECTION 2.2 or permanently decreased in accordance with SECTION 2.3. "BOARD" shall mean the Board of Governors of the Federal Reserve System of the United States. "BUSINESS DAY" shall mean any day other than a day on which commercial banks are authorized or required to close in Houston, Texas or New York, New York. "CALCULATION PERIOD" shall mean the year ending on the last day of a March; with respect to calculations for a Calculation Period determined with reference to amounts for two calendar years, it shall be assumed (unless such amounts are due on scheduled dates, in which case such calculations shall be made with reference to such dates) that each such calendar year amount is spread evenly over the appropriate calendar year, with the result that each such amount for a Calculation Period beginning on an April 1 shall be composed of (a) 9/12 of the calendar year amount for the calendar year containing such March 1 plus (b) 3/12 of the calendar year amount for the next calendar year. "CAPITAL GAINS" shall mean gains (net of expenses and income taxes applicable thereto) in excess of losses resulting from the sale, conversion or other disposition of capital assets (I.E., assets other than current assets). "CAPITALIZED LEASE OBLIGATION" shall mean any rental obligation which, under GAAP, is or will be required to be capitalized on the books of the Company or any Restricted Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expense) in accordance with such principles. "CFADS" shall mean, for any Calculation Period and with respect to any Person, (a) Net Oil and Gas Income (PROVIDED that in calculating Combined CFADS, no more than 25% of Net Oil and Gas Income may be attributable to proved nonproducing and proved undeveloped Recognized Proved Reserves) LESS (b) Projected G & A Expense LESS (c) Projected Income Tax Expense PLUS (d) anticipated net income (or minus anticipated net losses) from the Price Protection Agreements (determined on the basis of the Approved Assumptions), (e) PLUS any anticipated gain, and MINUS any anticipated loss, on Interest Rate Protection Agreements (determined on the basis of the Approved Assumptions), PLUS (f) other income from operations as reasonably projected under the Approved Assumptions, not to exceed 5% of Combined CFADS, and PLUS (g) proceeds of sales of assets permitted by the Credit Documents, to the extent (but only to the extent) such proceeds are applied as -6- prepayments pursuant to SECTION 3.1, in each case for such Calculation Period and such Person. "CHANGE OF CONTROL" shall mean any change so that any Person (or any Persons acting together which would constitute a Group), together with any Affiliates or Related Persons thereof, shall at any time either (a) Beneficially Own more than 50% of the aggregate voting power of all classes of Voting Stock of the Company or (b) succeed in having sufficient of its or their nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the Board of Directors of the Company after such election who is an Affiliate or Related Person of such Person or Group, shall constitute a majority of the Board of Directors of the Company. As used herein (a) "BENEFICIALLY OWN" shall mean beneficially own as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or any successor provision thereto; (b) "GROUP" shall mean a "group" for purposes of Section 13(d) of the Exchange Act; (c) "RELATED PERSON" of any Person shall mean any other Person owning (1) 5% or more of the outstanding common stock of such Person or (2) 5% or more of the Voting Stock of such Person, 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. "CHAPTER ONE" shall mean Chapter One of the Texas Credit Code, as in effect on the date the document using such term was executed. "CODE" shall mean the Internal Revenue Code of 1986, as amended, or any successor statute, together with all publicly available written regulations, rulings and interpretations thereof or thereunder by the Internal Revenue Service. "COLLATERAL" shall mean all property at any time subject to the Security Documents under the Amended and Restated Revolving Credit Agreement. "COMBINED CFADS" shall mean, for any Calculation Period, the sum of (a) CFADS of the Company and the Restricted Subsidiaries PLUS, at all times and to the extent all Special Subsidiary Qualifying Conditions are met, (b) the product of (1) the Special Subsidiary Percentage times (2) the CFADS of the Special Subsidiary, in each case for such Calculation Period. "COMBINED COVERED DEBT" shall mean, as of any date, the sum of (a) the Covered Debt of the Company and the Restricted Subsidiaries PLUS, at all times and to the extent all Special Subsidiary Qualifying Conditions are met as of such date, (b) the product of (1) the Special Subsidiary Percentage times (2) the Covered Debt of the Special Subsidiary, all as of such date. -7- "COMBINED GROUP" shall mean the Company, the Restricted Subsidiaries and the Special Subsidiary. "COMBINED RESERVE VALUE" shall mean, as of any date, the sum of (a) the Reserve Value of the Company and the Restricted Subsidiaries PLUS, at all times and to the extent all Special Subsidiary Qualifying Conditions are met as of such date, (b) the product of (1) the Special Subsidiary Percentage times (2) the Reserve Value of the Special Subsidiary, all as of such date. In calculating the Combined Reserve Value, no more than 25% of such Combined Reserve Value may be attributable to the combination of proved nonproducing and proved undeveloped Recognized Proved Reserves. "COMMITMENT" shall mean, as to any Bank, the obligation, if any, of such Bank to incur Letter of Credit Liabilities in an aggregate principal amount at any one time outstanding up to but not exceeding such Bank's Commitment Percentage times the difference between (a) the Available Amount then in effect, and (b) the aggregate unpaid balance of the Facility B Notes, which amount shall be up to but not exceeding the amount set forth opposite such Bank's name on the signature pages hereof under the caption "Commitment" (as the same may be reduced from time to time pursuant to SECTION 2.3). "COMMITMENT FEE" shall mean the commitment fees payable by the Company to the Agent for the account of the Banks in their Commitment Percentages as provided in SECTION 2.5. "COMMITMENT PERCENTAGE" shall mean, as to any Bank, the percentage equivalent of a fraction, the numerator of which is the amount of such Bank's Commitment as shown opposite such Bank's name on the signature pages hereof under the caption "Commitment", subject to reduction and the identification of new Banks pursuant to SECTION 12.6, and the denominator of which is the Aggregate Commitment. "CONSOLIDATED NET EARNINGS" shall mean consolidated gross revenues (including Capital Gains) of the Company and the Restricted Subsidiaries less all operating and non-operating expenses of the Company and the Restricted Subsidiaries including all charges of a proper character (including current and deferred taxes on income, provision for taxes on unremitted foreign earnings which are included in gross revenues, and current additions to reserves), but not including in gross revenues any dividends, distributions or other payments received by the Company or any of its Restricted Subsidiaries in connection with the Hadson Stock, unless received in the form of cash, or any dividends, distributions or other payments received by the Company or any of its Restricted Subsidiaries from the Special Subsidiary or gains resulting from write-up of assets, any equity of the Company or any Restricted Subsidiary in the unremitted earnings of any Person which is not a Restricted -8- Subsidiary, any earnings of any Person acquired by the Company or any Restricted Subsidiary through purchase, merger or consolidation or otherwise for any year prior to the year of acquisition, or any deferred credit representing the excess of equity in any Restricted Subsidiary at the date of acquisition over the cost of the investment in such Restricted Subsidiary; all determined in accordance with GAAP. "CONSOLIDATED NET EARNINGS AVAILABLE FOR FIXED CHARGES" shall mean for any period the sum of (a) Consolidated Net Earnings for such period (PROVIDED that the maximum amount of Capital Gains included therein shall be $3,000,000 through December 31, 1990 and such maximum amount shall increase by $150,000 on the first day of each year thereafter); without duplication, (b) cash distributions received during such period by the Company and the Restricted Subsidiaries on their Investment in the Special Subsidiary to the extent not reinvested in the Special Subsidiary; to the extent deducted from gross revenues in determining Consolidated Net Earnings, (c) all provisions for any federal, state or other income taxes made by the Company and the Restricted Subsidiaries during such period; (d) Fixed Charges of the Company and the Restricted Subsidiaries during such period; (e) depreciation, depletion and amortization charges of the Company and the Restricted Subsidiaries for such period, and (f) all other non-cash charges of the Company and the Restricted Subsidiaries for such period, all determined in accordance with GAAP. "CONSOLIDATED NET TANGIBLE ASSETS" shall mean the aggregate net tangible assets of the Company and the Restricted Subsidiaries, determined as follows: (a) The MLP Investment (at such times as SFEP is treated as the Special Subsidiary) plus the aggregate gross book value of all the assets of the Company and the Restricted Subsidiaries, both real and personal, shall be computed, EXCLUDING, however, the following items: (i) all franchises, licenses, permits, patents, patent applications, copyrights, trademarks, trade names, goodwill, experimental or organizational expense, unamortized debt discount and expense, and all other assets which under GAAP are deemed intangible; (ii) any reacquired shares or reacquired Debt of the Company or the Restricted Subsidiaries; (iii) any write-up of assets made after December 31, 1989; (iv) 50% of the value of all assets of the Company and the Restricted Subsidiaries acquired after April 1, 1990 which are located outside the United States of America and Canada and not -9- freely returnable to the United States of America or Canada, including any notes or accounts receivable from any debtor having any substantial part of its business, operations or properties located outside the United States of America and Canada, except notes or accounts receivable from such a debtor which arose in the ordinary course of business of the Company or any Restricted Subsidiary, as the case may be, to which such notes or accounts receivable are payable and which otherwise constitute current assets, but only to the extent of an amount of dollars readily realizable from such notes or accounts receivable by liquidation either directly or through a currency freely convertible into dollars; and (v) all Restricted Investments of the Company and the Restricted Subsidiaries (other than Restricted Investments in the capital stock of Hadson). (b) From the gross book value of the tangible assets of the Company and the Restricted Subsidiaries, determined as provided in the preceding CLAUSE (a), there shall be deducted the following items: (i) all reserves for depreciation, depletion, obsolescence and amortization of the assets of the Company and the Restricted Subsidiaries (other than assets excluded as provided in the preceding CLAUSE (a)), all proper reserves (other than reserves for deferred taxes and general contingency reserves and other reserves representing mere appropriations of surplus) which in accordance with GAAP should be set aside in connection with the business conducted by them; (ii) all Current Debt of the Company and the Restricted Subsidiaries; and (iii) all other liabilities of the Company and the Restricted Subsidiaries, including the reduction in equity attri- butable to minority interests but excluding deferred taxes, Funded Debt of the Company and the Restricted Subsidiaries, capital shares, surplus and general contingency reserves and other reserves representing mere appropriations of surplus. (c) In the determination of Consolidated Net Tangible Assets, no amount shall be included therein on account of any excess cost of acquisition of shares of any Restricted Subsidiary over the net book value of the assets of such Restricted Subsidiary attributable to such shares at the date of such acquisition or on account of any excess of the net book value of the assets of any Restricted Subsidiary attributable to any shares of such Restricted Subsidiary at the date of acquisition of such shares over the cost of acquisition of such shares. -10- "COVERAGE REPORT" shall mean a report substantially in the form of SCHEDULE IV setting forth the calculation of the TLOR Coverage Ratio, the SLOR Coverage Ratio, the Annual Debt Service Coverage Ratio and the Alternate Annual Debt Service Coverage Ratio. "COVERED DEBT" shall mean, for any Person, without duplication, (a) all obligations for borrowed money (including obligations for borrowed money consisting of or arising in connection with Junior Securities); (b) all obligations evidenced by bonds, debentures, notes or other similar instruments; (c) all obligations to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business; (d) all Capitalized Lease Obligations; (e) all obligations in respect of production payments, proceeds production payments and similar financing arrangements; (f) all reimbursement obligations and all letter of credit advances with respect to letters of credit issued for the account of such Person, including the Letter of Credit Liabilities; (g) surety bonds for environmental purposes; (h) all obligations of the types described in CLAUSES (a) through (g) of this definition (collectively, "ORDINARY DEBT") of another Person secured by a Lien on any property of the Person as to which Covered Debt is being determined, regardless of whether such Ordinary Debt is assumed by such Person, and (i) all Ordinary Debt of another Person guaranteed (but excluding the obligations of the Company and the Restricted Subsidiaries arising solely by virtue of their serving as general partner of SFEP) by such Person; PROVIDED that Covered Debt shall not include Ordinary Debt or any obligation of the types described in CLAUSES (h) or (i) of this definition which is (1) non-recourse (either directly or contingently) as to all members of the Combined Group and (2) secured only by assets which are not Recognized Proved Reserves. "CREDIT DOCUMENTS" shall mean this Agreement, all Applications, all Letters of Credit, the Notice of Entire Agreement, the Amended and Restated Revolving Credit Agreement and all instruments, certificates and agreements now or hereafter executed or delivered to the Agent or any Bank pursuant to any of the foregoing. "CURRENT DEBT" shall mean any obligation for borrowed money (and any notes payable and drafts accepted representing obligations for borrowed money) payable on demand or within a period of one year from the date of the creation thereof and any Guaranty with respect to Current Debt (of the kind otherwise described in this definition) of another Person; PROVIDED that any obligation shall be treated as Funded Debt, regardless of this term, if such obligation is renewable pursuant to the terms thereof or of a revolving credit or similar agreement effective for more than one year after the date of the creation of such obligation, or may be payable out -11- of the proceeds of a similar obligation pursuant to the terms of such obligation or of any such agreement. "DEBT" shall mean Funded Debt and/or Current Debt, as the case may be. "DEBT SERVICE" shall mean, for any Calculation Period, the total of principal payments in respect of Covered Debt of the Person as to which Debt Service is to be determined and the total of interest payments (using, with respect to interest to accrue, the interest rates set forth in the most recent Approved Assumptions for such Covered Debt not bearing interest at a fixed rate; if some or all of such Covered Debt bears interest at one or more fixed rates as of the date of determination of Debt Service but such Covered Debt will not bear interest at such fixed rate or rates to the end of such Calculation Period, then interest payments in respect of Debt Service with respect to such Covered Debt shall be calculated on the basis of such fixed rate or rates for such time as the same shall be applicable to such Covered Debt, and then at the interest rates set forth in the most recent Approved Assumptions) in respect of Covered Debt of such Person, in each case paid and scheduled to be paid during such Calculation Period; PROVIDED that the principal amount of any Covered Debt of such Person which by its terms matures on a date within such Calculation Period but which may reasonably be expected to be reborrowed in a Rollover on such date shall not be deemed, for purposes of this definition, to be scheduled to be paid on such date; and PROVIDED FURTHER that for purposes of this definition it shall be assumed (to the extent relevant with respect to such Person) that (a) Letters of Credit will be fully drawn upon their respective expiry dates; (b) other letters of credit issued for the account of such Person will not be drawn; (c) surety bonds for environmental purposes issued on behalf of such Person will not be drawn, and (d) the reimbursement obligations of the Company under this Agreement shall be satisfied immediately and considered as a "principal payment" for purposes of this definition. "DEFAULT" shall mean an Event of Default or an event which with notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DEFEASED" shall mean, with respect to any amount of Designated Debt, that the Company (a) shall have given to the holders of such Designated Debt irrevocable notice of the repayment of such Designated Debt, (b) shall have deposited with the trustee or an independent escrow or paying agent as trust funds the entire amount sufficient to pay at the date fixed for such repayment all of such Designated Debt, including principal, premium if any, and interest due or to become due to such date of repayment, such amount to be invested only in readily marketable direct full faith and credit obligations of the United States of America having maturities of not more than one year from date of issue, and (c) -12- shall have paid or caused to be paid all other sums payable by the Company in connection with such Designated Debt. "DESIGNATED DEBT" shall mean the indebtedness of the Company described on SCHEDULE X. SCHEDULE X sets forth, for each range of Qualifying Amounts of Junior Securities, the maturities of Covered Debt which must be repaid in order for the Facility A Maximum Amount and the Preliminary Available Amount to reach the levels set forth in EXHIBITS C. "EBITD" shall mean for any period Consolidated Net Earnings for such period, plus the aggregate amounts deducted in determining Consolidated Net Earnings in respect of (a) all provisions for any federal, state or other income taxes made by the Company and the Restricted Subsidiaries during such period; (b) Fixed Charges of the Company and the Restricted Subsidiaries during such period; (c) depreciation, depletion and amortization charges of the Company and the Restricted Subsidiaries for such period, and (d) all other non- cash charges of the Company and the Restricted Subsidiaries for such period, all determined in accordance with GAAP. "ELIGIBLE ASSIGNEE" shall mean (a) a commercial bank having total assets in excess of $1,000,000,000 or (b) a finance company, insurance company, other financial institution or fund, acceptable to the Agent and the Company, which is regularly engaged in making, purchasing or investing in loans and having total assets in excess of $1,000,000,000. "ENGINEERING SHORTFALL" shall mean the amount, if any, by which the sum of (a) the aggregate outstanding principal balance of the Facility B Notes PLUS (b) the aggregate Letter of Credit Liabilities shall exceed the Available Amount at the time of any delivery of (and as determined in accordance with) an Independent Engineering Report and its related Coverage Report. The effects of an Engineering Shortfall are described, among other places herein, in SECTIONS 2.2(c), 7.2(a), 7.2(f), 9.9, and 10.1(d) AND (e). An Engineering Shortfall shall continue until cured by presentation of a new Coverage Report demonstrating that the sum of (a) and (b) is equal to or less than the Available Amount then in effect. "ENVIRONMENTAL CLAIM" shall mean any claim, demand, action, cause of action, suit, judgment, governmental or private investigation relating to remediation or compliance with Applicable Environmental Laws, proceeding or lien, whether threatened, sought, brought or imposed, that seeks to recover costs, damages, punitive damages, expenses, fines, criminal liability, judgments, response costs, investigative and monitoring costs, abatement costs, attorney's fees, expert's fees or consultant's fees, or seeks to impose liability regarding the Company or any of its Subsidiaries, or any of their sites or properties for violations of Applicable Environmental Laws or for pollution, contamination, investigation, preservation, protection, remediation or clean up of the air, -13- surface water, ground water, soil or wetlands, or otherwise in relation to the use, storage, generation, release, handling or disposal of materials and substances that are regulated by or subject to Applicable Environmental Laws. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and all rules, regulations and interpretations by the Internal Revenue Service or the Department of Labor thereunder. "ERISA AFFILIATE" shall mean any trade or business (whether or not incorporated) which on and after December 5, 1990 is under common control with the Company within the meaning of the regulations under Section 414 of the Code. "EVENT OF DEFAULT" shall have the meaning assigned to such term in SECTION 10. "EXISTING LETTERS OF CREDIT" shall mean the letters of credit listed on SCHEDULE VIII. "EXISTING PRIORITY DEBT" at any time shall mean, to the extent that it is otherwise Priority Debt, an amount equal to the sum of (a) the Merger Debt at such time, (b) the outstanding principal amount of Debt under the Springing Lien Agreement at such time, and (c) the outstanding principal amount of Debt under those certain Credit Agreements of Petrolera Santa Fe S.A., dated as of June 25, 1991 and April 28, 1992, at such time. "FACILITY B COMMITMENT" shall have the meaning ascribed to such term in the Amended and Restated Revolving Credit Agreement. "FACILITY B LOAN" shall mean a Loan made pursuant to SECTION 2.1(b) of the Amended and Restated Revolving Credit Agreement. "FACILITY B NOTES" shall mean the Facility B Notes of the Company under (and as defined in) the Amended and Restated Revolving Credit Agreement. "FDIC" shall mean the Federal Deposit Insurance Corporation or any entity succeeding to any or all of its functions. "FED 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 on the succeeding 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 the day of such transactions received by the Agent from three federal funds brokers of recognized standing selected by it. -14- "FIXED CHARGES" shall mean (without duplication) for any period the sum of interest expense in respect of all Debt of the Person for which the determination is made (calculated, in the case of Debt which bears interest at a floating rate, at the rate in effect at the time of calculation), including imputed interest expense in respect of Capitalized Lease Obligations. "FUNDED DEBT" shall mean and include, without duplication, any obligation (including the current maturities thereof) (a) payable more than one year from the date of creation thereof (1) for borrowed money; (2) evidenced by bonds, debentures, notes or reimbursement obligations in respect of letters of credit or other similar instruments (other than letters of credit and surety bonds relating to trade obligations incurred in the ordinary course of business and includable, under GAAP, in current liabilities on a balance sheet or in the notes relating thereto); (3) for the payment of the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business; (4) constituting Capitalized Lease Obligations; (5) in respect of production payments, proceeds production payments or similar financing arrangements; (6) which is, under GAAP, shown on a balance sheet (after giving effect, in the case of the balance sheet of the Company or a Restricted Subsidiary, to the eliminating entries, if any, for the Unrestricted Subsidiaries as a group and the Special Subsidiary) as long-term debt (excluding provisions for deferred income taxes, unfunded pension obligations, unfunded liabilities for other post- employment benefits and other reserves or provisions to the extent that such reserves or provisions do not constitute an obligation), or (7) for any item described in any of the foregoing CLAUSES (1) through (6) which is secured by any Lien on property owned by the Company or any Restricted Subsidiary, whether or not the obligations secured thereby shall have been assumed by the Company or such Restricted Subsidiary; or (b) payable more than one year from the date of creation thereof, which under GAAP is shown on the balance sheet as a long-term liability (EXCLUDING provisions for deferred income taxes, unfunded pension obligations, unfunded liabilities for other post-employment benefits and other reserves or provisions to the extent that such reserves or provisions do not constitute an obligation); or (c) constituting a Guaranty with respect to Funded Debt (of the kind otherwise described in CLAUSES (a) and (b) of this definition) of another Person, including any obligation by the Company or a Restricted Subsidiary for Funded Debt of SFEP or any other Person, regardless of the percentage of equity interest owned therein by the Company or a Restricted Subsidiary, by virtue of its capacity as a general partner of SFEP or such other Person. -15- "GAAP" shall mean, as to a particular Person, such accounting practice as, in the opinion of the independent accountants of recognized national standing regularly retained by such Person and acceptable to the Agent, conforms at the time to generally accepted accounting principles, consistently applied. Generally accepted accounting principles means those principles and practices which are (a) recognized as such by the Financial Accounting Standards Board; (b) applied for all periods after the date hereof in a manner consistent with the manner in which such principles and practices were applied to the financial statements of the relevant Person dated December 31, 1989 and for the period then ended, and (c) consistently applied for all periods after the date hereof so as to reflect properly the financial condition and results of operations of such Person. "GOVERNMENTAL AUTHORITY" shall mean any sovereign governmental authority, the United States of America, any State of the United States and any political subdivision of any of the foregoing, and any agency, instrumentality, department, commission, board, bureau, central bank, authority, court or other tribunal, in each case whether executive, legislative, judicial, regulatory or administrative, having jurisdiction over the Company, any of the Company's Subsidiaries, any of their respective