EXHIBIT A
The Agreement by and Between Gateway Energy Corporation And Its
Wholly-Owned Subsidiaries and Xxxxx Drilling Acquisition Company
AGREEMENT
THIS AGREEMENT, made this 6th day of March, 2003, by and between
Gateway Energy Corporation, a Delaware corporation, and its wholly owned
subsidiaries, Gateway Processing Company, a Texas corporation, and Gateway
Pipeline Company, a Texas corporation, hereinafter collectively called "Gateway"
and Xxxxx Drilling Acquisition Company, a Nebraska corporation, hereinafter
called "ADAC".
W I T N E S S E T H:
WHEREAS, Gateway Processing Company is a party to a certain First
Amended and Restated Master Agreement dated September 12, 2002, by and between
Redwood Energy Production, L.P., Gateway Processing Company and Hanover
Compression Limited Partnership, and the ancillary agreements contained therein,
as same have been or may be amended from time to time, hereinafter referred to
as the "Restated Master Agreement"; and
WHEREAS, pursuant to the terms of the Restated Master Agreement Gateway
is required to construct approximately 48,500 feet of ten-inch pipeline, 500
feet of four-inch pipeline, 3,000 feet of three-inch pipeline and related
facilities located in Madison County, Texas, which, together with all related
assets, easements, rights of way and contract rights whatsoever, are hereinafter
collectively referred to as the "Pipeline Facilities"; and
WHEREAS, Gateway has a Term Loan with Southwest Bank of Texas
("Southwest Bank") in the original principal amount of One Million Five Hundred
Thousand Dollars ($1,500,000) ("Southwest Bank Term Loan") which provides a
portion of the funds required to construct the Pipeline Facilities; and
WHEREAS, in order for Gateway to complete construction of the Pipeline
Facilities, and for other corporate purposes, it is necessary for Gateway to
obtain additional financing from Southwest Bank in the amount of Nine Hundred
Thousand Dollars ($900,000); and
WHEREAS, in order to obtain such financing it is necessary for Gateway
to provide credit enhancements to Southwest Bank, in the form of a letter of
credit or other secured guarantee; and
WHEREAS, ADAC has agreed to provide such credit enhancement; and
WHEREAS, as consideration for providing such credit enhancement ADAC is
to be paid certain compensation as described herein, and further ADAC is to have
the option to elect to receive an equity position in the Pipeline Facilities;
and
WHEREAS, the parties hereto now desire to enter into an Agreement
providing for the provision of the credit enhancement, and the compensation to
be paid by Gateway to ADAC for the credit enhancement, and the option of ADAC to
acquire an ownership interest in the Pipeline Facilities.
NOW, THEREFORE, in consideration of the foregoing, and in consideration
of the mutual covenants herein contained, the parties hereto agree as follows:
1. Incorporation of Recitals. The foregoing recitals are specifically
incorporated in this Agreement by this reference.
2. Definitions. ADAC acknowledges receipt of a complete copy of the
Restated Master Agreement. Capitalized terms used in this Agreement, and not
defined in this Agreement, shall have the same meaning as set forth in the
Restated Master Agreement. Gateway shall give written notice to ADAC of any
change or modification that is made to the Restated Master Agreement or any
agreement or document related thereto within ten (10) calendar days after such
change or modification is made, provided, however, that neither the Restated
Master Agreement nor any agreement or document related thereto shall be modified
in any way that may be reasonably expected to have a material adverse impact on
ADAC unless fifteen (15) days' prior written notice has been given to ADAC of
the proposed modification.