property, the Agent, the Co-Agent or any Bank. "GUARANTY" shall mean and include, without limitation, any obligation of the Company or a Restricted Subsidiary (a) constituting a guaranty, endorsement (other than an endorsement of a negotiable instrument for collection in the ordinary course of business) or other contingent liability (whether direct or indirect) in connection with the obligations, stock or dividends of any Person (other than the Company or a Restricted Subsidiary); (b) payable under any contract (other than the Tax Indemnification Agreement and any other tax indemnification or sharing agreement) providing for the making of loans, advances or capital contributions to any Person (other than the Company or a Restricted Subsidiary), or for the purchase of any property from any Person, in each case in order primarily to enable such Person to maintain working capital, net worth or any other balance sheet condition or to pay debts, dividends or expenses; (c) payable under any contract for the purchase of materials, supplies or other property or services (other than any natural gas transportation contract or any electrical, water supply, steam purchase or other utility supply contract) if such contract (or any related document) requires that payment for such materials, supplies or other property or services shall be made regardless of whether or not delivery of such materials, supplies or other property or services is ever made or tendered; PROVIDED that the -16- exceptions contained in this CLAUSE (c) shall not apply to any contract for the purchase or transportation of natural gas where payment is required regardless of whether the delivery of such natural gas is ever made or tendered, unless at the time such contract is entered into the aggregate of payments under such contract and all such existing contracts would not exceed $20,000,000 in any calendar year based on existing rates and automatic escalations in such rates under such contracts; (d) payable under any contract to rent or lease (as lessee) any real or personal property (other than any oil and gas leases) if such contract (or any related document) provides that the obligation to make payments thereunder is absolute and unconditional under conditions not customarily found in commercial leases then in general use or requires that the lessee purchase or otherwise acquire securities or obligations of the lessor; or (e) payable under any other contract which, in economic effect, is substantially equivalent to a guarantee for any payment or performance of an obligation of a Person other than the Company or a Restricted Subsidiary. "HADSON" shall mean Hadson Corporation, a Delaware corporation, and any successor corporation thereto. "HADSON STOCK" shall mean, to the extent held continuously by the Company or any of its Restricted Subsidiaries after the merger of SFER Pipeline, Inc. into the Company, (a) any of the 2,080,000 shares of the Senior Cumulative Preferred Stock, Series A, par value $.01 per share, of Hadson and the 10,395,665 shares of the common stock, par value $.01 per share, of Hadson, acquired by the Company or any of its Subsidiaries on or before January 31, 1994, (b) any stock acquired by virtue of one or more stock splits or recapitalizations involving such common stock or Senior Cumulative Preferred Stock and not involving any additional economic consideration on the part of the Company or any of its Subsidiaries, and (c) any dividend paid on such common stock or Senior Cumulative Preferred Stock solely in the capital stock of Hadson. "HIGHEST LAWFUL RATE" shall mean, on any day, the maximum nonusurious rate of interest permitted for that day by whichever of applicable federal or Texas law permits the higher interest rate, stated as a rate per annum. On each day, if any, that Chapter One establishes the Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate ceiling" (as defined in Chapter One) for that day. "HYDROCARBONS" shall mean crude oil, condensate, natural gas, natural gas liquids and associated substances. -17- "INDEPENDENT ENGINEERING REPORT" shall mean a report prepared by an Independent Petroleum Engineer which sets forth the gross and net volume of Hydrocarbons projected to be produced from the Petroleum Properties, by calendar years, for the remaining economic life of the Petroleum Properties. The Petroleum Properties of the Special Subsidiary shall be segregated from the Petroleum Properties of the other members of the Combined Group, and the Adobe Properties shall be separately identified. Each Independent Engineering Report shall also contain a list of Petroleum Properties of the members of the Combined Group and indicate the Net Oil and Gas Income for each calendar year attributable thereto, all in reasonable detail. Each such report shall identify which of the Petroleum Properties covered thereby are "proved developed producing", "proved developed non-producing" and "proved undeveloped" (as defined in the "Definitions for Oil and Gas Reserves" as published by the Society of Petroleum Engineers). Each such report shall be prepared in accordance with established criteria generally accepted in the oil and gas industry and standards customarily used by independent petroleum engineers well regarded in the industry in making reserve determinations or appraisals, and shall be based on Approved Assumptions and such other assumptions, estimates and projections as are fully disclosed in such Independent Engineering Report. "INDEPENDENT PETROLEUM ENGINEER" shall mean Ryder Scott Company Petroleum Engineers or another independent petroleum engineer retained by the Company acceptable to the Required Banks. "INTEREST RATE PROTECTION AGREEMENTS" shall mean an interest rate swap agreement, interest rate cap agreement or other similar arrangement which satisfies all of the following requirements: (a) a member of the Combined Group is a party to such agreement; (b) the Company has given evidence (satisfactory to the Agent) of such agreement to the Agent; (c) the terms and parties to such agreement, taking into account all similar agreements to which members of the Combined Group are parties, are satisfactory to the Required Banks; and (d) such agreement is in full force and effect and has not been unwound. "INVESTMENT" shall mean any purchase or other acquisition of the stock, obligations or securities of, or any interest in, or any capital contribution, loan or advance to, or any Guaranty in respect of the obligations of (but excluding the obligations of the Company and the Restricted Subsidiaries arising solely by virtue of their serving as general partner of SFEP) any Person, but in any event shall include as an investment in any Person the amount of all Debt owed by such Person, and all accounts receivable from such Person which are not current assets or did not arise from sales to such Person in the ordinary course of business. As used herein, any capital contribution of assets by the Company or any Restricted Subsidiary shall be valued at the book value of such assets as reflected in the consolidated financial statements of the Company -18- and the Restricted Subsidiaries as at the end of the quarter ending immediately prior to such contribution. "JUNIOR SECURITIES" shall mean (a) equity (including preferred stock but excluding any equity which the holder thereof may have any right to put back to the Company for cash and excluding any equity mandatorily redeemable for cash) of the Company or (b) indebtedness of the Company which in the sole discretion of the Required Banks satisfies all of the following requirements: (1) such indebtedness shall be subordinated by writing in Proper Form in right of payment to all existing and future indebtedness of the Company under the Credit Documents, as renewed, extended, amended, modified, supplemented and increased from time to time; (2) such indebtedness shall be unsecured; (3) no principal of such indebtedness shall be scheduled to be due before January 31, 1999; (4) such indebtedness shall not be governed by any covenant or event of default more restrictive than those set forth in the Credit Documents; (5) the provisions applicable to such indebtedness with respect to a change in the control of the Company and the sale of assets by any member of the Combined Group shall be not more restrictive than those set forth in the Credit Documents; (6) such indebtedness shall be subject to Blockage for periods aggregating up to 180 days within any 365 day period; (7) the holders of such indebtedness shall be required to give the Agent at least five days' prior written notice of any intended acceleration of such indebtedness (which the Agent shall transmit to each Bank promptly upon receipt); and (8) the holders of such indebtedness shall not have the right to declare a default with respect to, or to accelerate, any of such indebtedness in the event of a default on other indebtedness of any member of the Combined Group except (i) at the scheduled maturity of such other indebtedness or (ii) in the event that principal of such other indebtedness in excess of $25,000,000 shall be duly accelerated. For purposes of this definition, "BLOCKAGE" shall mean, upon the occurrence of a default and so long as it is continuing, the prohibition of the payment (including principal of, interest or premium on or sinking fund requirements) of any indebtedness or obligations of the Company consisting of or arising in connection with any Junior Securities. For purposes of this definition, "PAYMENT" shall include any deposit of property to defease any JuniorSecurities. "LEGAL REQUIREMENT" shall mean any applicable law, statute, ordinance, decree, requirement, order, judgment, rule, regulation (or official interpretation by any Governmental Authority of any of the foregoing) of, and the terms of any license or permit issued by, any Governmental Authority, in each case as now or hereafter in effect. "LETTER OF CREDIT" shall have the meaning ascribed to such term in SECTION 2.1(a). -19- "LETTER OF CREDIT FEE" shall mean with respect to any Letter of Credit issued pursuant hereto a fee equal to 1% per annum of the face amount of each such Letter of Credit issued; PROVIDED, that each Letter of Credit Fee shall in no event be less than $600. "LETTER OF CREDIT LIABILITIES" shall mean, at any time and in respect of Letters of Credit under this Agreement, the sum of (i) the aggregate amounts then or thereafter available for drawings under such outstanding Letters of Credit PLUS (without duplication) (ii) the aggregate unpaid amount of all Reimbursement Obligations at the time due and payable in respect of previous drawings made under such Letters of Credit. "LIEN" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing), any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of, or agreement to give, any financing statement under the Uniform Commercial Code of any jurisdiction or any other type of preferential arrangement. "LOANS" shall mean the loans and Rollover of loans provided for by the Amended and Restated Revolving Credit Agreement. "MATERIAL ADVERSE CHANGE" shall mean an occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding), which after taking into account actual insurance coverage and effective indemnification with respect to such occurrence, (a) has a material adverse effect on the financial condition, business, operations or properties of the Company and its Subsidiaries taken as a whole and (b) impairs in any material respect either (1) the ability of the Company to perform any of its obligations under the Credit Documents or (2) the ability of the Banks to enforce any of such obligations or any of their remedies under the Credit Documents. "MERGER" shall mean the merger of Adobe into the Company, which occurred May 19, 1992. "MERGER DEBT", for purposes of the definition of "Existing Priority Debt" used in SECTION 9.7(b)(3) and 9.7(b)(4) of this Agreement, shall mean at any time, with respect to the Debt of the Company incurred as of May 20, 1992, in connection with the Merger, as such Debt may have been or hereafter may be renewed, extended or otherwise modified, the maximum principal amount of such Debt that can be outstanding at such time, but only to the extent that such amount is equal to or less than (a) $90,000,000, at any time during the period from and including December 31, 1993, to and including December 30, 1994, (b) $72,000,000, at any time during the period from and including December 31, 1994, to and including December 30, 1995, (c) $54,000,000, at any time during the period from and including December 31, 1995, to and including December 30, 1996, -20- (d) $36,000,000, at any time during the period from and including December 31, 1996, to and including December 30, 1997, (e) $18,000,000, at any time during the period from and including December 31, 1997, to and including December 30, 1998, and (f) $0.00 at any time thereafter. "MLP INVESTMENT" shall mean, at any time, the lesser of (a) the book value of the Investment of the Company and the Restricted Subsidiaries in the Special Subsidiary, as determined from the most recent consolidated balance sheet of the Company or (b) the product of (1) the average closing price of the publicly traded limited partner interests of the Special Subsidiary for the 30 days immediately preceding the date upon which such determination is made multiplied by (2) the total limited partner interests in the Special Subsidiary owned by the Company and the Restricted Subsidiaries on the date such determination was made. "MOST RECENT ENGINEERING REPORT" shall mean, as of any date of determination, (a) until the first Independent Engineering Report is delivered pursuant to SECTION 9.1 or SECTION 2.2(d), the Independent Engineering Report of Ryder Scott Company Petroleum Engineers dated February 3, 1994; (b) thereafter, the most recent Independent Engineering Report delivered pursuant to either SECTION 9.1 or SECTION 2.2(d) on or prior to such date of determination. "NET OIL AND GAS INCOME" shall mean, for any calendar year (or portion thereof) and for any Person, (a) an amount (or, with respect to any portion of a calendar year, PRO RATA in accordance with the number of days in such portion of such calendar year) of projected gross revenues (based on the prices set forth in the Approved Assumptions) from the sale of Hydrocarbons produced from the Recognized Proved Reserves to be received, subject to no entitlement of any other Person but including appropriate adjustments for over- and under-produced status, by such Person during such calendar year as set forth in the Most Recent Engineering Report LESS (b) an amount (or, with respect to any portion of a calendar year, PRO RATA in accordance with the number of days in such portion of such calendar year) of projected royalties and windfall profit, production, ad valorem, severance and all other similar taxes and operating and capital expenditures required to be incurred during such calendar year in order to generate such gross revenues (but not including general and administrative expenses or principal and interest payable with respect to Debt), as set forth in the Most Recent Engineering Report. "NOTICE OF ENTIRE AGREEMENT" shall mean that certain Notice of Entire Agreement, DTPA Waiver and Release of Claims of even date herewith between the Company and the Agent. -21- "OBLIGATIONS" shall mean, as at any date of determination thereof, the sum of (a) the aggregate principal amount of Loans out- standing under the Amended and Restated Revolving Credit Agreement PLUS (b) the aggregate amount of the Reimbursement Obligations. "OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the Company by its President, one of its Vice Presidents or its Treasurer. "OPTIONAL RESERVE REPORT" shall mean the Independent Engineering Report permitted by SECTION 2.2(d). "ORGANIZATIONAL DOCUMENTS" shall mean, with respect to a corporation, the certificate of incorporation, articles of incorporation and bylaws of such corporation; with respect to a partnership or a limited partnership, the partnership agreement establishing such partnership; with respect to a joint venture, the joint venture agreement establishing such joint venture; and with respect to a trust, the instrument establishing such trust; in each case including any and all modifications thereof as of the date of the Credit Document referring to such Organizational Document. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERSON" shall mean and include an individual or legal entity in the form of a partnership, a limited liability company, a joint venture, a corporation, a trust, an unincorporated organization or a government or any department or agency thereof. The term "Person" shall not, however, mean and include an arrangement that is not a separate legal entity such as the legal arrangement between two or more parties owning interests in the same property or unit. "PETROLEUM PROPERTIES" shall mean, at any time and with respect to any Person, all Recognized Proved Reserves which are (a) owned by such Person at such time free and clear of any Lien (other than Liens permitted by SECTION 9.7) and (b) covered in the Most Recent Engineering Report. "PLAN" shall mean an employee benefit plan which is covered by ERISA which is either (a) maintained by the Company or any ERISA Affiliate for employees of the Company or such ERISA Affiliate or (b) a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which (i) the Company, (ii) any ERISA Affiliate or (iii) any trade or business which was previously under common control with the Company within the meaning of Section 414 of the Code (but only with respect to such period of common control with the Company), has an obligation to make contributions (or with respect to (iii) above, had an obligation to make contributions during any portion -22- of time that the limitations period under Section 4301(f) of ERISA with respect to such obligation has not expired). "POST-DEFAULT RATE" shall mean, in respect of any principal of any Reimbursement Obligation or any other amount payable by the Company under any Credit Document which is not paid when due (whether at stated maturity, by acceleration, or otherwise), a rate per annum on each day during the period commencing on the due date until such amount is paid in full equal to the lesser of (a) the Alternate Base Rate as in effect for that day PLUS the Applicable Margin in effect for that day PLUS 2% or (b) the Highest Lawful Rate for that day. "PRELIMINARY AVAILABLE AMOUNT" shall mean, on any day occurring during the respective Applicable Periods set forth on EXHIBIT C, the amount set forth for such Applicable Period in the applicable table in EXHIBIT C (as the same may be reduced from time to time pursuant to SECTION 2.3). The applicable table shall be determined according to the aggregate Qualifying Amount of Junior Securities issued by the Company as of the most recent Achievement Date, but to qualify for a particular table (other than Table Five), the Company must have repaid or Defeased, on or before such Achievement Date, all Designated Debt for such aggregate Qualifying Amount set forth on SCHEDULE X. "PRICE PROTECTION AGREEMENT" shall mean a product price protection agreement which satisfies all of the following requirements: (a) a member of the Combined Group is a party to such agreement; (b) the Company has given evidence (satisfactory to the Agent) of such agreement to the Agent; (c) the terms and parties to such agreement, taking into account all similar agreements to which members of the Combined Group are parties, are satisfactory to the Required Banks; and (d) such agreement is in full force and effect and has not been unwound. The agreements described on SCHEDULE III are Price Protection Agreements for purposes of this Agreement as of the date hereof. "PRIME RATE" shall mean, as of a particular date, the prime rate most recently announced by TCB and thereafter entered in the minutes of TCB's Loan and Discount Committee, automatically fluctuating upward and downward with and at the time specified in each such announcement without special notice to the Company or any other Person, which prime rate may not necessarily represent the lowest or best rate actually charged to a customer. "PRINCIPAL OFFICE" shall mean the principal banking building of the Agent, presently located at 712 Main Street, Houston, Harris County, Texas 77002. "PRIORITY DEBT" at any time shall mean an amount equal to the sum of (without duplication) the amount of all Special Debt outstanding at such time and the amount of all Debt of the Company -23- and its Restricted Subsidiaries outstanding at such time that is secured by one or more Liens permitted under CLAUSE (4), (5), (6), (7), (8), (9), (10), (11), (12) or (13) of SECTION 9.7(a). "PROJECTED G & A EXPENSE" shall mean, for any Person, the appropriate projected annual levels of general and administrative expense and district overhead to be used in the calculation of CFADS of such Person, as mutually agreed among the Agent, the Co-Agents and the Company as soon as practical after the delivery of the Most Recent Engineering Report. "PROJECTED INCOME TAX EXPENSE" shall mean, for any Person, the appropriate projected annual levels of income tax expense to be used in the calculation of CFADS of such Person, as determined by the Agent after consultation with the Company and based on such Person's current tax position projected into the future and the Most Recent Engineering Report; the Agent will give written notice of the Projected Income Tax Expense of each such Person to the Company as soon as practical after the delivery of the Most Recent Engineering Report. "PROPER FORM" shall mean in form and substance satisfactory to the Agent. "PROVED RESERVES" shall mean reserves of Hydrocarbons in place which are estimated to be recoverable with reasonable certainty and are consistent with the "Definitions for Oil and Gas Reserves" as published by the Society of Petroleum Engineers. "QUALIFYING AMOUNT" shall mean that amount of Junior Securities which results in gross cash proceeds to the Company of not less than the amounts specified herein. "QUALIFYING DATE" shall mean the first date prior to July 1, 1994, on which the Agent shall have received evidence satisfactory to it in its sole discretion that both (a) Junior Securities in a Qualifying Amount of at least $75,000,000 shall have been issued (such issuance may be in one or more transactions on one or more dates) and cash proceeds thereof shall have been received by the Company and (b) all Designated Debt for the aggregate Qualifying Amount of Junior Securities actually issued, as shown on SCHEDULE X, shall have been repaid or Defeased. The Qualifying Date must occur, if at all, before July 1, 1994. "QUARTERLY DATES" shall mean the last day of each March, June, September and December; PROVIDED that if any such date is not a Business Day, the relevant Quarterly Date shall be the next succeeding Business Day. "RECOGNIZED PROVED RESERVES" shall mean Proved Reserves if (a) the designation of such Proved Reserves was by an Independent Petroleum Engineer; (b) a member of the Combined Group owns such -24- Proved Reserves; (c) the estimates with respect to such Proved Reserves were made on the basis of the most recent Approved Assumptions, and (d) either (1) such Proved Reserves are located onshore or offshore the United States or Canada or (2) the Required Banks have consented to the inclusion of such Proved Reserves in the Recognized Proved Reserves. "REGISTRATION STATEMENT" shall mean the Registration Statement on Form S-4 filed by the Company with the Securities and Exchange Commission and declared effective by the Commission on February 27, 1992, true and correct copies of which have been delivered to the Banks. "REGULATION D" shall mean Regulation D of the Board as the same may be amended or supplemented from time to time and any successor or other regulation relating to reserve requirements. "REGULATORY CHANGE" shall mean, with respect to any Bank, any change on or after the date of this Agreement in any Legal Requirement (including Regulation D) or the adoption or making on or after such date of any official interpretation, directive or request applying to a class of banks including such Bank under any Legal Requirement (whether or not having the force of law) by any Governmental Authority charged with the interpretation or administration thereof. "REIMBURSEMENT OBLIGATIONS" shall mean, at any date, the obligations of the Company then outstanding in respect of Letters of Credit under this Agreement to reimburse the Banks for the amount paid by such Banks in respect of any drawing under such Letters of Credit or otherwise owing under this Agreement. "REQUIRED BANKS" shall mean Banks having equal to or greater than 66-2/3% of the Aggregate Commitment. "REQUIRED RATIOS" shall mean (a) an Annual Debt Service Coverage Ratio of at least 1.15 to 1.00; (b) an Alternate Annual Debt Service Coverage Ratio of at least 1.00 to 1.00; (c) a TLOR Coverage Ratio of at least 1.50 to 1.00, and (d) an SLOR Coverage Ratio of at least 1.75 to 1.00. "REQUIRED RESERVE REPORT" shall mean each Independent Engineering Report required to be provided pursuant to SECTION 9.1(g). "RESERVE VALUE" shall mean, as of any date and with respect to a Person, the net present value (discounted at the discount rate set forth in the most recent Approved Assumptions) of projected Net Oil and Gas Income (calculated on the basis of the Most Recent Engineering Report) attributable to the Petroleum Properties of such Person for the period commencing on such date and ending at the end of the economic life of such Petroleum Properties. -25- "RESTRICTED INVESTMENT" shall mean any Investment other than: (a) Investments in the Company or a Restricted Subsidiary or in an entity which immediately after or concurrently with such Investment will be a Restricted Subsidiary; (b) Investments in the Special Subsidiary; (c) readily marketable direct full faith and credit obligations of the United States of America or any agency thereof or obligations unconditionally guaranteed by the full faith and credit of the United States of America or any agency thereof, due within three years of the making of the Investment; (d) readily marketable direct obligations of any State of the United States of America or any political subdivision of any such State having a credit rating of at least "Aa" by Moody's Investors Service, Inc. ("MOODY'S") or "AA" by Standard & Poor's Corporation ("S&P"), in each case due within three years from the making of the Investment; (e) domestic and eurodollar certificates of deposit maturing within one year from the making of the Investment issued by, deposits in, Eurodollar deposits through, and banker's acceptances of, commercial banks incorporated under the laws of the United States or any State thereof, Canada, Japan or any Western European country, and having combined capital, surplus and undivided profits of at least $100,000,000; (f) readily marketable commercial paper of any commercial bank or corporation doing business and incorporated under the laws of the United States of America or any State thereof having a credit rating of at least "A-1" from S&P or at least "P-1" by Moody's, in each case due within 270 days after the making of the Investment; (g) money market investment programs which primarily invest in the types of Investments described in CLAUSES (c) through (f) above and which are classified as a current asset in accordance with GAAP and which are administered by broker-dealers acceptable to the Agent; (h) repurchase agreements with major dealers or banks, pursuant to which physical delivery of the respective securities is required, except for obligations of the U.S. Treasury to be delivered through the Federal Reserve book entry system; (i) travel and other like advances to officers and employees of the Company or a Restricted Subsidiary in the ordinary course of business; (j) Investments in the Hadson Stock; or -26- (k) Investments not described in CLAUSES (a) through (j) of this definition in an aggregate principal amount not to exceed $10,000,000. "RESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company designated as a Restricted Subsidiary on SCHEDULE I, together with any Subsidiary hereafter created or acquired and, at the time of creation or acquisition, not designated by the Board of Directors of the Company as an Unrestricted Subsidiary. Any Subsidiary of the Company designated as an Unrestricted Subsidiary for purposes of this Agreement may thereafter be designated a Restricted Subsidiary upon 30 days' prior written notice to the Banks if, at the time of such designation and after giving effect thereto and to the concurrent retirement of any Debt, (a) no Default shall have occurred and be continuing; (b) such Subsidiary is organized under the laws of the United States or any state thereof; (c) 80% or more of each class of voting stock outstanding of such Subsidiary is owned by the Company or a wholly owned Restricted Subsidiary, and (d) such Subsidiary could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(4). "ROLLOVER" shall mean any reborrowing from a lender of a loan which is prepaid, or by its terms is due, to such lender on the date of such reborrowing if the instrument or agreement governing such Debt specifically contemplates the periodic prepayment or repayment and simultaneous reborrowing of such loan, PROVIDED that such reborrowing results in no net increase in the aggregate outstanding principal balance of such loan; without limiting the generality of the foregoing, "Rollover" shall include specifically the repayment of a Loan at the end of the Interest Period applicable thereto and the simultaneous reborrowing by the Company of a new Loan in the same principal amount. "SALE AND LEASEBACK TRANSACTION" shall mean any arrangement in which the Company or a Restricted Subsidiary shall sell its buildings, equipment or surface real properties, which was acquired or occupied by the Company or a Restricted Subsidiary for more than 180 days, and within 180 days from the date of such sale, enter into a lease as lessee of such buildings, equipment or surface real properties having a term (including terms of renewal or extension at the option of the lessor or the lessee, whether or not such option has been exercised) expiring three or more years after the commencement of the initial term. "SECURED DEBT" shall mean all Funded Debt that is secured by a Lien permitted by SECTION 9.7(a)(13) on any property or assets of the Company or any Restricted Subsidiary. "SENIOR INDEBTEDNESS" shall mean, without duplication, that part of Covered Debt consisting of (a) all indebtedness and obligations evidenced by, arising under or incurred in connection -27- with the Credit Documents and all renewals, extensions, rearrangements, refundings, and modifications of any thereof; (b) all other indebtedness and obligations of the Company, the Restricted Subsidiaries or the Special Subsidiary, which is PARI PASSU with or senior to the indebtedness and obligations described in CLAUSE (a) above, (c) Capitalized Lease Obligations, and (d) all indebtedness and obligations of the Company, the Restricted Subsidiaries or the Special Subsidiary which is at the time of any determination of Senior Indebtedness secured by any Lien. "SERIAL NOTE AGREEMENT" shall mean that certain Note Agreement dated as of March 31, 1990, evidencing the issuance of Series A, B, C, D, E, F and G Notes by the Company in the aggregate amount of $365,000,000, as amended from time to time. "SFEP" shall mean, collectively, Santa Fe Energy Partners, L.P. and Santa Fe Energy Operating Partners, L.P., each a Delaware limited partnership. "SFP GROUP" shall mean Santa Fe Pacific Corporation and its affiliated group of corporations which together constitute an affiliated group of corporations within the meaning of Section 1504(a) of the Code. "SLOR COVERAGE RATIO" shall mean, as of any date of determination, the ratio of (a) the Combined Reserve Value to (b) all Senior Indebtedness included in Combined Covered Debt, in each case as of such date. "SPECIAL DEBT" shall mean the sum of (a) Attributable Debt; (b) Secured Debt, and (c) Funded Debt of the Restricted Subsidiaries. "SPECIAL SUBSIDIARY" shall mean SFEP until (a) the Company designates SFEP a Restricted Subsidiary pursuant to the terms of the Serial Note Agreement or (b) the Company designates or continues to designate SFEP as an Unrestricted Subsidiary subsequent to the acquisition by the Company and the Restricted Subsidiaries of all of the outstanding limited partnership interests in SFEP. "SPECIAL SUBSIDIARY PERCENTAGE" shall mean, as of any date, the percentage ownership interest of the Company and the Restricted Subsidiaries in the Special Subsidiary on such date. "SPECIAL SUBSIDIARY QUALIFYING CONDITIONS" shall mean all of the following conditions: (a) the Company or a Restricted Subsidiary owns more than 50% of the outstanding indicia of equity rights issued by Santa Fe Energy Partners, L.P. and serves as the sole managing general partner of Santa Fe Energy Partners, L.P.; (b) Santa Fe Energy Partners, L.P. owns more than 50% of the outstanding indicia of equity rights issued by Santa Fe Energy -28- Operating Partners, L.P.; (c) the Company or a Restricted Subsidiary serves as the sole managing general partner of Santa Fe Energy Operating Partners, L.P., and (d) both Santa Fe Energy Partners, L.P. and Santa Fe Energy Operating Partners, L.P. are permitted (by applicable law and applicable contract) to make distributions to their partners. "SPIN-OFF" shall mean (a) the distribution, by dividend to the stockholders of Santa Fe Pacific Corporation of the shares of capital stock of the Company owned by Santa Fe Pacific Corporation, which distribution was commenced on December 4, 1990, and (b) the distribution by SFP Properties, Inc. to Santa Fe Pacific Corporation of the capital stock of the Company that was made on December 27, 1989. "SPRINGING LIEN" shall mean the Liens on real property of SFEP that come into existence at any time SFEP is a Restricted Subsidiary pursuant to section 5.08(b) or 5.11 of the Credit Agreement (the "SPRINGING LIEN AGREEMENT") dated as of June 30, 1987 among Santa Fe Energy Operating Partners, L.P., the lenders listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as the Agent, as the same may be amended, PROVIDED that (a) the Debt under the Springing Lien Agreement is not increased, extended or renewed and (b) the Springing Lien Agreement is not amended in any way which would increase the likelihood or potential circumstances under which such Liens may arise; if either clause of the foregoing proviso is violated, then such Liens shall not be "Springing Liens" for purposes of this Agreement. "SUBSIDIARY" shall mean, with respect to any Person (the "PARENT"), any corporation or entity, a majority of the shares of voting stock (or in the case of an entity which is not a corporation, of the equity interests that provide the power to manage or direct the management of such entity) of which is at the time any determination is being made, owned, directly or indirectly, by the parent. "TAX ALLOCATION AGREEMENTS" shall mean those nine certain agreements among the SFP Group, dated as of January 1, 1990 unless otherwise specified in this definition and styled as follows: (a) Agreement for the Allocation of the Combined Utah Franchise Tax Liability; (b) Agreement for the Allocation of the Combined Oregon Excise Tax Liability; (c) Agreement for the Allocation of the Consolidated New Mexico Income Tax Liability; (d) Agreement for the Allocation of the Combined Kansas Income Tax Liability; (e) Agreement for the Allocation of the Combined Illinois Income Tax Liability; (f) Agreement for the Allocation of the Combined California Franchise Tax Liability; (g) Agreement for the Allocation of the Combined Arizona Income Tax Liability; (h) Agreement Concerning Taxes, and (i) Agreement for the Allocation of the Consolidated Federal Income Tax Liability Among the Members of -29- the Santa Fe Southern Pacific Corporation Affiliated Group, dated as of January 1, 1987. "TAX INDEMNIFICATION AGREEMENT" shall mean any agreement pursuant to which the Company agrees to indemnify Santa Fe Pacific Corporation or any member of the SFP Group from and against any and all federal, state or local taxes, interest, penalties or additions to tax imposed upon or incurred by the SFP Group or any member thereof as a result of the Spin-Off to the extent specified in any such agreement. "TERMINATION DATE" shall mean the earliest of (a) the date the Commitments are terminated pursuant to SECTION 10.1, (b) the date the Commitments are terminated pursuant to SECTION 32.3, or (c) March 15, 1995. "TEXAS CREDIT CODE" shall mean Title 79, Revised Civil Statutes of Texas, 1925, as amended. "TLOR COVERAGE RATIO" shall mean, as of any date of determination, the ratio of (a) the Combined Reserve Value to (b) the Combined Covered Debt (including obligations in connection with any Junior Securities), in each case as of such date. "UNFUNDED LIABILITIES" shall mean, with respect to any Plan, at any time, the amount (if any) by which (a) the present value of all benefits under such Plan exceeds (b) the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plan (in accordance with GAAP), but only to the extent that such excess represents a potential liability of the Company or any ERISA Affiliate to the PBGC or a Plan under Title IV of ERISA. "UNIMPAIRED CONSOLIDATED NET EARNINGS" shall mean, for any period, the amount of Consolidated Net Earnings for such period except that with respect to the oil and gas properties impairments taken by the Company and its Restricted Subsidiaries in the fourth quarter of 1993 in the amount of up to $100 million as reflected in the Company's consolidated financial statements for the year ended December 31, 1993: (a) for any calculation of "Unimpaired Consolidated Net Earnings" for any fiscal period of the Company and its Restricted Subsidiaries ending on or after December 31, 1993, the net earnings of the Company and its Restricted Subsidiaries shall not be reduced by the amount of such oil and gas properties impairments; and (b) for any such calculation for any fiscal period of the Company and its Restricted Subsidiaries ending on or after December 31, 1993, the depreciation, depletion and amortization expenses of the Company and its Restricted -30- Subsidiaries shall be calculated on a pro forma basis as if such oil and gas properties impairments had never occurred. "UNRESTRICTED SUBSIDIARY" shall mean each Subsidiary of the Company designated as an Unrestricted Subsidiary on SCHEDULE I, together with any Subsidiary of the Company which is hereafter designated by the Board of Directors of the Company as an Unrestricted Subsidiary. Unless designated as a Restricted Subsidiary after the date hereof, SFEP shall be treated hereunder as an Unrestricted Subsidiary except as SFEP is otherwise treated hereunder as a Special Subsidiary. Any Subsidiary may be designated an Unrestricted Subsidiary upon 30 days' prior written notice to the Banks if, at the time of such designation and after giving effect thereto and to the concurrent retirement of any Debt, (a) no Default shall have occurred and be continuing; (b) such Subsidiary does not own, directly or indirectly, any Funded Debt or capital stock of the Company or a Restricted Subsidiary, and (c) the Company could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(3). "UNUSED COMMITMENT" shall mean, on any date, the difference of (a) the Aggregate Commitment minus (b) the Letter of Credit Liabilities, all determined on such date. 1.2 ACCOUNTING TERMS AND DETERMINATIONS. Except where specifically otherwise provided: (a) The symbol "$" and the word "dollars" shall mean lawful money of the United States of America. (b) For purposes of SECTIONS 9.6 and 9.7 and the definitions used solely therein, any accounting term not otherwise defined shall have the meaning ascribed to it under GAAP. For all other purposes any accounting term not otherwise defined shall have the meaning ascribed to it under GAAP. (c) Unless otherwise expressly provided, any accounting concept and all financial covenants shall be determined on a consolidated basis, and financial measurements shall be computed without duplication. (d) Wherever the term "including" or any of its correlatives appears in the Credit Documents, it shall be read as if it were written "including (by way of example and without limiting the generality of the subject or concept referred to)". (e) Wherever the word "herein" or "hereof" is used in any Credit Document, it is a reference to that entire Credit Document and not just to the subdivision of it in which the word is used. (f) References in any Credit Document to Section numbers are references to the Sections of such Credit Document. -31- (g) References in any Credit Document to Exhibits, Schedules, Annexes and Appendices are to the Exhibits, Schedules, Annexes and Appendices to such Credit Document, and they shall be deemed incorporated into such Credit Document by reference. (h) Any term defined in the Credit Documents which refers to a particular agreement, instrument or document shall also mean, refer to and include all modifications, amendments, supplements, restatements, renewals, extensions and substitutions of the same; PROVIDED that nothing in this subsection shall be construed to authorize any such modification, amendment, supplement, restatement, renewal, extension or substitution except as may be permitted by other provisions of the Credit Documents. (i) All times of day used in the Credit Documents mean local time in Houston, Texas. (j) Defined terms may be used in the singular or plural, as the context requires. Section 2. COMMITMENTS. 2.1 LETTERS OF CREDIT. (a) COMMITMENTS. Subject to the terms and conditions of this Agreement, the Agent agrees, upon receipt by Agent of an Application therefor, to issue, and each Bank severally agrees to purchase from the Agent a participation in (according to such Bank's Commitment Percentage), letters of credit containing such provisions not inconsistent with the terms of this Agreement as the Company may reasonably request and such provisions not inconsistent with the terms of this Agreement as the Banks may reasonably require (together with the Existing Letters of Credit, the "LETTERS OF CREDIT") for the account of the Company and on behalf of the Company, or for the joint and several account of and on behalf of the Company and one or more of its Subsidiaries, as follows. From time to time on or after the conditions herein set forth to issue such Letters of Credit have been satisfied, and prior to the Termination Date, the Agent shall issue and/or may have outstanding Letters of Credit under this SECTION 2.1 in an aggregate principal amount at any one time outstanding (including all Letter of Credit Liabilities at such time) up to but not exceeding the lesser of (1) $15,000,000 (as adjusted downward from time to time in accordance herewith) or (2) the lesser of (I) the Available Amount and (II) the aggregate Facility B Commitments less (in each case of (I) and (II)) the aggregate unpaid principal balance of the Facility B Notes; PROVIDED, that the aggregate Letter of Credit Liabilities at any one time outstanding together with the aggregate principal amount of Facility B Loans at any time outstanding shall never exceed the Available Amount then in effect and PROVIDED, that anything to the contrary in this Agreement notwithstanding, the Agent shall have no obligation to issue any Letter of Credit on or after the Termination Date. Upon the date of the issuance of a Letter of Credit on or after the date hereof, -32- the Agent shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Agent, a participation, to the extent of such Bank's Commitment Percentage, 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. Each Bank has heretofore purchased participations in each of the Existing Letters of Credit and the related Letter of Credit Liabilities, to the extent of such Bank's Commitment Percentage. Such participations are hereby ratified and confirmed and made subject hereto. All provisions of this Agreement applicable to participations in Letters of Credit hereunder shall be deemed to apply to participations in the Existing Letters of Credit. (b) ADDITIONAL PROVISIONS. The following additional provisions shall apply to each Letter of Credit: (i) The Company shall give the Agent and each other Bank at least five Business Days' irrevocable prior notice (effective upon receipt) specifying the date such Letter of Credit is to be issued and describing the proposed terms of such Letter of Credit and the nature of the transaction proposed to be supported thereby. The Company shall furnish such additional information regarding such transaction as the Agent may reasonably request. Upon receipt of such notice, the Agent shall promptly notify each Bank of such Bank's Commitment Percentage of the amount of the proposed Letter of Credit and not later than two Business Days prior to the requested issuance date for such Letter of Credit shall furnish to each Bank and the Company a proposed form of an Application for such Letter of Credit. The issuance by the Agent of each Letter of Credit shall, in addition to the conditions precedent set forth in SECTION 7, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory to the Agent and that the Company shall have executed and delivered to the Agent an Application and such other instruments and agreements relating to such Letter of Credit not inconsistent with terms of this Agreement as the Agent shall have reasonably requested and are not inconsistent with the terms of this Agreement. (ii) No Letter of Credit may be issued if after giving effect thereto the sum of (a) the aggregate outstanding principal amount of the Facility B Loans plus (b) the aggregate Letter of Credit Liabilities would exceed the 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 been terminated, the Facility B Commitment of each Bank shall be deemed to be utilized for all purposes hereof in an amount equal to such Bank's Commitment Percentage of the amount then or thereafter available for drawings under such Letter of Credit. -33- (iii) In consideration of the issuance of each Letter of Credit the Company agrees to pay to the Agent, for the ratable benefit of the Banks, the Letter of Credit Fee. The Letter of Credit Fee shall be payable concurrently with the issuance of each such Letter of Credit and shall be separate from and in addition to interest on any Reimbursement Obligation. The Agent will pay to each Bank, promptly after receiving any payment in respect of Letter of Credit Fees, an amount equal to such Bank's Commitment Percentage of such Letter of Credit Fees. (iv) Upon receipt from the beneficiary of any Letter of Credit of any demand for payment thereunder, the Agent shall promptly notify the Company and each Bank as to the amount to be paid as a result of such demand and the payment date. If at any time the Agent shall have made a payment to a beneficiary of a Letter of Credit in respect of a drawing or in respect of an acceptance created in connection with a drawing under such Letter of Credit, each Bank will pay to the Agent immediately upon demand (or, if such demand is made after 1:00 p.m., on the next succeeding Business Day) by the Agent at any time during the period commencing after such payment until reimbursement thereof in full by the Company, an amount equal to such Bank's Commitment Percentage of such payment, together with interest on such amount for each day from the later of (x) the date such payment is due as provided in the preceding sentence or (y) the date such payment is made under such Letter of Credit to the date of payment by such Bank of such amount at a rate of interest per annum equal to the Fed Funds Rate for such period. No interest shall be due from any Bank that makes full payment to the Agent on the date such payment is due. Nothing herein shall be deemed to require any Bank to pay to the Agent any amount as reimbursement for any payment made by the Agent to acquire (discount) for its own account prior to maturity thereof any acceptance created under a Letter of Credit. (v) The Company shall be irrevocably and unconditionally obligated forthwith to reimburse the Agent for the account of each Bank for any amount paid by the Agent or such Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind all of which are hereby expressly waived by the Company. Each drawing under any Letter of Credit shall bear interest at the Post-Default Rate until the Company shall have made reimbursement for such drawing. If the Company shall fail to make reimbursement for any such drawing prior to noon on the second Business Day after such notice is given, the Agent may in its discretion and without the consent of (but with concurrent notice to) the Company effect such reimbursement of any Letter of Credit, subject to the satisfaction of the conditions in SECTION 7 of the Amended and Restated Revolving Credit Agreement and to the existence of Facility B Commitment, by borrowing of Facility B Loans and the application of the proceeds thereof to the related Reimbursement Obligations. The Reimbursement Obligations shall survive the Termination Date and the termination of this -34- Agreement. The Agent will pay to each Bank such Bank's Commitment Percentage of all amounts received from the Company for application in payment, in whole or in part, of the Reimbursement Obligation in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Agent in respect of such Letter of Credit pursuant to CLAUSE (iv) above. Nothing herein shall be deemed to require the Agent to pay to any Bank any part of the proceeds of disposition (rediscount) by the Agent for its own account to any other Person of any acceptance created under a Letter of Credit which is acquired (discounted) by the Agent prior to the maturity thereof or to require any Bank to reimburse the Agent for the consequences of the Agent's own gross negligence or willful misconduct. (vi) The obligations of the Company to pay Reimbursement Obligations under this Agreement shall be absolute, unconditional and irrevocable and shall be paid or performed strictly in accordance with the terms of this Agreement under all circumstances whatsoever, including, without limitation, the following circumstances: (a) any lack of legality, validity, regularity or enforceability of this Agreement, any Letter of Credit, any Application or any agreement or document related to any of the foregoing; (b) any amendment or waiver of (including any default), or any consent to departure from, any Letter of Credit, this Agreement, any Application or any agreement or document related to any of the foregoing; (c) the existence of any claim, set-off, defense or other rights which the Company may have at any time against any beneficiary or any transferee of any Letter of Credit (or any Persons or entities for which such beneficiary or any such transferee may be acting), the Agent, any Bank or any other Person, whether in connection with this Agreement, any Letter of Credit, any Application or any agreement or document related to any of the foregoing, the transactions contemplated hereby or any unrelated transaction; (d) any statement, certificate, draft or any other document presented under any Letter of Credit proves to have been forged, fraudulent, invalid or insufficient in any respect or any statement therein proves to have been untrue or inaccurate in any respect whatsoever; (e) payment by the Agent under any Letter of Credit against presentation of a draft or certificate which appears on its face to comply but does not in fact comply with the terms of such Letter of Credit; -35- (f) any defense based upon the failure of any beneficiary or any transferee to receive all or any part of the proceeds of a draw under any Letter of Credit transmitted by the Agent, or any non- application or misapplication by any beneficiary or other transferee of the proceeds of demand for payment under any Letter of Credit; and (g) any bankruptcy, insolvency, reorganization, arrangement, assignment for the benefit of creditors, readjustment of debt, dissolution, liquidation or other similar event with respect to the Company. PROVIDED, that no such payment shall impair any claim the Company may have against the Agent or any Bank. (c) ILLEGALITY. In the event that any restriction or limitation is imposed upon or determined or held to be applicable to the Agent, any Bank or the Company by, under or pursuant to any Legal Requirement, which in the reasonable judgment of the Agent or any Bank would prevent the Agent or such Bank from legally incurring liability under or in respect of a Letter of Credit issued or proposed to be issued hereunder, then the Agent shall give prompt written notice thereof to the Company, whereupon the Agent and the Bank or Banks affected shall have no obligation to issue or purchase participations in any such Letter of Credit. 2.2 AVAILABLE AMOUNT. (a) Concurrently with the delivery of each Independent Engineering Report and related Coverage Report required or permitted hereby, there shall be determined, based on the Most Recent Engineering Report and Approved Assumptions, the total maximum amount of Facility B Loans and Letter of Credit Liabilities to be available to the Company hereunder without violation of any Required Ratio. Upon each such delivery, the Company may by notice to the Co-Agents designate as the Available Amount any amount (not to exceed the Preliminary Available Amount as of the most recent Achievement Date (or, if no Achievement Date occurs, the Preliminary Available Amount then in effect), according to the applicable table in EXHIBIT C equal to or less than such total maximum amount. The Available Amount so designated shall remain in effect as the Available Amount until the next determination under this SECTION 2.2. If no amount lesser than (a) or (b) in this sentence is designated in accordance with this SECTION 2.2, the Available Amount shall be the lesser of (a) the Preliminary Available Amount then in effect according to the applicable table in EXHIBIT C or (b) such total maximum amount. (b) Notwithstanding anything in this Agreement to the contrary, (1) no Bank shall be required to have aggregate Letters of Credit Liabilities at any one time outstanding in excess of such Bank's Commitment Percentage of the lesser of (x) $15,000,000 and -36- (y) the difference between (i) the Available Amount and (ii) the aggregate Facility B Loans, and (2) if a Bank fails to participate in a Letter of Credit as and when required hereunder and the Company subsequently makes a repayment on the Reimbursement Obligations with respect to such Letter of Credit, such repayment shall be split among the non-defaulting Banks ratably in accordance with their respective Commitment Percentages until each Bank has its Commitment Percentage of all of the outstanding Reimbursement Obligations, and the balance of such repayment shall be divided among all of the Banks in accordance with their respective Commitment Percentages. (c) Notwithstanding anything in this Agreement to the contrary, the Agent shall not be required to issue any Letter of Credit during the existence of an Engineering Shortfall. (d) The Company may from time to time at its option, exercisable by giving written notice to the Co-Agents not more often than once in any Calculation Period, provide to the Co-Agents an Independent Engineering Report. Upon the receipt of such notice, the Co-Agents shall consult with the Company to determine new Approved Assumptions, which shall be furnished to the Banks by a notice as provided in the definition of "Approved Assumptions" and shall be subject to the approval by Banks with aggregate Commitment Percentages of 75% or more as provided therein. The Optional Reserve Report shall be based on the new Approved Assumptions and shall be accompanied by a Coverage Report as of the date such Optional Reserve Report is furnished. The Annual Debt Service Coverage Ratio, the Alternate Annual Debt Service Coverage Ratio, the TLOR Coverage Ratio and the SLOR Coverage Ratio shall each be redetermined in accordance with this Agreement on the basis of each such Optional Reserve Report and Coverage Report, and the Available Amount recalculated as provided in this SECTION 2.2. (e) Notwithstanding any other provision of this Agreement to the contrary, should both (x) the Company at any time designate as the Available Amount an amount less than the maximum amount then offered to it as the Available Amount by the Co-Agents and (y) as a result the Company shall obtain the release of any Mortgaged Properties under the Amended and Restated Revolving Credit Agreement, the Available Amount may never thereafter exceed the amount so designated by the Company. 2.3 REDUCTIONS AND CHANGES OF COMMITMENTS. (a) MANDATORY. On the Termination Date the aggregate Commitments shall be terminated in their entirety. (b) THE COMPANY'S OPTION. The Company shall have the right to terminate or reduce the unused portion of the Commitments at any time or from time to time; PROVIDED that: (i) the Company shall give notice of each such termination or reduction to the Agent as -37- provided in SECTION 5.5; (ii) each such partial reduction shall be in minimum increments equal to $5,000,000; and (iii) the Company may not cause the Available Amount to be less than the aggregate principal amount of the Facility B Loans then outstanding plus the Letter of Credit Liabilities then outstanding. Any voluntary reduction in the Available Amount prior to any scheduled reduction in the Available Amount shall not affect the Available Amount after such scheduled reduction date unless such voluntarily reduced Available Amount is less than the amount scheduled to be the Available Amount after such scheduled reduction date, in which case the Available Amount after such scheduled reduction date shall be no greater than such voluntarily reduced Available Amount. Reference is made to SECTION 2.8 of the Amended and Restated Revolving Credit Agreement for restrictions on the Company's right to increase the Available Amount under certain circumstances. (c) NO REINSTATEMENT. No reduction in or termination of Commitments pursuant to this Section may be reinstated without the written approval of the Agent and all Banks. 2.4 SEVERAL OBLIGATIONS. The failure of any Bank to participate in any Letter of Credit shall not relieve any other Bank of its obligation to participate in any Letter of Credit (the face amount of which shall be reduced dollar for dollar by the amount of the share of the Bank that failed to participate in such Letter of Credit) on such date, but neither the Agent nor any Bank shall be responsible for the failure of any other Bank to participate in any Letter of Credit. 2.5 FEES. In consideration of the Commitments, the Company shall pay to the Agent for the account of each Bank in accordance with its Commitment Percentage commitment fees (the "COMMITMENT FEES") for the period from the date of the execution of this Agreement to and including the earlier of the date the Commitments are terminated or the Termination Date at a rate per annum equal to 1/2% of the Unused Commitment. The Company shall be entitled to credit on the Commitment Fees any amount paid pursuant to SECTION 2.3 of the Amended and Restated Revolving Credit Agreement. The Commitment Fees shall be computed for each day and shall be based on the Unused Commitment for such day. Accrued Commitment Fees shall be payable in arrears on the date of the initial Letter of Credit, within three days after demand therefor on or about the Quarterly Dates, and within three days after demand therefor on or about the Termination Date. All past due Commitment Fees shall bear interest at the Post-Default Rate. Upon receipt, the Agent shall disburse the Commitment Fees to the Banks in accordance with their Commitment Percentages. Section 3. PREPAYMENTS. 3.1 (a) COMMITMENT AMOUNT. The Company shall from time to time on demand by the Agent prepay the Facility B Loans or reduce -38- Letter of Credit Liabilities in such amounts as shall be necessary (A) so that at all times the aggregate outstanding principal amount of all Facility B Loans and all Letter of Credit Liabilities hereunder shall not be in excess of the aggregate of the Available Amount or (B) to comply with SECTION 9.9. Any such payment shall be allocated between Facility B Loans, Letter of Credit Liabilities (and if to Letter of Credit Liabilities, first, to Reimbursement Obligations) and other obligations as the Company may elect. (b) AVAILABLE AMOUNT. The Company shall from time to time on demand by the Agent and on the Termination Date prepay the Facility B Loans or reduce Letter of Credit Liabilities in such amounts as shall be necessary so that at all times the aggregate outstanding principal amount of all Facility B Loans and all Letter of Credit Liabilities of the Company hereunder shall be less than or equal to the Available Amount. Any such payment shall be allocated between Facility B Loans, Letter of Credit Liabilities (and if to Letter of Credit Liabilities, first, to Reimbursement Obligations) and then to other obligations as the Company may elect. Section 4. PAYMENTS OF PRINCIPAL AND INTEREST. 4.1 REPAYMENT OF REIMBURSEMENT OBLIGATIONS. The Company will pay to the Agent for the account of each Bank the amount of each Reimbursement Obligation forthwith upon its incurrence. The amount of any Reimbursement Obligation may, if the applicable conditions precedent specified in SECTION 7 of the Amended and Restated Revolving Credit Agreement have been satisfied, be paid with the proceeds of Facility B Loans. 4.2 INTEREST. Subject to SECTION 12.8, the Company will pay to the Agent for the account of each Bank interest on the unpaid principal amount of each Reimbursement Obligation owed to such Bank for the period commencing on the date such Reimbursement Obligation arises to but excluding the date such Reimbursement Obligation shall be paid in full, at the Post-Default Rate. Accrued interest shall be due and payable from time to time on demand of the Agent or the Required Banks (through the Agent). Section 5. PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS, ETC. 5.1 PAYMENTS. (a) Except to the extent otherwise provided herein, all payments of principal of or interest on the Reimbursement Obligations and other amounts to be made by the Company hereunder shall be made in dollars, in immediately available funds, to the Agent at its Principal Office (or in the case of a successor Agent, at the principal office of such successor Agent in the United States), not later than 11:00 a.m. on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). -39- (b) The Company shall, at the time of making each payment hereunder, specify to the Agent the Reimbursement Obligations or other amounts payable by the Company hereunder to which such payment is to be applied (and in the event that it fails so to specify, such payment shall be applied as the Agent may designate to the amounts then due and payable); PROVIDED that if no Reimbursement Obligations are then due and payable or an Event of Default has occurred and is continuing, the Agent may apply such payment to the Obligations in such order as it may elect in its sole discretion, but subject to the other terms and conditions of this Agreement, including SECTION 5.2). Each payment received by the Agent hereunder for the account of a Bank shall be paid promptly to such Bank, in immediately available funds for the account of such Bank's Applicable Lending Office. (c) If the due date of any payment hereunder falls on a day which is not a Business Day, the due date for such payment shall be extended to the next succeeding Business Day and interest shall be payable for any principal so extended for the period of such extension. 5.2 PRO RATA TREATMENT. Except to the extent otherwise provided herein, (a) each issuance of a Letter of Credit and each termination or reduction of the Commitments of the Banks under SECTION 2.3 shall be made PRO RATA according to the Banks' respective Commitments; (b) each payment by the Company of principal of or interest on any Reimbursement Obligation shall be made to the Agent for the account of the Banks PRO RATA in accordance with the respective unpaid principal amounts of such Reimbursement Obligation held by the Banks; and (c) the Banks (other than the Agent) shall purchase from the Agent participations in the Letters of Credit in accordance with their respective Commitment Percentages. 5.3 COMPUTATIONS. Interest based on the Alternate Base Rate (to the extent determined by reference to the Prime Rate), and fees hereunder, will be computed on the basis of 365 (or 366) days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable. All other interest shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable, unless the effect of so computing shall be to cause the rate of interest to exceed the Highest Lawful Rate (in which event interest shall be calculated on the basis of the actual number of days elapsed in a year composed of 365 or 366 days, as the case may be). 5.4 MINIMUM AND MAXIMUM AMOUNTS. Each Letter of Credit shall be in a face amount at least equal to $100,000. 5.5 CERTAIN ACTIONS, NOTICES, ETC. Notices to the Agent of any termination or reduction of Commitments, prepayments under -40- SECTION 3.1 and requests for the issuance of Letters of Credit shall be irrevocable and shall be effective only if received by the Agent not later than 11:00 a.m. on the number of Business Days prior to the date of the relevant issuance, termination, reduction, and/or prepayment specified below: Number of Business Days Prior NOTICE Termination or reduction of Commitments 10 Issuance of Letters of Credit 5 Prepayments 1 Each such notice of termination or reduction shall specify the amount of the Commitments to be terminated or reduced. Each such notice of prepayment shall specify the amount to be prepaid (subject to SECTION 3.1) and the date of prepayment (which shall be a Business Day). The Agent shall promptly notify the Banks of the contents of each such notice or Application. Notice of any prepayment having been given, the principal amount specified in such notice, together with interest thereon to the date of prepayment, shall be due and payable on such prepayment date. 5.6 NON-RECEIPT OF FUNDS BY THE AGENT. Unless the Agent shall have been notified by a Bank prior to noon on the date on which such Bank is to make payment to the Agent of any amount to be paid by such Bank to reimburse the Agent for a drawing under any Letter of Credit or by the Company prior to the date on which the Company is to make a payment to the Agent for the account of one or more of the Banks, as the case may be (such Bank or the Company being herein called the "PAYOR" and such payment being herein called the "REQUIRED PAYMENT"), which notice shall be effective upon receipt, that the Payor does not intend to make the Required Payment to the Agent, the Agent may assume that the Required Payment has been made and may, in reliance upon such assumption (but shall not be required to), make the amount thereof available to the intended recipient on the date that such Required Payment is to be made. If the Payor is the Company and the Company has not in fact made the Required Payment to the Agent on or before such date, the recipient of such payment (or, if the recipient is the beneficiary of a Letter of Credit, the Company, and, if the Company fails to pay the amount thereof to the Agent on demand, then the Banks, to the extent not already paid, ratably in proportion to their respective Commitment Percentages) shall, on demand, pay to the Agent the amount made available by the Agent, together with interest thereon from the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to the Fed Funds Rate for the first three days -41- after demand and thereafter at the Fed Funds Rate plus 2%. If the Payor is a Bank and such Bank has not in fact made the Required Payment to the Agent on or before such date, then such Bank shall pay to the Agent the amount made available by the Agent on behalf of such Bank, together with interest thereon from the date such amount was so made available by the Agent until the Agent recovers such amount at a rate per annum equal to the Fed Funds Rate for the first three days and thereafter at the Fed Funds Rate plus 2%. 5.7 SHARING OF PAYMENTS, ETC. If a Bank or any participant of a Bank shall obtain payment of any obligation to it under this Agreement, through the exercise of any right of set-off, banker's lien, counterclaim or similar right, or otherwise, then such Bank or participant shall promptly purchase from the other Banks participa- tions in the Reimbursement Obligations or other obligations held by the other Banks in such amounts, and make such other adjustments from time to time as shall be equitable to the end that all the Banks and participants shall share the benefit of such payment (net of any expenses which may be incurred by such Bank or its participant in obtaining or preserving such benefit) PRO RATA in accordance with the unpaid principal and interest on such obligations then due to each of them. To such end all the Banks and their participants shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Company agrees, to the fullest extent it may effectively do so under applicable law, that any Bank so purchasing a participation in the Reimbursement Obligations or other obligations held by other Banks may exercise all rights of set-off, bankers' lien, counterclaims or similar rights with respect to such participation as fully as if such Bank were a direct holder of Reimbursement Obligations or other obligations in the amount of such participation. Nothing contained herein shall require any Bank to exercise any such right or shall affect the right of any Bank to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Company. 5.8 OTHER EXPENSES. The Company agrees to pay the Agent, for the account of the Agent, the usual and customary charges of TCB for each extension, amendment and wire advice of and drawing under the Letters of Credit. Section 6. YIELD PROTECTION AND ILLEGALITY. 6.1 ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT. If as a result of any Regulatory Change there shall be imposed, modified or deemed applicable any tax, reserve, special deposit or similar requirement against or with respect to or measured by reference to Letters of Credit issued or to be issued hereunder and the result shall be to increase the cost to the Agent or any Bank of issuing or maintaining or participating in any Letter of Credit or reduce -42- any amount receivable by the Agent or any Bank hereunder in respect of any Letter of Credit or participation therein, then such Bank shall notify the Company through the Agent, and upon demand therefor by such Bank through the Agent, the Company (subject to SECTION 12.8) shall pay to the Agent or such Bank, from time to time as specified by the Agent or such Bank, such additional amounts as shall be sufficient to compensate the Agent or such Bank for such increased costs or reductions in amount. Before making such demand pursuant to this SECTION 6.1, the Agent or such Bank will designate a different available Applicable Lending Office for the Letter of Credit or participation or take such other action as the Company may request, if such designation or action will avoid the need for, or reduce the amount of, such compensation and will not, in the sole opinion of the Agent or such Bank, be disadvantageous to the Agent or such Bank. A statement as to such increased costs or reductions in amount incurred by the Agent or such Bank, submitted by the Agent or such Bank to the Company, shall cover amounts accruing under this section with respect to a period beginning not earlier than 120 days from the date thereof and be conclusive as to the amount thereof, absent manifest error. In the event any Bank shall seek compensation pursuant to this SECTION 6.1, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to assume the Commitment of such Bank and to purchase and assume its outstanding Letter of Credit Liabilities. Each Bank requesting compensation pursuant to this SECTION 6.1 agrees to sell its Commitment and interest in this Agreement and in the Obligations and in the Amended and Restated Revolving Credit Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to the sum of the outstanding unpaid principal of and accrued interest on such Obligations plus all other fees and amounts (including any compensation claimed by such Bank under this SECTION 6.1) owing to such Bank hereunder and under the Amended and Restated Revolving Credit Agreement calculated, in each case, to the date such Commitment, Obligations and interests are purchased, whereupon such Bank shall have no further Commitment or other obligation to the Company hereunder or under the Amended and Restated Revolving Credit Agreement. 6.2 CAPITAL ADEQUACY. If any Bank shall have determined that the adoption after the date hereof or effectiveness after the date hereof (regardless of whether previously announced) of any applicable Legal Requirement or treaty regarding capital adequacy, or any change after the date hereof in any existing or future Legal Requirement or treaty regarding capital adequacy, or any change in the interpretation or administration thereof after the date hereof by any Governmental Authority or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive -43- after the date hereof regarding capital adequacy (whether or not having the force of law) of any such Governmental Authority or comparable agency has or would have the effect of reducing the rate of return on the capital of such Bank (or any holding company of which such Bank is a part) as a consequence of its obligations hereunder and under or in respect of the Letters of Credit to a level below that which such Bank or holding company could have achieved but for such adoption, change or compliance by an amount deemed by such Bank to be material, then from time to time, upon demand by such Bank (with a copy to the Agent), the Company (subject to SECTION 12.8) shall pay to such Bank such additional amount or amounts as will compensate such Bank or holding company for such reduction. The certificate of any Bank setting forth such amount or amounts as shall be necessary to compensate it and the basis therefor shall cover amounts accruing under this SECTION 6.2 with respect to a period beginning not earlier than 120 days from the date thereof and shall be conclusive and binding, absent manifest error. The Company shall pay the amount shown as due on any such certificate upon delivery of such certificate. In preparing such certificate, a Bank may employ such assumptions and allocations of costs and expenses as it shall in good faith deem reasonable and may use any reasonable averaging and attribution method. In the event any Bank shall seek compensation pursuant to this SECTION 6.2, the Company may give notice to such Bank (with copies to the Agent) that it wishes to seek one or more Eligible Assignees (which may be one or more of the Banks) to assume the Commitment of such Bank and to purchase and assume its outstanding Letter of Credit Liabilities. Each Bank requesting compensation pursuant to this SECTION 6.2 agrees to sell its Commitment and interest in this Agreement and in the Obligations and in the Amended and Restated Revolving Credit Agreement pursuant to SECTION 12.6 (without recourse, representation or warranty except as provided in SECTION 12.6) to any such Eligible Assignee for an amount equal to the sum of the outstanding unpaid principal of and accrued interest on such Obligations plus all other fees and amounts (including any compensation claimed by such Bank under this SECTION 6.2) owing to such Bank hereunder and under the Amended and Restated Revolving Credit Agreement calculated, in each case, to the date such Commitment, Obligations, and interests are purchased, whereupon such Bank shall have no further Commitment or other obligation to the Company hereunder or under the Amended and Restated Revolving Credit Agreement. Section 7. CONDITIONS PRECEDENT. 7.1 CLOSING CONDITIONS. The effectiveness of this Agreement is subject to the following conditions precedent, each of which shall have been fulfilled or waived to the satisfaction of the Agent: (a) CORPORATE ACTION AND STATUS. The Agent shall have received copies of the Organizational Documents of the Company -44- certified by the Secretary of the Company, and resolutions of the Board of Directors of the Company, certified by the Secretary of the Company, for all corporate action taken by the Company authorizing the execution, delivery and performance of the Credit Documents and all other documents related to this Agreement, together with such certificates as may be appropriate to demonstrate the qualification and good standing of and payment of taxes by each member of the Combined Group in each jurisdiction set forth on SCHEDULE VIII. (b) INCUMBENCY. The Company shall have delivered to the Agent a certificate in respect of the name and signature of each officer who (1) is authorized to sign on its behalf the applicable Credit Documents related to any Letter of Credit and (2) will, until replaced by another officer or officers duly authorized for that purpose, act as its representative for the purposes of signing documents and giving notices and other communications in connection with any Letter of Credit hereunder. The Agent and each Bank may conclusively rely on such certificates until they receive notice in writing from the Company to the contrary. (c) CREDIT DOCUMENTS. The Company shall have duly executed and delivered the other Credit Documents to which it is a party and each such Credit Document shall be in Proper Form. (d) FEES AND EXPENSES. The Company shall have paid to the Agent all fees in the amounts previously agreed upon in writing among the Company and the Agent. (e) OPINION OF COUNSEL TO THE COMPANY. The Agent shall have received the opinions of Andrews & Kurth, L.L.P. and David L. Hicks, counsel to the Company, substantially in the forms of SCHEDULES VI and VII hereto, respectively. (f) COUNTERPARTS. The Agent shall have received counterparts of each of the Credit Documents duly executed and delivered by or on behalf of each of the parties thereto (or, in the case of any Bank as to which the Agent shall not have received such a counterpart, the Agent shall have received evidence satisfactory to it of the execution and delivery by such Bank of a counterpart hereof). (g) CONSENTS. The Agent shall have received evidence satisfactory to it that all consents of each Governmental Authority and of each other Person, if any, required in connection with (1) the Letters of Credit and (2) the execution, delivery and performance of the Credit Documents have been received and remain in full force and effect. (h) AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT. The Amended and Restated Revolving Credit Agreement shall be executed and delivered by the parties thereto and shall be in full force and effect. -45- (i) OTHER DOCUMENTS. The Agent shall have received such other documents consistent with the terms of this Agreement and relating to the transactions contemplated hereby as the Agent may reasonably request. All provisions and payments required by this SECTION 7.1 are subject to the provisions of SECTION 12.8. 7.2 ALL LETTERS OF CREDIT. In addition to the conditions precedent described in SECTION 2, the obligation of the Agent to issue and each Bank to participate in any Letter of Credit is subject to the additional conditions precedent that, as of the date of such issuance, and after giving effect thereto: (a) no Default shall have occurred and be continuing, and no "Default" shall have occurred and be continuing under the Amended and Restated Revolving Credit Agreement; (b) there has been no Material Adverse Change since December 31, 1993; (c) the representations and warranties made in each Credit Document shall be true and correct in all material respects on and as of the date of the issuance of such Letter of Credit, with the same force and effect as if made on and as of such date; (d) the Company shall have delivered to the Agent an Application within the time specified in SECTION 5.5; (e) the issuance of such Letter of Credit shall not be prohibited by, or subject any Bank to any penalty under, any Legal Requirement applicable to any Bank; and (f) after giving effect to such Letter of Credit the Company shall be in compliance with all Required Ratios and no Engineering Shortfall shall exist. Each request for issuance of a Letter of Credit by the Company hereunder shall include a representation and warranty by the Company to the effect set forth in SUBSECTIONS (a) through (d) and SUBSECTION (f) (if applicable) of this SECTION 7.2 (both as of the date of such notice and, unless the Company otherwise notifies the Agent prior to the date of such issuance, as of the date of such issuance). Section 8. REPRESENTATIONS AND WARRANTIES. To induce the Agent and the Banks to enter into this Agreement and to issue and participate in Letters of Credit, the Company represents and warrants (such representations and warranties to survive any investigation and the issuance of Letters of Credit) to the Banks and the Agent as follows: -46- 8.1 CORPORATE EXISTENCE. Each member of the Combined Group (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite power, and has all licenses, permits, authorizations, consents and approvals necessary, to own its property and carry on its business as now being conducted, and (c) is qualified to do business, and is in good standing, in (1) all jurisdictions in which any of the Recognized Proved Reserves which it owns are located and (2) any other jurisdiction in which the nature of the business conducted by it makes such qualification necessary or advisable, unless (for purposes only of this CLAUSE (2)) the failure to be so qualified or in good standing would not individually or in the aggregate have a material adverse effect on the business, financial condition or results of operations of the Combined Group taken as a whole. 8.2 INFORMATION. (a) (i) The most recent consolidated balance sheet of the Company and its Subsidiaries and the related consolidated statements of operations, changes in financial position and cash flows for the period then ended, together with the respective notes thereto, delivered to each of the Banks prior to the execution of this Agreement (which financial statements are dated December 31, 1993) or in accordance with the provisions of SECTION 9.1(a) or (b), as the case may be (the latest of such financial statements and the notes thereto being referred to herein as the "MOST RECENT FINANCIAL STATEMENTS"), fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of such date and their consolidated results of operations for the period then ended in conformity with generally accepted accounting principles. (ii) The Company and its Subsidiaries did not on the date of the Most Recent Financial Statements, and do not on the date as of which this representation is made in accordance with the terms of this Agreement, have any material contingent liabilities, material liabilities for taxes, unusual and material forward or long-term commitments or material unrealized or anticipated losses from any commitments, except (A) as referred to or reflected or provided for in the Most Recent Financial Statements; (B) as otherwise hereafter disclosed to the Banks in writing in accordance with the terms of this Agreement, or (C) in connection with the obligations of the Company under this Agreement and the Amended and Restated Revolving Credit Agreement. (b) Since December 31, 1991, there has been no Material Adverse Change. 8.3 LITIGATION; COMPLIANCE. Except as disclosed in writing to the Banks prior to the date hereof, or as hereafter disclosed to the Banks in accordance with the provisions of SECTION 9.1(e), -47- there are no legal or arbitral proceedings or any proceedings by or before any Governmental Authority now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its Subsidiaries which, if adversely determined, would cause a Material Adverse Change. The Company and its Subsidiaries comply in all material respects with all applicable material (based on the Company and its Subsidiaries taken as a whole) Legal Requirements (other than the Applicable Environmental Laws, representations regarding which are subject to SECTION 8.13). Neither the Company nor any of its Subsidiaries is in default in any material respect under or violation of any material (based on the Company and its Subsidiaries taken as a whole) judgment, order or decree of any Governmental Authority. 8.4 NO BREACH. None of the execution and delivery of the Credit Documents, the consummation of the transactions therein contemplated or compliance with the terms and provisions thereof will conflict with or result in a breach of, or require any consent that has not been obtained under, the Serial Note Agreement, the Organizational Documents of the Company or any of its Subsidiaries or any material Legal Requirement (including any securities law, rule or regulation) applicable to the Company or any of its Subsidiaries or (except for the Liens required or permitted by this Agreement) result in the creation or imposition of any Lien upon any of the revenues or property of the Company or any of its Subsidiaries. Such execution, delivery, consummation and compliance do not and will not conflict with or result in a breach of any material agreement or instrument to which the Company is a party or by which the Company is bound or to which it is subject, or constitute a default under any such agreement or instrument. 8.5 CORPORATE ACTION. The Company has all necessary corporate power and authority to execute, deliver and perform its obligations under the Credit Documents. The execution, delivery and performance of the Credit Documents by the Company have been duly authorized by all necessary corporate action. The Credit Documents have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general equitable principles. 8.6 APPROVALS. All authorizations, approvals and consents of, and all filings and registrations with, all Governmental Authorities and each other Person necessary for the execution, delivery or performance of any Credit Document or for the validity or enforceability thereof, except for the filings and recordings of the Liens created pursuant to the Security Documents under the Amended and Restated Revolving Credit Agreement, have been obtained by the Company and are in full force and effect. -48- 8.7 REGULATIONS G, U AND X. 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 of purchasing or carrying margin stock (within the meaning of Regulation G, U or X of the Board) and no Letter of Credit hereunder will be used to acquire or carry, directly or indirectly, any such margin stock. 8.8 ERISA. The Company and each ERISA Affiliate have fulfilled their contribution obligations under each Plan subject to Title IV of ERISA and have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan subject to Title IV of ERISA, and in all other regard with respect to each Plan are in material compliance with the applicable provisions of ERISA, the Code, and all other applicable laws, regulations and rules, to the extent that noncompliance with such provisions would result in a Material Adverse Change. The Company has no knowledge of any event with respect to each Plan which could result in a Material Adverse Change. 8.9 TAXES. Each of the Company and its Subsidiaries has filed all United States federal income tax returns and all other material tax returns which are required to be filed by it and has paid all taxes due pursuant to such returns or pursuant to any assessment received by it, except to the extent the same may be contested in good faith by appropriate proceedings diligently conducted for which adequate reserves have been established in accordance with generally accepted accounting principles. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of taxes and other governmental charges, as made on a periodic basis, are adequate. 8.10 SUBSIDIARIES. SCHEDULE I is a complete and correct list, as of the date of this Agreement, of all Subsidiaries of the Company. All shares or other indicia of equity interest of the Restricted Subsidiaries and the Special Subsidiary directly or indirectly owned by the Company are free and clear of Liens, and all such shares are validly issued, fully paid and non-assessable. 8.11 INVESTMENT COMPANY ACT. No member of the Combined Group is an investment company within the meaning of the Investment Company Act of 1940, as amended, or, directly or indirectly controlled by or acting on behalf of any Person which is an investment company, within the meaning of said Act. 8.12 PUBLIC UTILITY HOLDING COMPANY ACT. No member of the Combined Group is a "public utility company", or, to the knowledge of the Company, an "affiliate" or a "subsidiary company" of a "public utility company", or a "holding company", or an "affiliate" or a "subsidiary company" of a "holding company" or of a "subsidiary company" of a "holding company", as such terms are -49- defined in the Public Utility Holding Company Act of 1935, as amended. 8.13 ENVIRONMENTAL MATTERS. Except as disclosed in writing to the Agent prior to the date hereof, the Company and its Subsidiaries, and the plants and sites of each, have complied with all Applicable Environmental Laws, except, in any such case, where such failure to so comply would not result in a Material Adverse Change. Without limiting the generality of the preceding sentence, neither the Company nor any of its Subsidiaries has received notice of or has actual knowledge of any actual or claimed or asserted failure so to comply with Applicable Environmental Laws or of any other Environmental Claim which alone or together with all other such failures or Environmental Claims is material and would result in a Material Adverse Change. Except as disclosed in writing to the Agent prior to the date hereof, neither the Company nor any of its Subsidiaries nor their plants or other sites manage, generate or dispose of, or during their respective period of use, ownership, occupancy or operation by the Company or its Subsidiaries have managed, generated, released or disposed of, any hazardous wastes, hazardous substances, hazardous materials, toxic substances or toxic pollutants, as those terms are used or defined in the Applicable Environmental Laws, in material violation of or in a manner which would result in liability under the Applicable Environmental Laws or any other applicable Legal Requirement, or in a manner which would result in an Environmental Claim except where such noncompliance or liability or Environmental Claim would not result in a Material Adverse Change. The representation and warranty contained in this SECTION 8.13 is based in its entirety upon (a) current interpretations and enforcement policies that have been publicly disseminated and are used by Governmental Authorities charged with the enforcement of the Applicable Environmental Laws or which apply to the Company or any of its Subsidiaries with respect to any property or sites in a particular jurisdiction and (b) current levels of publicly disseminated scientific knowledge concerning the detection of, and the health and environmental risks associated with the discharge of, substances and pollutants regulated pursuant to the Applicable Environmental Laws. Section 9. COVENANTS. The Company agrees with the Banks and the Agent that until the termination of this Agreement: 9.1 FINANCIAL STATEMENTS AND CERTIFICATES. The Company will deliver in duplicate: (a) to each Bank, as soon as practicable and in any event within 45 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, consolidated and consolidating statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, and a consolidated and consolidating balance -50- sheet of the Company and its Subsidiaries as of the end of such quarterly period, setting forth (1) as to each account affected thereby, all eliminating entries for the Unrestricted Subsidiaries as a group and for the Special Subsidiary, respectively, and (2) the resulting consolidated and consolidating figures for the Company and the Restricted Subsidiaries, and setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year, all in reasonable detail and unaudited but certified by an authorized financial officer of the Company as fairly presenting the financial position and results of operations of the Company and its Subsidiaries as of the date thereof and the period then ended, subject to changes resulting from year-end adjustments; (b) to each Bank, as soon as practicable and in any event within 90 days after the end of each fiscal year, consolidated and consolidating statements of operations, stockholders' equity and cash flows of the Company and its Subsidiaries for such year, and a consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such fiscal year, setting forth (1) as to each account affected thereby, all eliminating entries for the Unrestricted Subsidiaries as a group and for the Special Subsidiary, respectively, and (2) the resulting consolidating figures for the Company and the Restricted Subsidiaries, and setting forth in each case in comparative form corresponding consolidating figures from the preceding annual audit, all in reasonable detail and which shall be reported on by Price Waterhouse & Co. or other independent public accountants of recognized national standing selected by the Company whose report shall (A) contain an opinion that shall be unqualified as to the scope or limitations imposed by the Company and shall not be subject to any other material qualification and (B) state that such financial statements present fairly, in all material respects, the financial position of the Company and its Subsidiaries at the dates indicated and their cash flows and the results of their operations and the changes in their financial position for the periods indicated in conformity with generally accepted accounting principles, and shall be accompanied by a report of such independent public accountants stating that (W) such audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole; (X) the consolidating information set forth therein is presented for purposes of additional analysis rather than to present the financial position, results of operations and cash flows of the individual companies; (Y) such consolidating information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and (Z) in such independent public accountants' opinion, such consolidating information is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole, with such changes thereto as such accountants reasonably determine to be appropriate under the circumstances; -51- (c) to each Bank, promptly upon transmission thereof, copies of all financial statements, proxy statements, notices and reports as it shall send to its public stockholders and copies of all registration statements (without exhibits, and other than registration statements and reports relating to employee benefit or compensation plans) and all reports which it files with the Securities and Exchange Commission (or any governmental body or agency succeeding to the functions of the Securities and Exchange Commission); (d) to each Bank, promptly upon receipt thereof, a copy of each other report submitted to the Company or any of its Subsidiaries by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or any such Subsidiary; (e) to each Bank, as soon as practicable and in any event within 15 days after any executive officer of the Company obtains knowledge (1) of any Default or any condition or event which, in the opinion of management of the Company, would have a Material Adverse Change (to the extent affecting the Company and its Subsidiaries in a materially different manner or extent than the oil and gas industry generally); (2) that any Person has given any notice to the Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in SECTION 10.1(b) or (m); (3) of the institution of any litigation involving claims against the Company or any of its Subsidiaries equal to or greater than $5,000,000 with respect to any single cause of action or of any adverse determination in any court proceeding in any litigation involving a potential liability to the Company or any of its Subsidiaries equal to or greater than $5,000,000 with respect to any single cause of action which makes the likelihood of an adverse determination in such litigation against the Company or such Subsidiary substantially more probable, or (4) of any regulatory proceeding which, if determined adversely to the Company, would have a Material Adverse Change (to the extent affecting the Company and its Subsidiaries in a materially different manner or extent than the oil and gas industry generally), an Officer's Certificate specifying the nature and period of existence of any such Default, condition or event, or specifying the notice given or action taken by such Person and the nature of any such claimed Default, event or condition, or specifying the details of such proceeding, litigation or dispute and, in each case, what action the Company or any of its Subsidiaries has taken, is taking or proposes to take with respect thereto; (f) to each Bank, (1) promptly after the filing or receiving thereof, copies of all annual reports and such other material reports and notices which the Company or any ERISA Affiliate files under ERISA with the Internal Revenue Service, the PBGC or the U.S. Department of Labor with respect to a Plan that is subject to Title -52- IV of ERISA; (2) promptly upon acquiring knowledge of any "reportable event" (as defined in Section 4043 of ERISA) or of any "prohibited transaction," as such term is defined in the Code or ERISA, in connection with any Plan which may result in a Material Adverse Change, a statement executed by the president or chief financial officer of the Company or the applicable ERISA Affiliate, setting forth the details thereof and the action which the Company or the ERISA Affiliate proposes to take with respect thereto and, when known, any action taken by the PBGC, the Internal Revenue Service or the U.S. Department of Labor with respect thereto; (3) promptly after the filing or receiving thereof by the Company or any ERISA Affiliate, any notice of the institution of any proceedings or other actions which may result in the termination of any Plan or notice of complete or partial withdrawal liability under Title IV of ERISA, and (4) each request for waiver of the funding standards or extension of the amortization periods required by Sections 303 and 304 of ERISA or Section 412 of the Code promptly after the request is submitted by the Company or any ERISA Affiliate, to the Secretary of the Treasury, the U.S. Department of Labor or the Internal Revenue Service, as the case may be; (g) to each Bank, as soon as available but in no event later than February 28 of each year, an Independent Engineering Report reflecting data as of December 31 of the prior year; and (h) to each Bank, with reasonable promptness, such other information respecting the business, financial condition or results of operations of the Company or any of its Subsidiaries as such Bank may reasonably request. Additionally, the Company will deliver to each Bank: (x) Together with each delivery of financial statements required by SUBSECTION (a) above, each Required Reserve Report and each Optional Reserve Report, an Officer's Certificate and a Coverage Report demonstrating (with computations in reasonable detail) compliance by the Company and the Restricted Subsidiaries with the provisions of SECTIONS 9.6, 9.7(b)(3), (4) and (6), 9.7(c)(2) and (3), 9.7(d), 9.7(e), 9.7(f), 9.7(g) and 9.9, demonstrating that no Default exists under SECTION 10.1(i) and stating that there then exists no Default, or, if any Default exists, specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. (y) Together with each delivery of financial statements required by SUBSECTION (b) above, a certificate of such accountants stating that, in conducting the audit of the Company's consolidated financial statements in accordance with generally accepted auditing standards they have obtained no knowledge of any Default arising under SECTION 10.1(a), (b) or (i) or any Default arising under SECTION 10.1(d) that occurs as result of the breach or violation by the Company or the Restricted Subsidiaries of SECTIONS 9.6, 9.7(b), -53- (c), (d), (e), (f), (g), (h), (i) or 9.8, or, if they have obtained knowledge of any such Default, specifying the nature and period of existence thereof. Such accountants, however, shall not be liable to the Agent or any Bank by reason of their failure to obtain knowledge of any such Default which would not be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards. The Company also covenants that forthwith upon the chief executive officer, principal financial officer or principal accounting officer of the Company obtaining knowledge of a Default, it will deliver to each Bank an Officer's Certificate specifying the nature and period of existence thereof and what action the Company proposes to take with respect thereto. (z) Together with each delivery of financial statements required by SUBSECTIONS (a) or (b) above, the Company will deliver to each Bank a pro forma statement of operations of the Company and its Restricted Subsidiaries for the same fiscal period as such financial statements that assumes that the impairments of oil and gas properties taken by the Company and its Restricted Subsidiaries in the fourth quarter of 1993 in the amount of up to $100 million as reflected in the Company's consolidated financial statements for the year ended December 31, 1993, shall not have occurred and a calculation in reasonable detail showing the determination of Consolidated Net Earnings and Unimpaired Consolidated Net Earnings for such fiscal period. 9.2 INSPECTION OF PROPERTY. The Company covenants that it will permit any Person designated in writing by any Bank, at such Bank's expense and risk, to visit and inspect any of the properties of the Company and its Subsidiaries; and also to examine the corporate books and financial records of the Company and its Subsidiaries and to make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of such Persons with the executive officers of the Company, the petroleum reserve engineers employed by the Company and its Subsidiaries and the Company's independent public accountants, all at such reasonable times, with a representative of the Company present and as often as such Bank may reasonably request, and will assist such Person or Persons in all such activities. 9.3 COMPLIANCE WITH ENVIRONMENTAL LAWS. The Company will, and will cause each of its Subsidiaries and each of its Affiliates that are controlled by the Company or its Subsidiaries to, comply in a timely fashion with, or operate pursuant to valid waivers of the provisions of, all Applicable Environmental Laws, except where non-compliance would neither (a) result in a Material Adverse Change nor (b) subject the Agent or any Bank to any liability for such non-compliance (PROVIDED that the Company shall not be in default of this SUBSECTION (b) if the Company indemnifies each of the Agent, Banks or any of them subjected to such liability and provides collateral to secure such indemnification, all to the extent required by the Person subjected to such liability in its -54- sole and unfettered discretion). THE COMPANY AGREES TO INDEMNIFY AND HOLD THE AGENT AND EACH BANK, AND THEIR RESPECTIVE OFFICERS, AGENTS AND EMPLOYEES HARMLESS FROM ANY LOSS, LIABILITY, CLAIM OR EXPENSE WHICH ANY SUCH PERSON MAY INCUR OR SUFFER AS A RESULT OF A BREACH BY THE COMPANY OR ITS SUBSIDIARIES OR AFFILIATES, AS THE CASE MAY BE, OF THIS COVENANT. The Company shall not be deemed to have breached or violated this SECTION 9.3 if the Company or its Subsidiary or Affiliate, as the case may be, is challenging in good faith by appropriate proceedings diligently pursued the application or enforcement of any such Applicable Environmental Laws for which adequate reserves have been established in accordance with generally accepted accounting principles. 9.4 PAYMENT OF TAXES. The Company will, and will cause each of its Subsidiaries to, pay, or have paid on its behalf, before the same become delinquent all taxes, assessments and governmental charges imposed upon it or upon its property, except to the extent contested in good faith by appropriate proceedings diligently conducted for which adequate reserves have been established in accordance with generally accepted accounting principles. 9.5 MAINTENANCE OF INSURANCE. The Company covenants that it and each of its Subsidiaries will carry and maintain insurance (subject to self-insurance in the maximum amount of $10,000,000, customary deductibles and retentions) in at least such amounts and against such liabilities and hazards and by such methods as customarily maintained by other companies operating similar businesses and, together with each delivery of financial statements required by SECTION 9.1(b), will deliver to the Agent for each Bank an Officer's Certificate specifying the details of such insurance in effect. Upon the request of the Agent or any Bank, the Company shall promptly deliver to the Agent one or more current certificates of the insurer or insurers providing the insurance required by this SECTION 9.5 to the effect that such insurance may not be canceled, reduced or affected in any manner without 30 days' prior written notice to the Agent. 9.6 RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS. The Company will not and will not permit any Restricted Subsidiary to (a) make any Restricted Investment; (b) pay or declare any dividend on any class of its stock or make any other distribution on account of any class of its stock, or redeem, purchase or otherwise acquire, directly or indirectly, any shares of its stock, or (c) make any additional Investment in the Special Subsidiary (all of the foregoing described in SUBSECTIONS (b) and (c) above being herein called "RESTRICTED PAYMENTS") (1) except out of Consolidated Net Earnings Available for Restricted Payments and Restricted Investments; PROVIDED that the Company or any wholly owned Restricted Subsidiary may, without violation of this clause, in a single transaction or a series of publicly announced related transactions to be completed within six months, make an Investment in the Special Subsidiary which results in the ownership by the -55- Company and the wholly owned Restricted Subsidiaries of 100% of the outstanding general and limited partner interests in the Special Subsidiary; PROVIDED FURTHER that the amount of such Investment shall be included in any subsequent computations of Restricted Payments and of Consolidated Net Earnings Available for Restricted Payments and Restricted Investments under this Section unless immediately after giving effect to such Investment in the Special Subsidiary, the Special Subsidiary is designated as a Restricted Subsidiary; (2) unless, after giving effect to any such Restricted Investment or Restricted Payment, as the case may be, (A) no Default shall have occurred and be continuing and (B) the Company could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(3), and (3) unless, in the case of Investments in the Special Subsidiary, such Investment shall otherwise be permitted by SECTION 9.7(g). "CONSOLIDATED NET EARNINGS AVAILABLE FOR RESTRICTED PAYMENTS AND RESTRICTED INVESTMENTS" shall mean an amount equal to (a) the sum of (1) $45,000,000; (2) 100% (or minus 100% in case of a deficit) of Unimpaired Consolidated Net Earnings for the period (taken as one accounting period) commencing on April 1, 1990 (the "COMMENCEMENT DATE") and terminating at the end of the last fiscal quarter preceding the date of any proposed Restricted Investment or Restricted Payment, as the case may be; (3) the net cash proceeds received by the Company or any Restricted Subsidiary from the sale of any shares of its stock on or after the Commencement Date, except (A) any such proceeds used as a basis, for a prepayment in respect of the then-outstanding notes issued under the Serial Note Agreement pursuant to Paragraphs 4A, 4B or 4C thereof and (B) any proceeds from the sale of stock to the Company or any of its Subsidiaries on or after the Commencement Date; (4) the net cash proceeds received by the Company or any Restricted Subsidiary from the sale, on or after the Commencement Date, of any convertible debt security which has been converted into stock of the Company or a Restricted Subsidiary, except (A) any such proceeds used as a basis for a prepayment in respect of the then-outstanding notes issued under the Serial Note Agreement pursuant to Paragraphs 4A, 4B or 4C thereof and (B) any proceeds from the sale of such convertible debt security to the Company or any of its Subsidiaries; (5) any cash distributions from the Special Subsidiary received by the Company or any Restricted Subsidiary on or after the Commencement Date, and (6) any return of capital from Unrestricted Subsidiaries or Restricted Investments received by the Company or any Restricted Subsidiary on or after the Commencement Date, less (b) the sum of all Restricted Investments and all Restricted Payments made on or after the Commencement Date. There shall not be included in Restricted Payments or in any computation of Consolidated Net Earnings Available for Restricted -56- Payments and Restricted Investments (w) dividends paid or declared in respect of stock held by any Person, or distributions made to any Person, in stock of the Company or any Restricted Subsidiary; (x) exchanges of stock of one or more classes of the Company or any Restricted Subsidiary for common stock of the Company or such Restricted Subsidiary, as the case may be, or for stock of the Company or such Restricted Subsidiary, as the case may be, of the same class, except to the extent that cash or other value is involved in such exchange; (y) dividends paid or declared in respect of stock held by, or distributions made to, or redemptions, purchases or other acquisitions of stock made from, the Company or a wholly owned Restricted Subsidiary, or (z) any advances to the Special Subsidiary not in excess of $20,000,000 in the aggregate at any one time outstanding that are repaid in full within 60 days pursuant to customary cash management services provided to the Special Subsidiary. The term "stock" as used in this Section shall include warrants, options to purchase stock and redeemable rights. 9.7 LIEN, DEBT AND OTHER RESTRICTIONS. The Company will not and will not permit any Restricted Subsidiary to: (a) LIENS. Create, assume or suffer to exist any Lien upon any of its properties or assets, whether now owned or hereafter acquired except (1) Liens for taxes or assessments or other governmental charges or levies not yet due or which are being actively contested in good faith by appropriate proceedings; (2) Liens (including mechanics' and materialmen's liens, landlord liens, easements, rights-of-way or the like) incidental to the conduct of its business or the ownership of its property and assets which are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (3) Liens for lessor's royalties, overriding royalties, net profits interests, carried interests, reversionary interests and other similar burdens, production sales contracts, division orders, contracts for the sale, purchase, exchange, or processing of hydrocarbons, unitization and pooling designations, declarations, orders and agreements, operating agreements, agreements of development, area of mutual interest agreements, gas balancing or deferred production agreements, processing agreements, plant agreements, pipeline gathering and transportation agreements, injection, repressuring and recycling agreements, salt water or -57- other disposal agreements, seismic or geophysical permits or agreements, and other agreements which are customary in the oil, gas and mineral exploration and development business or in the business of processing gas and gas condensate production for the extraction of products therefrom, if the net cumulative effect of such burdens does not operate to reduce the net revenue interest of any oil and gas properties to less than (A) the "Net Revenue Interest" set forth in the Most Recent Engineering Report for those oil and gas properties included in the Most Recent Engineering Report or (B) the net revenue interest so acquired for those oil and gas properties acquired after the date of the Most Recent Engineering Report; PROVIDED that such Liens are not incurred in connection with the borrowing of money or the obtaining of advances or credit (other than advances or credit on open account, includable in current liabilities, for goods and services in the ordinary course of business and on terms and conditions which are customary in the oil, gas and mineral exploration and development business) or the guaranteeing of the obligations of another Person; (4) Liens described in SCHEDULE II securing Debt of the Company or a Restricted Subsidiary set forth in SCHEDULE II; (5) the Springing Lien, Liens existing on any real property of any Person at the time such Person becomes a Restricted Subsidiary, or any Liens existing prior to the time of acquisition upon any real property acquired by the Company or any Restricted Subsidiary through purchase, merger or consolidation or otherwise, whether or not the obligation secured by such Lien is assumed by the Company or such Restricted Subsidiary; PROVIDED that except as otherwise permitted by SECTION 9.7(a), any such Springing Lien or Lien (A) shall not encumber any other property of the Company or any Restricted Subsidiary and (B) shall not have been created in anticipation of such Person becoming a Restricted Subsidiary or in anticipation of the acquisition by the Company or any Restricted Subsidiary of the real property secured thereby; (6) Liens placed on property at the time of acquisition, construction, development or improvement thereof, or created in respect of such property within six months after the time of acquisition thereof or the commencement of construction, development or improvement thereof, as the case may be, to secure all or a portion of (or to secure Debt incurred to pay all or a portion of) the purchase price of such acquisition, or the cost of such construction, development or improvement, as the case may be; PROVIDED that (A) such property is not and shall not thereby become encumbered in an amount in excess of the lesser of the cost or fair market value thereof; (B) except as otherwise permitted in SECTION 9.7(a), any such Lien shall not encumber any other property of the Company or a Restricted Subsidiary, and (C) any such Lien shall not encumber property of the Company or a Restricted Subsidiary for the purpose of securing an obligation of the Company or a Restricted Subsidiary or securing a Guaranty by the Company or any -58- Restricted Subsidiary in connection with the sale, exchange, transfer or other disposition by the Company or a Restricted Subsidiary of net profits interests; PROVIDED that the Company or a Restricted Subsidiary may assign all or part of the proceeds of production of property in which a net profits interest has been granted to secure its obligation to make net profits interests payments therefrom; and PROVIDED FURTHER that any such Lien shall not encumber any other property of the Company or any Restricted Subsidiary; (7) Liens on the capital stock of a Restricted Subsidiary acquired after April 11, 1990 by the Company or a Restricted Subsidiary and created or assumed contemporaneously with such acquisition, to secure Debt assumed or incurred to finance all or a part of the purchase price of such acquisition; (8) Liens on the capital stock of an Unrestricted Subsid- iary other than the Special Subsidiary; (9) from and after the time that the Company and the wholly owned Restricted Subsidiaries shall have become the owners of all of the outstanding general and limited partner interests in the Special Subsidiary, (A) Liens on all or any portion of the limited partner interests in SFEP, at such times as SFEP shall be an Unrestricted Subsidiary or (B) at such times as SFEP shall be a Restricted Subsidiary, Liens securing Debt incurred to finance all or a part of the purchase price of limited partner interests in the Special Subsidiary acquired by the Company and the wholly owned Restricted Subsidiaries from Persons other than the Special Subsidiary in a single transaction or a series of publicly announced related transactions that were completed within six months and that result in the ownership by the Company and the wholly owned Restricted Subsidiaries of 100% of the general and limited partner interests therein; PROVIDED that the Liens described in this CLAUSE (B) shall extend only to the limited partner interests so acquired; (10) Liens on property of the Company or a Restricted Subsidiary to secure Debt assumed or incurred in the form of Capitalized Lease Obligations or industrial revenue bonds, pollution control bonds or similar tax-exempt financings; PROVIDED that any such Lien shall not encumber any property of the Company or a Restricted Subsidiary other than the property the acquisition or construction of which is financed or refinanced, in whole or in part, with proceeds from such Debt; (11) Liens created pursuant to the Security Documents under the Amended and Restated Revolving Credit Agreement; (12) any Lien renewing or extending any Lien permitted by CLAUSES (4), (5), (6), (7), (8), (9), (10) or (11) above; PROVIDED -59- that the principal amount of the Debt secured thereby is not increased and such Lien is not extended to other property; and (13) other Liens on any property of the Company or a Restricted Subsidiary securing any Funded Debt of the Company or a estricted Subsidiary permitted by SECTION 9.7(b)(3)(C) or (4)(C). (b) DEBT. Create, incur, assume or suffer to exist any Debt, except (1) Funded Debt of the Company under the Amended and Restated Revolving Credit Agreement and Funded Debt of the Company hereunder or represented by the notes issued pursuant to the Serial Note Agreement; (2) Funded Debt of the Company or any Restricted Subsidiary set forth in SCHEDULE II, which may not be renewed, extended, refunded or permitted to remain outstanding after the stated maturities thereof except by the Person primarily liable thereon and unless, after giving effect to such renewal, extension or refunding, neither the principal amount thereof nor the aggregate Funded Debt of the Company and the Restricted Subsidiaries is increased thereby; (3) Funded Debt of the Company if at the time it is created, incurred or assumed and after giving effect thereto, to the receipt of the proceeds thereof, and to the concurrent retirement of any Debt, (A) the aggregate amount of all Funded Debt of the Company and the Restricted Subsidiaries shall not exceed 65% of Consolidated Net Tangible Assets; (B) Consolidated Net Earnings Available for Fixed Charges for the four fiscal quarters of the Company (taken as a single period) most recently ended shall equal at least 225% of Fixed Charges for the four fiscal quarters of the Company (taken as a single period) commencing with and including the fiscal quarter during which such Funded Debt is created, incurred or assumed, and (C) (1) for any such creation, incurrence or assumption occurring prior to December 31, 1998, Priority Debt (other than Existing Priority Debt) shall not exceed the lesser of (y)(I) 40% of Consolidated Net Tangible Assets minus (II) Existing Priority Debt and (z) 33% of Consolidated Net Tangible Assets, and (2) for any such creation, incurrence or assumption occurring on or after December 31, 1998, Priority Debt shall not exceed 33% of Consolidated Net Tangible Assets, and (3) if such Funded Debt is Secured Debt, Special Debt shall not exceed 10% of Consolidated Net Tangible Assets; (4) Funded Debt of a Restricted Subsidiary if at the time it is created, incurred or assumed and after giving effect thereto, to the receipt of the proceeds thereof, and to the concurrent retirement of any Debt, (A) the aggregate amount of all Funded Debt of the Company and the Restricted Subsidiaries shall not exceed 65% of Consolidated Net Tangible Assets; (B) -60- Consolidated Net Earnings Available for Fixed Charges for the four fiscal quarters of the Company (taken as a single period) most recently ended shall equal at least 225% of Fixed Charges for the four fiscal quarters of the Company (taken as a single period) commencing with and including the fiscal quarter during which such Funded Debt is created, incurred or assumed, and (C) (1) for any such creation, incurrence or assumption occurring prior to December 31, 1998, Priority Debt (other than Existing Priority Debt) shall not exceed the lesser of (y)(I) 40% of Consolidated Net Tangible Assets minus (II) Existing Priority Debt and (z) 33% of Consolidated Net Tangible Assets, and (2) for any such creation, incurrence or assumption occurring on or after December 31, 1998, Priority Debt shall not exceed 33% of Consolidated Net Tangible Assets, and (3) Special Debt shall not exceed 10% of Consolidated Net Tangible Assets; (5) Debt of the Company owing to a wholly owned Restricted Subsidiary which is subordinated to the Obligations upon terms set forth on SCHEDULE V, and Debt of a Restricted Subsidiary owing to the Company or any other wholly owned Restricted Subsidiary; and (6) Current Debt of the Company not secured by any Lien on any property owned by the Company or the Restricted Subsidiaries; PROVIDED that for a period of at least 45 consecutive days in each period of 18 consecutive months commencing April 1, 1990, the amount of Current Debt (other than Current Debt existing pursuant to customary cash management services provided to the Special Subsidiary which is repaid in full within 60 days) permitted by this clause shall at no time exceed the maximum amount of Funded Debt that the Company could then incur under SECTION 9.7(b)(3) without violation thereof. For purposes of this SECTION 9.7(b), any Debt (i) which is extended, renewed or refunded shall be deemed to have been incurred when extended, renewed or refunded (except as provided pursuant to CLAUSE (2) above); (ii) of a Person when it becomes, or is merged into, or is consolidated with a Restricted Subsidiary or the Company shall be deemed to have been incurred at that time; (iii) which is permitted by CLAUSE (5) above and which is owing to a wholly owned Restricted Subsidiary when it ceases to be a wholly owned Restricted Subsidiary shall be deemed to have been incurred at that time; (iv) of a Restricted Subsidiary which is owing to the Company or any other Restricted Subsidiary shall be deemed to have been incurred at the time the Company or such other Restricted Subsidiary disposes of such Debt to any Person other than the Company or a wholly owned Restricted Subsidiary; (v) which is Funded Debt of the Company or a Restricted Subsidiary consisting of a reimbursement obligation in respect of a letter of credit or similar instrument shall be deemed to be incurred when such letter of credit or similar instrument is issued, or (vi) which is Funded Debt of the type described in CLAUSE (b) of the definition of -61- Funded Debt, or any Guaranty of such Funded Debt, shall not be deemed to have been created, incurred or assumed, as the case may be, at the time it becomes Funded Debt, but shall be included in all subsequent calculations of Funded Debt for all purposes of this Agreement. (c) SALE OF LESS THAN SUBSTANTIALLY ALL ASSETS. Sell, exchange, transfer or otherwise dispose of part, but less than all or substantially all, of their respective assets, unless (1) such sale, exchange, transfer or other disposition is made in the ordinary course of business (including abandonments, farm-ins, farm-outs, leases and subleases of developed or undeveloped properties owned or held by the Company or any Restricted Subsidiary that are made or entered into in the ordinary course of business, but EXCLUDING, however, any sale of net profits interests in developed oil and gas properties); or (2) after giving effect to such sale, exchange, transfer or other disposition, (A) the aggregate net book value of (i) all assets of the Company and the Restricted Subsidiaries (including the sale of net profits interests in developed oil and gas properties) sold, exchanged, transferred or otherwise disposed of (on a consolidated basis) (but excluding assets sold, exchanged, transferred or otherwise disposed of in the ordinary course of business pursuant to SECTION 9.7(c)(1)) during the period of 12 consecutive months immediately preceding such sale, exchange, transfer or other disposition and (ii) the assets of all Restricted Subsidiaries, the stock of which have been sold or otherwise disposed of pursuant to SECTION 9.7(d)(2)(A) during such 12-month period shall not exceed 10% of Consolidated Net Tangible Assets of the Company and the Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition, and (B) the assets described in the foregoing CLAUSE (A) shall not have contributed more than 10% of EBITD of the Company and the Restricted Subsidiaries for the four most recently completed fiscal quarters taken as a single accounting period; or (3) after giving effect to such sale, exchange, transfer or other disposition, (A) the aggregate net book value of (i) all assets of the Company and the Restricted Subsidiaries (including the sale of net profits interests in developed oil and gas properties) sold, exchanged, transferred or otherwise disposed of (on a consolidated basis) (but excluding assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(1) and (2)) during the period of 12 consecutive months immediately preceding such sale, exchange, transfer or other disposition and (ii) the assets of all Restricted Subsidiaries, the stock of which has been sold or otherwise disposed of pursuant to SECTION 9.7(d)(2)(B) during such 12-month period, shall not exceed 10% of Consolidated Net Tangible Assets of the Company and the Restricted -62- Subsidiaries as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition; (B) the assets described in the foregoing CLAUSE (A) shall not have contributed more than 10% of EBITD for the four most recently completed fiscal quarters taken as a single accounting period, and (C) within six months after such sale, exchange, transfer or other disposition, the net proceeds thereof are applied toward, or the exchange results in, (1) the acquisition by the Company or a Restricted Subsidiary of (i) assets which have an aggregate fair market value at least equal to the net proceeds received by the Company and its Restricted Subsidiaries from such sale, exchange, transfer or other disposition; (ii) if the assets so sold, exchanged, transferred or otherwise disposed of were located in the United States of America or Canada, the assets acquired are located in the United States of America or Canada, and (iii) the assets so acquired are of a type usual and customary in the oil and gas business; PROVIDED that no Liens shall at any time exist on the assets so acquired which secure any Debt except as permitted by SECTION 9.7(a)(13) or (2) the prepayment of an aggregate principal amount of all Obligations plus accrued interest and premium, if any, thereon in accordance with this Agreement and the Amended and Restated Revolving Credit Agreement, or the payment of an aggregate principal amount of other Funded Debt (other than Funded Debt subordinate in right of payment to the Obligations) plus accrued interest and premium, if any, in either case in an amount at least equal to the aggregate net proceeds that the Company or a Restricted Subsidiary receives from the sale, exchange, transfer or other disposition of such assets. (d) SALE OF STOCK OF RESTRICTED SUBSIDIARIES. Sell or otherwise dispose of, or part with control of, any shares of stock of any Restricted Subsidiary, except (1) to the Company or another wholly owned Restricted Subsidiary and (2) that all shares of stock of any Restricted Subsidiary at the time owned by the Company and all Restricted Subsidiaries may be sold as an entirety for a cash consideration which represents the fair market value (as determined in good faith by the Board of Directors of the Company) at the time of sale of the shares of stock so sold; PROVIDED that for purposes of this exception: (A) (i) the net book value of the assets of such Restricted Subsidiary together with (x) the net book value of the assets of any other Restricted Subsidiary the stock of which was sold during the preceding 12-month period and (y) the net book value of the assets of the Company and all Restricted Subsidiaries sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(2) during the preceding 12-month period, does not represent more than 10% of Consolidated Net Tangible Assets as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition and (ii) the earnings of such Restricted Subsidiary together with (x) the earnings of any other Restricted Subsidiary the stock of which was -63- sold or otherwise disposed of pursuant to the exception described in this CLAUSE (A) during the preceding 12-month period and (y) the earnings attributable to the assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(2) during such 12-month period, do not represent more than 10% of EBITD for the four most recently completed fiscal quarters taken as a single accounting period; and PROVIDED FURTHER that, at the time of such sale, such Restricted Subsidiary shall not own, directly or indirectly, any shares of stock of the Company or any other Restricted Subsidiary unless all of the shares of stock of such other Restricted Subsidiary owned, directly or indirectly, by the Company and all Restricted Subsidiaries are simultaneously being sold as permitted by the exception described in this CLAUSE (A); or (B) (i) the net book value of the assets of such Restricted Subsidiary together with (x) the net book value of the assets of any other Restricted Subsidiary the stock of which was sold during the preceding 12-month period and (y) the net book value of the assets of the Company and any Restricted Subsidiary sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(3) during the preceding 12-month period, does not represent more than 10% of the Consolidated Net Tangible Assets as of the end of the fiscal quarter immediately preceding or coinciding with such sale, exchange, transfer or other disposition; (ii) the earnings of such Restricted Subsidiary together with (x) the earnings of any other Restricted Subsidiary the stock of which was sold or otherwise disposed of pursuant to the exception described in this CLAUSE (B) during the preceding 12-month period and (y) the earnings attributable to the assets sold, exchanged, transferred or otherwise disposed of pursuant to SECTION 9.7(c)(3) during such 12-month period, do not represent more than 10% of EBITD for the four most recently completed fiscal quarters taken as a single accounting period, and (iii) within six months after such sale or other disposition, the proceeds thereof are applied toward (i) the acquisition by the Company or a Restricted Subsidiary of (1) assets which have an aggregate fair market value at least equal to the net proceeds received by the Company and the Restricted Subsidiaries from such sale or other disposition and (2) the assets so acquired are of a type usual and customary in the oil and gas business; PROVIDED that no Liens shall at any time exist on the assets so acquired which secure any Debt except as permitted by SECTION 9.7(a)(13), or (ii) the prepayment of an aggregate principal amount of all Obligations in accordance with this Agreement and the Amended and Restated Revolving Credit Agreement, or the payment of an aggregate principal amount of other Funded Debt (other than Funded Debt subordinate in right of payment to the Obligations) plus accrued interest and premium, if any, in either case in an amount at least equal to the aggregate net proceeds that the Company or a Restricted Subsidiary receives from the sale or other disposition; and PROVIDED FURTHER that, at the time of such sale or other disposition, such Restricted Subsidiary shall not own, directly or indirectly, (y) any shares of stock of the Company -64- or any other Restricted Subsidiary unless all of the shares of stock of such other Restricted Subsidiary owned, directly or indirectly, by the Company and all Restricted Subsidiaries are simultaneously being sold as permitted by the exception described in this CLAUSE (B). (e) MERGER AND SALE OF ALL OR SUBSTANTIALLY ALL ASSETS. Merge or consolidate with or into any other Person or convey, exchange, transfer or otherwise dispose of all or a substantial part of its assets (I.E., assets which could not otherwise be disposed of pursuant to SECTION 9.7(c)(2) or (3)) to any Person except that (1) any wholly owned Restricted Subsidiary may merge with the Company (PROVIDED that the Company shall be the continuing or surviving corporation) or with any one or more other wholly owned Restricted Subsidiaries; (2) any Restricted Subsidiary may sell, exchange, transfer or otherwise dispose of any of its assets to the Company or to a wholly owned Restricted Subsidiary; (3) any Restricted Subsidiary may sell, exchange, transfer or otherwise dispose of all or substantially all of its assets subject to the conditions and provisions specified in SECTIONS 9.7(c)(2) and (3); (4) any Restricted Subsidiary may merge into or consolidate with any Person which does not thereupon become a Restricted Subsidiary, subject to the conditions and provisions specified in SECTION 9.7(d) with respect to a sale or other disposition of the stock of such Restricted Subsidiary; (5) any Restricted Subsidiary may permit any Person to be merged into such Restricted Subsidiary or may consolidate with or merge into a Person which thereupon becomes a Restricted Subsidiary; PROVIDED that immediately after any such merger or consolidation, no Default shall have occurred and be continuing; (6) the Company may permit any Person to be merged into the Company (such that the Company shall be the continuing or surviving corporation); and (7) the Company may permit any corporation to consolidate with the Company and the Company may merge into or otherwise dispose of its assets as an entirety or substantially as an entirety to any solvent corporation organized under the laws of the United States of America or any state thereof and having at least 80% of its consolidated assets located in the United States of America and Canada which expressly assumes in writing the due and punctual performance of the obligations of the Company under the Credit Documents, to the same extent as if such successor or 65 transferee corporation had originally executed the Credit Documents in the place of the Company (it being agreed that such assumption shall, upon the request of any Bank and at the expense of such successor or transferee corporation, be evidenced by the exchange of each outstanding Application for another Application executed by such successor or transferee corporation, with such changes in phraseology and form as may be appropriate but in substance of like terms as the Application surrendered for such exchange and of like unpaid principal amount, and that each Application executed pursuant to this Agreement after such assumption shall be executed by and in the name of such successor or transferee corporation); PROVIDED that for purposes of SECTIONS 9.7(e)(6) and (7) immediately after such merger, consolidation, sale or other disposition, and after giving effect thereto, (x) such successor or transferee Person could incur at least $1.00 of additional Funded Debt without violation of SECTION 9.7(b)(3) and (y) no Default shall have occurred and be continuing. As soon as practicable, and in any event at least 75 days prior to the proposed consummation date of any merger, consolidation, sale or other disposition described in SECTION 9.7(e)(7), the Company shall give written notice thereof to each Bank describing in reasonable detail the proposed transaction, the date on which it is proposed to be consummated and the identity, jurisdiction of organization, and geographic composition of assets of the proposed successor or transferee corporation. No disposition by the Company of its assets as an entirety or substantially as an entirety under SECTION 9.7(e)(7) shall release the Company as the applicant under any Application from its liability as obligor thereon. (f) SALE AND LEASEBACK. Enter into any Sale and Leaseback Transaction unless: (1) immediately after giving effect thereto and to the application of any sales proceeds received in connection therewith, Special Debt shall not exceed 10% of the Consolidated Net Tangible Assets; or (2) the net sales proceeds received by the Company or a Restricted Subsidiary in respect of the assets sold pursuant to such Sale and Leaseback Transaction are greater than or equal to the fair market value of the assets sold (which determination shall be based upon a written opinion (the cost of which shall be borne exclusively by the Company) as to valuation from an independent valuation expert selected by the Company) and such proceeds are concurrently applied to (A) the purchase, acquisition, development or construction of assets having a value at least equal to such net proceeds, and to be used in the Company's or such Restricted Subsidiary's business; PROVIDED that no Liens shall at any time exist on such assets which secure any Debt except as permitted by SECTION 9.7(a)(13); (B) the prepayment in accordance with this Agreement of any aggregate principal amount of all the Obligations -66- (plus accrued interest and premium, if any) at least equal to the amount of such net proceeds; or (C) the payment of other Funded Debt (other than Funded Debt subordinate in right of payment to the Obligations) in an aggregate principal amount at least equal to the amount of such net sales proceeds; or (3) the Sale and Leaseback Transaction involves the sale of assets by the Company to a wholly owned Restricted Subsidiary or by a Restricted Subsidiary to the Company or to another wholly owned Restricted Subsidiary; PROVIDED that if the Company is the seller under any such Sale and Leaseback Transaction, its lease obligations thereunder shall be subordinated to the Obligations represented by the Applications upon terms set forth on SCHEDULE V. (g) INVESTMENTS IN THE SPECIAL SUBSIDIARY. Directly or indirectly make an Investment in the Special Subsidiary after March 31, 1990, unless (1) the aggregate amount of all other Investments in the Special Subsidiary made, directly or indirectly, by the Company and the Restricted Subsidiaries after March 31, 1990 shall not exceed the aggregate amount of cash distributions received by the Company and the Restricted Subsidiaries from the Special Subsidiary after March 31, 1990 or (2) in the opinion of the Board of Directors of the Company, the Investment would not impair the ability of the Company to make when due any payment (including any prepayment required by SECTION 3 of principal of or interest on the Reimbursement Obligations. (h) TRANSACTIONS WITH AFFILIATES. Directly or indirectly purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise deal with, in the ordinary course of business or otherwise, (1) any Affiliate (except any employee compensation benefit plan or any Restricted Subsidiary) or (2) any Person (other than a Restricted Subsidiary) in which an Affiliate or the Company (directly or indirectly) owns, beneficially or of record, 5% or more of the outstanding voting stock or similar equity interest, except that (A) any Affiliate may be a director, officer or employee of the Company or any Restricted Subsidiary and may be paid reasonable compensation in connection therewith and (B) subject to applicable fiduciary standards with respect to the Special Subsidiary, acts and transactions that would otherwise be prohibited by this Subsection may be performed or engaged in if upon terms not less favorable to the Company or any Restricted Subsidiary than if no relationship described in CLAUSES (1) and (2) above existed. (i) TAX CONSOLIDATION. Except for the Tax Allocation Agreements, the Company will not, and will not permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person unless such other Person shall have agreed in writing with the Company that the Company's or such Subsidiary's liability with respect to taxes as a result of the filing of any such consolidated income tax return with such Person -67- shall not be materially greater, nor the receipt of any tax benefits materially less, than they would have been had the Company and its Subsidiaries continued to file a consolidated income tax return with the Company as the parent corporation. 9.8 ISSUANCE OF STOCK BY RESTRICTED SUBSIDIARIES. The Company covenants that it will not permit any Restricted Subsidiary (either directly or indirectly, by the issuance of rights or options for, or securities convertible into, such shares) to issue, sell or otherwise dispose of any shares of any authorized but unissued or treasury class of such Restricted Subsidiary's stock (other than directors' qualifying shares) except to the Company or another Restricted Subsidiary. 9.9 COVERAGE RATIOS. As of the end of each fiscal quarter of the Company, and each delivery of a Required Reserve Report or Optional Reserve Report, the Company shall be in compliance with all Required Ratios (except for any noncompliance resulting solely from an Engineering Shortfall, and then only prior to the cure thereof permitted by SECTION 10.1(e)). 9.10 PREPAYMENT OF JUNIOR SECURITIES. Without the prior written consent of the Required Banks, the Company shall not prepay (or deposit any property to defease) any indebtedness consisting of Junior Securities before the payment in full of all indebtedness under the Credit Documents. Section 10. DEFAULTS. 10.1 EVENTS OF DEFAULT. If one or more of the following events (herein called "EVENTS OF DEFAULT") shall occur and be continuing: (a) the Company shall fail to pay any principal of any Reimbursement Obligation or any fee or other principal amount payable hereunder or under any other Credit Document when due, or shall fail to pay any interest on any amount hereunder or under any other Credit Document for more than three days after the date due; or (b) any member of the Combined Group shall default in any payment of principal of or interest on any other obligation for money borrowed (or any Capitalized Lease Obligation, any obligation under a conditional sale or other title retention agreement, any obligation issued or assumed as full or partial payment for property whether or not secured by a purchase money mortgage or any obligation under notes payable or drafted accepted representing extensions of credit) beyond any period of grace provided with respect thereto, or any member of the Combined Group shall fail to perform or observe any other agreement, term or condition contained in any agreement under which any such obligation is created (or if any other event thereunder or under any such agreement shall occur -68- and be continuing) and the effect of such failure or other event is to cause, or to permit the holder or holders of such obligation (or a trustee on behalf of such holder or holders) to cause, such obligation to become due prior to any stated maturity, or any member of the Combined Group shall fail to pay any Guaranty relating to Debt for borrowed money in accordance with its terms, PROVIDED that the aggregate amount of all obligations as to which such a payment default shall occur and be continuing or such a failure or other event causing or permitting acceleration shall occur and be continuing shall exceed $10,000,000; or (c) any representation or warranty by the Company or any of its officers in any Credit Document or in any writing furnished to the Agent or the Banks in connection herewith shall prove to have been false or misleading in any material respect as of the date as of which it was made; or (d) the Company shall default in the performance of any of its obligations under SECTIONS 9.6 through 9.8 or under SECTION 9.9 (other than a Default resulting solely from an Engineering Shortfall) or under SECTION 9.10; or (e) the Company shall deliver any Independent Engineering Report and related Coverage Report to the Banks in accordance with SECTION 9.1 or SECTION 2.2(d) reflecting noncompliance with any Required Ratio and such noncompliance shall result solely from an Engineering Shortfall and shall not be cured (such cure to be evidenced by a new Coverage Report demonstrating compliance with all Required Ratios) on or before the date 180 days after the Company delivers such Independent Engineering Report and related Coverage Report; or (f) the Company shall default in the performance of any of its obligations in any Credit Document other than those specified elsewhere in this SECTION 10.1 and such default shall not be remedied within 30 days after any executive officer of the Company obtains actual knowledge thereof; or (g) any member of the Combined Group shall (1) make an assignment for the benefit of creditors; (2) generally fail to pay its debts as such debts become due, or (3) admit in writing its inability to generally pay its debts as such debts become due; or (h) a Governmental Authority shall enter any decree or order for relief in respect of any member of the Combined Group under any bankruptcy, reorganization, compromise, arrangement, insolvency, readjustment of debt, dissolution or liquidation or similar law, whether now or hereafter in effect (herein called the "BANKRUPTCY LAW"), of any jurisdiction; or (i) any member of the Combined Group shall petition or apply to any Governmental Authority for, or consent to, the appointment -69- of, or taking possession by, a trustee, receiver, custodian, liquidator or similar official of such member of the Combined Group, or of any substantial part of the assets of such member of the Combined Group, or shall commence a voluntary case under the Bankruptcy Law of the United States or any proceedings (other than proceedings for the voluntary liquidation and dissolution of a Restricted Subsidiary) relating to any member of the Combined Group under the Bankruptcy Law of any other jurisdiction; or (j) any such petition or application referred to in SECTION 10.1(i) shall be filed, or any such proceedings referred to in SECTION 10.1(i) shall be commenced, against any member of the Combined Group and such member of the Combined Group by any act shall indicate its approval thereof, consent thereto or acquiescence therein, or an order, judgment or decree shall be entered appointing any such trustee, receiver, custodian, liquidator or similar official, or approving the petition in any such proceedings, and such order, judgment or decree shall remain unstayed and in effect for more than 60 consecutive days; or (k) any order, judgment or decree shall be entered in any proceedings against any member of the Combined Group decreeing the dissolution of any member of the Combined Group and such order, judgment or decree shall remain unstayed and in effect for more than the appeal time provided by law; or (l) any order, judgment or decree shall be entered in any proceedings against any member of the Combined Group decreeing a split-up of such member of the Combined Group which requires (1) the divestiture of assets which exceed, or the divestiture of partnership interest in the Special Subsidiary or of the stock of a Restricted Subsidiary whose assets exceed, 10% of Consolidated Net Tangible Assets as of the end of the fiscal quarter immediately preceding or coinciding with such divestiture or (2) the divestiture of assets or stock of a Restricted Subsidiary or assets of or partnership interest in the Special Subsidiary, which shall have contributed more than 10% of EBITD for the four most recently completed fiscal quarters, and such order, judgment or decree shall remain unstayed and in effect for more than 60 consecutive days; or (m) any judgment or order, or series of judgments or orders, for the payment of money in an amount in excess of $5,000,000 shall be rendered against any member of the Combined Group and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within the appeal time provided by law from the date of entry thereof, or such member of the Combined Group shall not, within said appeal time, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal; or -70- (n) the Company or any ERISA Affiliate shall fail to pay when due an amount or amounts aggregating in excess of $5,000,000 which it shall have become liable to pay with respect to any Plan; or notice of intent to terminate a Plan or Plans (other than a multiemployer plan under Section 4001(a)(3) of ERISA) having aggregate Unfunded Liabilities in excess of $5,000,000 shall be filed under Title IV of ERISA by the Company or any ERISA Affiliate, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any Plan or Plans (other than a multiemployer plan under Section 4001(a)(3) of ERISA) having aggregate Unfunded Liabilities in excess of $5,000,000 or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Company or any ERISA Affiliate to enforce Section 515 or 4219(c)(5) of ERISA; or the Company or any ERISA Affiliate shall incur a complete or partial withdrawal liability under Title IV of ERISA in an annual amount in excess of $2,000,000 (and in the aggregate $5,000,000) in connection with any Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Plan or Plans having aggregate Unfunded Liabilities in excess of $5,000,000 must be terminated; or there shall occur any event or condition that might reasonably constitute grounds for the termination of any Plan or Plans having aggregate Unfunded Liabilities in excess of $5,000,000 or with respect to such Plan or Plans either the imposition of any liability in excess of $5,000,000 (other than contributions in the ordinary course) or any Lien provided under Section 4068 of ERISA securing an amount in excess of $5,000,000 on any property of the Company or any ERISA Affiliate; provided, however, any amounts owing by Santa Fe Pacific Corporation pursuant to the ERISA Indemnification Agreement between Santa Fe Pacific Corporation and the Company shall first be offset against the dollar threshold amounts set forth above before any such condition or event constitutes an event of default under this paragraph; or (o) one or more demands for payment is made upon the Company by Santa Fe Pacific Corporation or any other Person pursuant to the Tax Indemnification Agreement and such demands would exceed $5,000,000 in the aggregate; or (p) any Change of Control shall occur; or (q) any Event of Default shall occur and be continuing under the Amended and Restated Revolving Credit Agreement, THEREUPON: (I) the Agent may (and, if directed by the Required Banks, shall) do any or all of the following: (a) terminate any Letter of Credit providing for such termination by sending a notice of termination as provided therein; (b) declare the Commitments terminated (whereupon the Commitments shall be terminated); and (c) declare the principal amount then outstanding of and the accrued -71- interest on all Reimbursement Obligations and all fees and all other amounts payable hereunder and under the Applications to be forthwith due and payable, whereupon such amounts shall be and become immediately due and payable, without notice (including notice of acceleration and notice of intent to accelerate), presentment, demand, protest or other formalities of any kind, all of which are hereby expressly WAIVED by the Company; PROVIDED that in the case of the occurrence of an Event of Default with respect to the Company referred to in SECTION 10.1(g) through (l), the Commitments shall be automatically terminated and the principal amount then outstanding of and the accrued interest on the Reimbursement Obligations and fees and all other amounts payable hereunder and under the Applications shall be and become automatically and immediately due and payable, without notice (including notice of intent to accelerate and notice of acceleration) and without presentment, demand, protest or other for- malities of any kind, all of which are hereby expressly WAIVED by the Company; (II) each Bank may exercise its rights of offset against each account and all other property of the Company in the possession of such Bank, which right is hereby granted by the Company to the Banks; and (III) the Agent and each Bank may exercise any and all other rights pursuant to the Credit Documents, at law and in equity. Section 11. THE AGENT. 11.1 APPOINTMENT, POWERS AND IMMUNITIES. Each Bank hereby irrevocably appoints and authorizes the Agent to act as its Agent under the Credit Documents and under the Letters of Credit with such powers as are specifically delegated to the Agent by the terms thereof, together with such other powers as are reasonably incidental thereto, including the execution and delivery of the First Amendment to Deed of Trust (as that term is defined in the Amended and Restated Revolving Credit Agreement). The Agent (which term as used in this SECTION 11 shall include reference to its Affiliates and its own and its Affiliates' officers, directors, employees and agents) shall (a) have no duties or responsibilities except those expressly set forth in the Letters of Credit and the Credit Documents, and shall not by reason of any Credit Document be a trustee or fiduciary for any Bank; (b) not be responsible to any Bank for any recitals, statements, representations or warranties contained in any Credit Document, or in any certificate or other document referred to or provided for in, or received by any of them under, any Credit Document, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of any Credit Document or any other document referred to or provided for therein or any property covered thereby or for any failure by the Company or any other Person to perform any of its obligations thereunder; (c) not be required to initiate or conduct any litigation or collection proceedings hereunder or under any Credit Document except to the extent requested by the Required Banks (and SECTION 11.7 shall apply), and (d) not be responsible for any action taken or omitted to be taken by it under any Credit Document -72- or any other document or instrument referred to or provided for therein or in connection therewith, including pursuant to its own negligence, except for its own gross negligence or willful misconduct. The Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. Without in any way limiting any of the foregoing, each Bank acknowledges that the Agent shall have no greater responsibility in the operation of the Letters of Credit than is specified in the Uniform Customs and Practice of Documentary Credits (1993 Revision, International Chamber of Commerce Publication No. 500). 11.2 RELIANCE BY AGENT. The Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel (which may be counsel for the Company), independent accountants and other experts selected by the Agent. As to any matters not expressly provided for by any Credit Document, the Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and thereunder in accordance with instructions of the Required Banks, and any action taken or failure to act pursuant thereto shall be binding on all of the Banks. 11.3 DEFAULTS. The Agent shall not be deemed to have knowledge of the occurrence of a Default (other than the non-payment of principal of or interest on Reimbursement Obligations) unless it has received notice from a Bank or the Company specifying such Default and stating that such notice is a "Notice of Default". In the event that the Agent receives such a notice of the occurrence of a Default, the Agent shall give prompt notice thereof to the Banks (and shall give each Bank prompt notice of each such non-payment). The Agent shall (subject to SECTIONS 11.7 and 12.5) take such action with respect to such Default as shall be directed by all Banks or the Required Banks, as appropriate, and within its rights under the Credit Documents and at law or in equity; PROVIDED that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, permitted hereby with respect to such Default as it shall deem advisable in the best interests of the Banks and within its rights under the Credit Documents, at law or in equity. 11.4 RIGHTS AS A BANK. With respect to their Commitments, the Letters of Credit and the Reimbursement Obligations, TCB and NationsBank in their capacities as Banks hereunder shall have the same rights and powers hereunder as any other Bank and may exercise the same as though they were not acting as the Agent or the Co-Agents, and the term "Bank" or "Banks" shall, unless the context otherwise indicates, include the Agent and the Co-Agents in their -73- individual capacity. The Agent and the Co-Agents may (without having to account therefor to any Bank) accept deposits from, lend money to and generally engage in any kind of banking, trust, letter of credit, agency or other business with the Company (and any of its Affiliates) as if they were not acting as the Agent and the Co-Agents, and the Agent and the Co-Agents may accept fees and other consideration from the Company and its Affiliates (in addition to the fees heretofore agreed to between the Company and the Agent or the Co-Agents) for services in connection with this Agreement or otherwise without having to account for the same to the Banks. 11.5 INDEMNIFICATION. THE BANKS AGREE TO INDEMNIFY THE AGENT (TO THE EXTENT NOT REIMBURSED UNDER SECTION 12.3 OR 12.4, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE COMPANY UNDER SAID SECTIONS 12.3 AND 12.4), RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE COMMITMENTS, FOR ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, EXPENSES OR DISBURSEMENTS OF ANY KIND AND NATURE WHATSOEVER (INCLUDING THE CONSEQUENCES OF THE NEGLIGENCE OF THE AGENT) WHICH MAY BE IMPOSED ON, INCURRED BY OR ASSERTED AGAINST THE AGENT IN ANY WAY RELATING TO OR ARISING OUT OF ANY CREDIT DOCUMENT (AS DEFINED HEREIN) OR ANY OTHER DOCUMENTS CONTEMPLATED BY OR REFERRED TO THEREIN OR THE TRANSACTIONS CONTEM- PLATED THEREBY (INCLUDING THE COSTS AND EXPENSES WHICH THE COMPANY IS OBLIGATED TO PAY UNDER SECTIONS 12.3 AND 12.4 BUT EXCLUDING, UNLESS A DEFAULT HAS OCCURRED AND IS CONTINUING, NORMAL ADMINISTRATIVE COSTS AND EXPENSES INCIDENT TO THE PERFORMANCE OF ITS AGENCY DUTIES HEREUNDER) OR THE ENFORCEMENT OF ANY OF THE TERMS HEREOF OR THEREOF OR OF ANY SUCH OTHER DOCUMENTS, INCLUDING THE NEGLIGENCE OF THE AGENT; PROVIDED THAT NO BANK SHALL BE LIABLE FOR ANY OF THE FOREGOING TO THE EXTENT THEY ARISE FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE PARTY TO BE INDEMNIFIED. THE OBLIGATIONS OF THE BANKS UNDER THIS SECTION 11.5 SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT. 11.6 NON-RELIANCE ON THE AGENT AND OTHER BANKS. Each Bank agrees that it has received current financial information with respect to the Company and that it has, independently and without reliance on the Agent, the Co-Agents or any other Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis of the Company and decision to enter into this Agreement and that it will, independently and without reliance upon the Agent, the Co-Agents or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under the Credit Documents. The Agent and the Co-Agents shall not be required to keep themselves informed as to the performance or observance by the Company of any Credit Document or any other document referred to or provided for therein or to inspect the property or books of the Company or any other Person. Except for notices, reports and other documents and information expressly required to be furnished to the Banks by the Agent and the Co-Agents under the Credit Documents, the Agent and the Co- -74- Agents shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the affairs, financial condition or business of the Company (or any of its Affiliates) which may come into the possession of the Agent or either Co-Agent. 11.7 FAILURE TO ACT. Except for action expressly required of the Agent under the Credit Documents, the Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction by the Banks of their indemnification obligations under SECTION 11.5 against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 11.8 RESIGNATION OR REMOVAL OF THE AGENT. Subject to the appointment and acceptance of a successor Agent as provided below, the Agent may resign at any time by giving notice thereof to the Banks and the Company, and the Agent may be removed at any time with or without cause by the Required Banks. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation or the Required Banks' removal of the retiring Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent. Any successor Agent shall be a bank which has an office in the United States and a combined capital and surplus of at least $250,000,000 and with its deposits insured by the FDIC. Upon the acceptance of any appointment as the 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 hereunder. Such successor Agent shall promptly specify its Principal Office referred to in SECTIONS 3.1 and 5.1 by notice to the Company. After any retiring Agent's resignation or removal hereunder as the Agent, the provisions of this SECTION 11 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Agent. Section 12. MISCELLANEOUS. 12.1 WAIVER. No waiver of any Default shall be a waiver of any other Default. No failure on the part of the Agent or any Bank to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Credit Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The remedies provided in the -75- Credit Documents are cumulative and not exclusive of any remedies provided by law or in equity. 12.2 NOTICES. All notices and other communications provided for herein (including any modifications of, or waivers or consents under, this Agreement) shall be given or made by telex, telegraph, telecopy (confirmed by mail), cable or other writing and telexed, telecopied, telegraphed, cabled, mailed or delivered to the intended recipient at the "Address for Notices" specified below its name on the signature pages hereof; or, as to any party, at such other address as shall be designated by such party in a notice to the Company and the Agent given in accordance with this Section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telex or telecopier, delivered to the telegraph or cable office or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid. 12.3 EXPENSES, ETC. Whether or not any Letter of Credit is ever issued, the Company shall pay or reimburse on demand each of the Banks, the Agent and the Co-Agents for paying: (a) the reasonable fees and expenses of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., special counsel to the Agent, in connection with (1) the preparation, execution and delivery of the Credit Documents (including the exhibits and schedules hereto), the issuance of the Letters of Credit hereunder and (2) any modification, supplement or waiver of any of the terms of any Credit Document; (b) all reasonable out-of-pocket costs and expenses of the Banks, the Agent and the Co-Agents (including costs of preparing an Independent Engineering Report and reasonable counsels' fees) in connection with any Event of Default under or the enforcement of any Credit Document; (c) all transfer, stamp, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of any Credit Document or any other document referred to therein; and (d) reasonable expenses of due diligence and syndication, and mutually agreed advertising and marketing costs. 12.4 INDEMNIFICATION. THE COMPANY SHALL INDEMNIFY THE AGENT (INCLUDING THE AGENT WHEN ACTING AS ISSUER OF THE LETTERS OF CREDIT), THE CO-AGENTS, THE BANKS, AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS AND COUNSEL FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES TO WHICH ANY OF THEM MAY BECOME SUBJECT, REGARDLESS OF AND INCLUDING LOSSES ARISING FROM THE NEGLIGENCE OF THE AGENT OR THE CO-AGENTS OR THE BANKS OR ANY OTHER INDEMNITEE, (A) IN CONNECTION WITH THE EXECUTION AND DELIVERY OR TRANSFER OF OR PAYMENT OR FAILURE TO PAY UNDER ANY LETTER OF CREDIT, INCLUDING, WITHOUT LIMITATION, ANY CLAIMS, DAMAGES, LOSSES, LIABILITIES, COSTS OR EXPENSES WHICH THE AGENT, SUCH CO-AGENT OR SUCH BANK, AS THE CASE MAY BE, MAY INCUR (WHETHER INCURRED AS A RESULT OF ITS OWN NEGLIGENCE OR OTHERWISE) BY REASON -76- OF OR IN CONNECTION WITH THE FAILURE OF ANY OTHER BANK (WHETHER AS A RESULT OF ITS OWN NEGLIGENCE OR OTHERWISE) TO FULFILL OR COMPLY WITH ITS OBLIGATIONS TO THE AGENT OR SUCH BANK, AS THE CASE MAY BE, HEREUNDER (BUT NOTHING HEREIN CONTAINED SHALL AFFECT THE RIGHTS THE COMPANY MAY HAVE AGAINST SUCH DEFAULTING BANK); AND (B) INSOFAR AS SUCH LOSSES, LIABILITIES, COSTS, EXPENSES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM ANY (A) ACTUAL OR PROPOSED USE BY THE COMPANY OF THE PROCEEDS OF ANY EXTENSION OF CREDIT BY THE AGENT OR ANY BANK HEREUNDER; (B) BREACH BY THE COMPANY OF ANY CREDIT DOCUMENT (AS DEFINED HEREIN); (C) VIOLATION BY THE COMPANY OR ANY OF ITS SUBSIDIARIES OF ANY LEGAL REQUIREMENT INCLUDING APPLICABLE ENVIRONMENTAL LAWS; (D) ANY BANK'S OR THE AGENT'S OR ANY CO-AGENT'S BEING DEEMED AN OWNER OR OPERATOR OF ANY ASSETS OF THE COMPANY OR ITS SUBSIDIARIES BY A COURT OR OTHER REGULATORY OR ADMINISTRATIVE AGENCY OR TRIBUNAL IN CIRCUMSTANCES IN WHICH NEITHER THE AGENT, EITHER CO-AGENT NOR ANY OF THE BANKS IS GENERALLY OPERATING OR GENERALLY EXERCISING CONTROL OVER SUCH ASSETS, TO THE EXTENT SUCH LOSSES, LIABILITIES, CLAIMS OR DAMAGES ARISE OUT OF OR RESULT FROM ANY LEGAL REQUIREMENT INCLUDING APPLICABLE ENVIRONMENTAL LAWS PERTAINING TO THE CONDITION OF SUCH ASSETS, (E) ENVIRONMENTAL CLAIM OR (F) INVESTIGATION, LITIGATION OR OTHER PROCEEDING (INCLUDING ANY THREATENED INVESTIGATION OR PROCEEDING) RELATING TO ANY OF THE FOREGOING, and the Company shall reimburse the Agent, Co-Agent, each Bank, and each Affiliate thereof and their respective directors, officers, employees, agents and counsel, upon demand, for any expenses (including legal fees) incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages, costs or expenses incurred by a Person or any Affiliate thereof or their respective directors, officers, employees, agents or counsel by reason of the gross negligence or willful misconduct of such Person, Affiliate, director, officer, employee, agent or counsel. The obligation of the Company to provide indemnification under this SECTION 12.4 for fees and expenses of counsel shall be limited to the fees and expenses of one counsel in each jurisdiction representing all of the Persons entitled to such indemnification, except to the extent that, in the reasonable judgment of any such indemnified Person, the existence of actual or potential conflicts of interest make representation of all of such indemnified Persons by the same counsel inappropriate; in such a case, the Person exercising such judgment shall be indemnified for the reasonable fees and expenses of its separate counsel to the extent provided in this SECTION 12.4 without giving effect to the first clause of this sentence. Nothing in this SECTION 12.4 is intended to limit the obligations of the Company under any other provision of this Agreement. 12.5 AMENDMENTS, ETC. No amendment or waiver of any provision of any Credit Document, nor any consent to any departure by the Company therefrom, shall in any event be effective unless the same shall be agreed or consented to by the Required Banks and the Company, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; -77- PROVIDED that no amendment, waiver or consent shall, unless in writing and signed by each Bank affected thereby, (a) increase the Commitment of any of the Banks or subject the Banks to any additional obligations; (b) reduce the principal of, or interest on, any Reimbursement Obligation, fee or other sum to be paid under any Credit Document; (c) postpone any scheduled date fixed for any payment of principal of, or interest on, any Reimbursement Obligation, fee or other sum to be paid under any Credit Document; (d) change the percentage of any of the Commitments, or of the aggregate unpaid principal amount of the Reimbursement Obligations, or the number of Banks which shall be required for the Banks or any of them to take any action under this Agreement; (e) change any provision contained in SECTIONS 2.3, 5.2, 5.7, 6, 12.3 or 12.4 or this SECTION 12.5, or in the definition of "Required Ratios". Anything in this SECTION 12.5 to the contrary, no amendment, waiver or consent shall be made with respect to SECTION 11 without the consent of the Agent and the Co-Agents. 12.6 SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and inure to the benefit of the Company, the Agent, the Co-Agents and the Banks and their respective successors and assigns. The Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of all of the Banks. (b) Each Bank may sell participations to any Person in all or part of its Reimbursement Obligation, or all or part of its Commitment, in which event, without limiting the foregoing, the provisions of SECTION 6 shall inure to the benefit of each purchaser of a participation and the PRO RATA treatment of payments, as described in SECTION 5.2, shall be determined as if such Bank had not sold such participation. In the event any Bank shall sell any participation, (1) the Company, the Agent, the Co-Agent and the other Banks shall continue to deal solely and directly with such selling Bank in connection with such selling Bank's rights and obligations under the Credit Documents (including the Applications held by such selling Bank); (2) such Bank shall retain the sole right and responsibility to enforce the Reimbursement Obligations, including the right to approve any amendment, modification or waiver of any provision of this Agreement other than amendments, modifications or waivers with respect to (A) any fees payable hereunder to the Banks, and (B) the amount of principal or the rate of interest payable on, or the dates fixed for the scheduled repayment of principal of, the Reimbursement Obligations and other sums to be paid to the Banks hereunder, and (3) the Company agrees, to the fullest extent it may effectively do so under applicable law, that any participant of a Bank may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such participant were a direct holder of Reimbursement Obligations if such Bank has previously given notice of such participation to the Company. -78- (c) Each Bank may assign to one or more Banks or Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the same portion of the related Reimbursement Obligations at the time owing to it); PROVIDED (1) other than in the case of an assignment to a Person at least 50% owned by the assignor Bank, or by a common parent of both, or to another Bank, the Agent and the Company must give their respective prior written consent, which consent will not be unreasonably withheld; (2) the aggregate amount of the Commitment and/or Reimbursement Obligations of the assigning Bank subject to each such assignment (determined as of the date the Assignment Agreement with respect to such assignment is delivered to the Agent) shall in no event be less than $750,000 (or $75,000 in the case of an assignment between Banks) (except for certain exceptions approved by the Company and the Agent) and shall be in an amount that is an integral multiple of $75,000; (3) the assigning Bank shall contemporaneously assign to such assignee Bank or Eligible Assignee an equal percentage of the assigning Bank's Facility B Commitment and Facility A Commitment (as that term is defined in the Amended and Restated Revolving Credit Agreement) and all of the assigning Bank's other rights and obligations under the Amended and Restated Revolving Credit Agreement; and (4) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in its records, an Assignment Agreement with blanks appropriately completed, together with the Applications subject to such assignment and a processing and recordation fee of $2,000 (for which the Company shall have no liability except in the case of assignments required by the Company pursuant to SECTION 6.1 or 6.2, in which case such fee shall be paid by the Company). Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment Agreement, (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment Agreement, have the rights and obligations of a Bank hereunder, and (B) the Bank making such assignment shall, to the extent provided in such assignment, be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Bank's rights and obligations under this Agreement, such Bank shall cease to be a party hereto). (d) By executing and delivering an Assignment Agreement, the Bank assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby, such assignor Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Credit Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Credit Document; (2) such assignor Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Company or the -79- performance or observance by the Company of any of its obligations under any Credit Document; (3) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements of the Company previously delivered in accordance herewith and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment Agreement; (4) such assignee will, independently and without reliance upon the Agent, such assignor Bank or any other Bank and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Documents; (5) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Documents as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of the Credit Documents are required to be performed by it as a Bank. (e) The Agent shall maintain at its office a copy of each Assignment Agreement delivered to it and a record of the names and addresses of the Banks and the Commitment of, and principal amount of the Reimbursement Obligations owing to, each Bank from time to time. The entries in such record shall be conclusive, in the absence of manifest error, and the Company, the Agent and the Banks may treat each Person the name of which is recorded therein as a Bank hereunder for all purposes of the Credit Documents. Such records shall be available for inspection by the Company or any Bank at any reasonable time and from time to time upon reasonable prior notice. (f) Upon its receipt of an Assignment Agreement executed by an assigning Bank and the assignee thereunder together with the Application subject to such assignment, the written consent to such assignment and the fee payable in respect thereto, the Agent shall, if such Assignment Agreement has been completed with blanks appropriately filled, (1) accept such Assignment Agreement; (2) record the information contained therein in its records, and (3) give prompt notice thereof to the Company. (g) Any Bank may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company furnished to such Bank by or on behalf of the Company. (h) Any assignment by a Bank pursuant to this SECTION 12.6 shall not result in any single Bank holding in excess of 25% of the Aggregate Commitment at any one time. -80- (i) Notwithstanding any other provision of this SECTION 12.6, TCB and its Affiliates may not assign their rights hereunder unless, after giving effect to such assignment, TCB and its Affiliates would have an aggregate Commitment Percentage of at least 10%. (j) Notwithstanding anything herein to the contrary, each Bank may pledge and assign all or any portion of its rights and interests under the Credit Documents to any Federal Reserve Bank. 12.7 SURVIVAL; TERM; REINSTATEMENT. In addition to the other provisions of this Agreement expressly stated to survive the termination of this Agreement, the obligations of the Company under SECTIONS 6, 12.3 and 12.4 and the last sentence of this SECTION 12.7 and the obligations of the Banks under SECTION 12.8 shall survive the termination of this Agreement. The term of this Agreement shall be until (a) the full and final payment of all Reimbursement Obligations, (b) the expiry of all Letters of Credit, (c) the termination of all Commitments and (d) the payment of all amounts due under the Credit Documents. The Company agrees that if at any time all or any part of any payment previously applied by any Bank to any Reimbursement Obligation or other sum hereunder is or must be returned by or recovered from such Bank for any reason (including the order of any bankruptcy court), the Credit Documents shall automatically be reinstated to the same effect as if the prior application had not been made, and the Company hereby agrees to indemnify such Bank against, and to save and hold such Bank harmless from, any required return by or recovery from such Bank of any such payment because of its being deemed preferential under applicable Legal Requirements, or for any other reason. 12.8 LIMITATION OF INTEREST. The parties to this Agreement intend to strictly comply with all applicable laws, including applicable usury laws. Accordingly, the provisions of this Section shall govern and control over every other provision of any Credit Document which conflicts or is inconsistent with this Section, even if such provision declares that it controls. As used in this SECTION 12.8, the term "interest" includes the aggregate of all charges, fees, benefits or other compensation which constitute interest under applicable law; PROVIDED that, to the maximum extent permitted by applicable law, (a) any non-principal payment shall be characterized as an expense or as compensation for something other than the use, forbearance or detention of money, and not as interest and (b) all interest at any time contracted for, taken, reserved, retained, charged or received shall be amortized, prorated, allocated and spread, in equal parts during the full term of this Agreement and the Commitments. In no event shall the Company or any other Person be obligated to pay, or the Agent or any Bank have any right or privilege to reserve, receive or retain, (x) any interest in excess of the maximum amount of nonusurious interest permitted under the laws of the State of Texas or the applicable laws (if any) of the United States or of any other state -81- or (y) total interest in excess of the amount which the Agent or such Bank could lawfully have contracted for, taken, reserved, received, retained or charged had the interest been calculated for the full term of this Agreement at the Highest Lawful Rate. On each day, if any, that the interest rate (the "STATED RATE") called for under any Credit Document exceeds the Highest Lawful Rate, the rate at which interest shall accrue shall automatically be fixed by operation of this sentence at the Highest Lawful Rate for that day, and shall remain fixed at the Highest Lawful Rate for each day thereafter until the total amount of interest accrued equals the total amount of interest which would have accrued if there were no such ceiling rate as is imposed by this sentence. Thereafter, interest shall accrue at the Stated Rate unless and until the Stated Rate again exceeds the Highest Lawful Rate when the provisions of the immediately preceding sentence shall again automatically operate to limit the interest accrual rate. The daily interest rates to be used in calculating interest at the Highest Lawful Rate shall be determined by dividing the applicable Highest Lawful Rate per annum by the number of days in the calendar year for which such calculation is being made. None of the terms and provisions contained in any Credit Document which directly or indirectly relate to interest shall ever be construed without reference to this Section, or be construed to create a contract to pay for the use, forbearance or detention of money at an interest rate in excess of the Highest Lawful Rate. If the term of this Agreement is shortened by reason of acceleration of maturity as a result of any Default or by any other cause, or by reason of any required or permitted prepayment, and if for that (or any other) reason the Agent or any Bank at any time, including the stated maturity, is owed or receives (and/or has received) interest in excess of interest calculated at the Highest Lawful Rate, then and in any such event all of any such excess interest shall be canceled automatically as of the date of such acceleration, prepayment or other event which produces the excess, and, if such excess interest has been paid to the Agent or such Bank, it shall be credited PRO TANTO against the then-outstanding principal balance of the Company's obligations to the Agent or such Bank, effective as of the date or dates when the event occurs which causes it to be excess interest, until such excess is exhausted or all of such principal has been fully paid and satisfied, whichever occurs first, and any remaining balance of such excess shall be promptly refunded to its payor. 12.9 CAPTIONS. Captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Agreement. 12.10 COUNTERPARTS. Each Credit Document may be executed in any number of counterparts, all of which taken together shall constitute one and the same agreement and any of the parties hereto may execute such Credit Document by signing any such counterpart. -82- 12.11 GOVERNING LAW. EXCEPT TO THE EXTENT OTHERWISE SPECIFIED THEREIN, EACH CREDIT DOCUMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS AND THE UNITED STATES OF AMERICA. THE COMPANY HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS AND OF ANY TEXAS STATE COURT SITTING IN HARRIS COUNTY, TEXAS FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 12.12 SEVERABILITY. Whenever possible, each provision of the Credit Documents shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of any Credit Document shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions of such Credit Document shall not be affected or impaired thereby. 12.13 CHAPTER 15 NOT APPLICABLE. Chapter 15 of the Texas Credit Code shall not apply to any Credit Document or to any Commitment or Letter of Credit or Application or Reimbursement Obligation, nor shall any Credit Document be governed by or be subject to the provisions of such Chapter 15 in any manner whatsoever. -83- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered effective as of the day and year first above written. SANTA FE ENERGY RESOURCES, INC., a Delaware corporation By:M. J. ROSINSKI M. J. Rosinski, Vice President and Chief Financial Officer Address for Notices: Santa Fe Energy Resources, Inc. 1616 South Voss, Suite 1000 Houston, Texas 77057 Telecopy: (713) 268-5341 Attention: Vice President-Finance Telex: 794-567 (Answerback: SFEPROD HOU) TEXAS COMMERCE BANK NATIONAL ASSOCIATION, individually, as Administrative Agent and as Co-Agent By:JAMES R. MCBRIDE James R. McBride Senior Vice President Address for Notices: Texas Commerce Bank National Lending Offices: Association 712 Main Street Texas Commerce Bank National Houston, Texas 77002 Association Attention: Manager, Energy Group ABA #113000609 Telecopy: (713) 236-4117 For Credit To: Acct. #10967 Telex: 166-053 (Answerback:TCB HOU) Attention: Investment Operations/Norma Benzon with copies to: Reference: Santa Fe Energy Resources, Inc. Texas Commerce Bank National Association P. O. Box 2558 Commitment: $1,971,428.59 Houston, Texas 77252 Attention: Manager, Capital Markets Division and Texas Commerce Bank National Association P. O. Box 2558 Houston, Texas 77252 Attention: Manager, Loan Agreements Division NATIONSBANK OF TEXAS, N.A., individually and as Co-Agent By:H. GENE SHIELS Name:H. Gene Shiels Title:Vice President Address for Notices: Lending Offices: NationsBank of Texas, N.A. NationsBank of Texas, N.A. ABA #111000025 700 Louisiana For Credit to: Acct. # P.O. Box 2518 0180019828 Houston, Texas 77252-2518 Attention: Loan Funds Attention: H. Gene Shiels Transfer Telecopy: (713) 247-6432 Reference: Santa Fe Energy Resources, Inc. Commitment: $1,885,714.29 THE BANK OF NEW YORK By:DANIEL T. GATES Name:Daniel T. Gates Title:Vice President Lending Office: Address for Notices: The Bank of New York ABA #021000018 The Bank of New York For Credit To: Special One Wall Street, 19th Floor Financial Products Dept. New York, New York 10286 Account No. 803-329-7689 Attention: Daniel T. Gates Reference: Santa Fe Energy Telecopy: (212) 635-7923 Resources, Inc. Telex: 420-268 (Answerback:BONY UR) Specify fees, period. With a copy to: Commitment: $1,542,857.14 The Bank of New York One Wall Street, 19th Floor New York, N.Y. 10286 Attention: Ann Marie Schron Telecopy: (212) 635-7923 Telex: 232 060 (Answerback: BONY UR) THE BANK OF NOVA SCOTIA By:A. S. NORSWORTHY Name:A. S. Norsworthy Title:Assistant Agent Address for Notices: Lending Office: Bank of Nova Scotia, New The Bank of Nova Scotia York Agency 600 Peachtree Street, Suite 2700 ABA #026002532 Atlanta, Georgia 30308 For Credit To: Atlanta Agency Attention: Claude Ashby Account #0606634 Telecopy: (404) 888-8998 Reference: Santa Fe Energy Telex: 00542319 Resources, Inc. (Answerback: SCOTIABANK ATL) Commitment: $1,542,857.14 with a copy to: The Bank of Nova Scotia 1100 Louisiana, Suite 3000 Houston, Texas 77002 Attention: Mark Ammerman Telecopy: (713) 752-2425 BANK OF MONTREAL By:MARK M. GREEN Name:Mark M. Green Title:Director Address for Notices: Lending Offices: Harris Bank Bank of Montreal ABA #071000288 700 Louisiana, Suite 4400 For Credit To: Bank of Houston, Texas 77002 Montreal, Chicago Branch Attention: Dennis Spencer Attention: E. Rios Telecopy: (713) 223-4007 Reference: Santa Fe Energy Telex: 77-5640 Resources, Inc. (Answerback: BKMONTREAL HOU) Commitment: $1,714,285.71 CIBC, INC. By:J. D. WESTLAND Name:J. D. Westland Title:Vice President Address for Notices: Lending Offices: Morgan Guaranty Trust CIBC, Inc. Company of New York Two Paces West, 2727 Paces Ferry Road ABA #021-000-238 Suite 1200 For Credit To: CIBC, Atlanta, Georgia 30339 Atlanta Acct. #630-00-480 Attention: Vice President For Further Credit To: Telephone: (404) 319-4999 Acct. #0701610 Telecopier No.: (404) 319-4950 Attention: Loan Operations Telex: 54-2413 Reference: Santa Fe Energy answer back: CANBANK ATL Resources, Inc. Commitment: $1,542,857.14 with a copy to: Canadian Imperial Bank of Commerce 2 Houston Center, Suite 1200 Houston, Texas 77010 Attention: Brian R. Swinford Telecopy: (713) 658-9922 BANQUE PARIBAS HOUSTON AGENCY By:BRIAN MALONE Name:Brian Malone Title:Vice President By:PATRICK J. MILOR Name:Patrick J. Milor Title:SVP-Deputy General Manager Address for Notices: Lending Offices: Bankers Trust Co. Banque Paribas Houston Agency ABA #02-100-1033 1200 Smith Street, Suite 3100 Houston, Texas 77002 For Credit To: Banque Attention: Brian Malone Paribas New York Telecopy: (713) 659-3832 #04202195 Final Credit 2144-001545 Banque Paribas Houston Agency Reference: Santa Fe Energy Resources, Inc. Commitment: $1,542,857.14 THE FIRST NATIONAL BANK OF BOSTON By:FRANK T. SMITH Name:Frank T. Smith Title:Director Address for Notices: Lending Offices: Bank of Boston The First National Bank of Boston ABA #011000390 100 Federal Street Boston, Massachusetts 02110 For Credit To: Attention: George W. Passela not applicable Telecopy: (617) 434-3652 Reference: Santa Fe Energy Resources, Inc. Commitment: $1,542,857.14 ABN AMRO Bank N.V., HOUSTON AGENCY By:W. BRYAN CHAPMAN Name:W. Bryan Chapman Title:Vice President By:CHARLES W. RANDALL Name:Charles W. Randall Title:Group Vice President Address for Notices: Lending Offices: ABN AMRO New York ABN AMRO Bank N.V., Houston Agency ABA #026009580 Three Riverway, Suite 1600 Houston, Texas 77056 For Credit To: ABN AMRO Attention: Mr. Bryan Chapman Houston Agency Telecopy: (713) 629-7533 Acct. #651001071541 Reference: Santa Fe Energy Resources, Inc. Commitment: $1,714,285.71 EXHIBITS: A - Form of Application B - Assignment Agreement C - Preliminary Available Amount SCHEDULES: I - Restricted and Unrestricted Subsidiaries II - Liens and Funded Debt III - Initial Approved Assumptions and Price Protection Agreements IV - Coverage Report V - Subordination Provisions VI - Opinion of Andrews & Kurth, L.L.P. VII - Opinion of David L. Hicks VIII - Existing Letters of Credit IX - Jurisdictions for Which Certificates Are to Be Provided X - Designated Debt EX-23.A 11 CONSENT PRICE WATERHOUSE INDEPENDENT ACCOUNTANTS EXHIBIT 23(A) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 33-37175, 33-44541 and 33-44542) of Santa Fe Energy Resources, Inc. of our report dated February 18, 1994 appearing on page 31 of this Form 10-K. PRICE WATERHOUSE Houston, Texas March 22, 1994 EX-23.B 12 CONSENT RYDER SCOTT COMPANY PETROLEUM ENGINEERS EXHIBIT 23(B) CONSENT OF EXPERTS As petroleum engineers, we hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-8 (Nos. 33-37175, 33-44541 and 33-44542) of Santa Fe Energy Resources, Inc. of our oil and gas reserve reports as of December 31, 1990, December 31, 1991, December 31, 1992 and December 31, 1993 included in the Santa Fe Resources, Inc. Form 10-K for the year ended December 31, 1993. RYDER SCOTT COMPANY PETROLEUM ENGINEERS Houston, Texas March 21, 1994 EX-24.ASC 13 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY Know all men by these presents that J. L. PAYNE, constitutes and appoints M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 J. L. PAYNE J. L. Payne POWER OF ATTORNEY Know all men by these presents that R. F. DAMMEYER constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 R. F. DAMMEYER R. F. Dammeyer POWER OF ATTORNEY Know all men by these presents that W. E. GREEHEY constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 W. E. GREEHEY W. E. Greehey POWER OF ATTORNEY Know all men by these presents that M. N. KLEIN constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 M. N. KLEIN M. N. Klein POWER OF ATTORNEY Know all men by these presents that R. D. KREBS constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 R. D. KREBS R. D. Krebs POWER OF ATTORNEY Know all men by these presents that A. V. MARTINI constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 A. V. Martini POWER OF ATTORNEY Know all men by these presents that M. A. MORPHY constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 M. A. MORPHY M. A. Morphy POWER OF ATTORNEY Know all men by these presents that R. F. RICHARDS constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 R. F. RICHARDS R. F. Richards POWER OF ATTORNEY Know all men by these presents that DAVID M. SCHULTE constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 DAVID M. SCHULTE David M. Schulte POWER OF ATTORNEY Know all men by these presents that M. J. SHAPIRO constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 M. J. SHAPIRO M. J. Shapiro POWER OF ATTORNEY Know all men by these presents that R. F. VAGT constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 R. F. VAGT R. F. Vagt POWER OF ATTORNEY Know all men by these presents that K. D. WRISTON constitutes and appoints J. L. PAYNE, M. J. ROSINSKI and DAVID L. HICKS and each or any of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign in his name to the Annual Report on Form 10-K of SANTA FE ENERGY RESOURCES, INC. for the fiscal year ended December 31, 1993 and to file the same, and with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their substitutes may lawfully do or cause to be done by virtue hereof. Dated: February 18, 1994 K. D. WRISTON K. D. Wriston -----END PRIVACY-ENHANCED MESSAGE-----