3. Terms of the Term Note. Gateway shall arrange to borrow from
Southwest Bank an amount not to exceed Nine Hundred Thousand Dollars ($900,000)
(the "Loan"). The Loan shall be represented by a Term Note which shall be due
and payable three (3) years after the date of the Term Note (the "Maturity
Date"). Interest only shall be payable at least annually at a rate not to exceed
eight percent (8%) per annum. Interest shall be payable more frequently if
Gateway and Southwest Bank so agree. The entire outstanding principal balance of
the Loan shall be due and payable on the Maturity Date. The terms of the Loan
shall incorporate such other provisions not inconsistent with the foregoing as
shall be agreeable to Southwest Bank and to Gateway, in their discretion,
provided, however, that the loan documents comprising and surrounding the Term
Note proposed to be made to Gateway by Southwest Bank shall be also subject to
the approval of ADAC in its discretion; provided, however, that in the exercise
of its discretion ADAC shall not refuse to consent to any loan document or any
term or terms in the loan documents comprising or surrounding the Term Note for
the sole reason that the Term Note will contain cross-collateralization and
cross-default provisions with regard to the Southwest Bank Term Loan. Gateway
agrees to promptly furnish to ADAC copies of all documents comprising or
surrounding the Term Note and to inform ADAC promptly, at all times during the
term of the Term Note, of any activity on the Term Note that may have a material
adverse impact on ADAC. Further, Gateway agrees to promptly, upon
execution hereof, furnish to ADAC copies of all documents comprising or
surrounding the Southwest Bank Term Loan and the Legacy Bank Loan (hereinafter
defined), including all documents relating to the original execution of such
loans, the current status of such loans, and to matters regarding Gateway's
performance of its obligations under the loans and to inform ADAC promptly, at
all times during the term of the Term Note, of any activity on the Southwest
Bank Term Loan and the Legacy Bank Loan that may have a material adverse impact
on ADAC
Title to the assets, properties and securities in which ADAC is to be
given a security interest shall be marketable title, subject only to the prior
lien of Southwest Bank on the Pipeline Facilities and on the Waxahachie Pipeline
System (referred to in Paragraph 7(a) hereof) and to the prior lien of Legacy
Bank on the FCFA assets (referred to in Paragraph 7(b) hereof).
4. Credit Enhancement by ADAC. ADAC will provide one or more letters of
credit in the aggregate amount of Nine Hundred Thousand Dollars ($900,000) from
a bank or banks which are acceptable to Southwest Bank in its sole discretion,
and on terms acceptable to Southwest Bank, which letter(s) of credit shall
secure and guarantee payment of the principal amount of Nine Hundred Thousand
Dollars ($900,000) pursuant to the Term Note. At ADAC's option, and subject to
the agreement of Southwest Bank, ADAC may provide a form of secured guarantee
other than a letter of credit. Southwest Bank shall be under no obligation to
accept another form of security other than a commercial letter of credit from a
bank or banks acceptable to Southwest Bank. The provision of the credit
enhancement by ADAC will be represented by a promissory note executed by Gateway
in favor of ADAC (the "ADAC Loan") in the form of Exhibit 1 attached hereto, and
secured as provided for herein.
5. Payments to ADAC. On condition that Southwest Bank loans to Gateway
the sum of Nine Hundred Thousand Dollars ($900,000) in accordance with the terms
and conditions set forth in paragraph 3 above, which includes the credit
enhancement by ADAC as set forth in paragraph 4 above, then in that event and
only in that event Gateway agrees to compensate ADAC as follows:
(a) Commencing in the first month following the month in which
start-up of the Treatment Plant and Pipeline Facilities occurs pursuant
to the Restated Master Agreement, and in each month thereafter during
the term of the Term Note, Gateway shall pay to ADAC an amount equal to
fifty percent (50%) of the price upside portion only (i.e. related to
the Resale Price and MMBtus Delivered) of the Floating Monthly Treating
Fee received by Gateway for said month (the "Price Upside Payment").
Gateway will be entitled to retain all of the Fixed Monthly Treating
Fee and the balance of the price upside portion of the Floating Monthly
Treating Fee.
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(b) In addition, if, on the Maturity Date or Modified Maturity Date
(as defined in Section 6 below) of the Term Note, the total of the
Price Upside Payments paid to ADAC by Gateway pursuant to paragraph (a)
above, plus Nine Hundred Thousand Dollars ($900,000) deemed to have
been repaid to ADAC when Gateway pays off the Term Note (the "Deemed
Repayment") does not result in ADAC achieving at least a pre-tax
fifteen percent (15%) internal rate of return (the "Target Return") on
Nine Hundred Thousand Dollars ($900,000) deemed to have been loaned to
Gateway by ADAC on the first day of the Term Note, then Gateway will
pay to ADAC an additional lump sum amount which, when added to the
Price Upside Payments previously paid and the Deemed Repayment, will
provide the Target Return to ADAC. By way of illustration only, there
is attached hereto as Exhibit 2 an example showing the methodology of
the computation of the Target Return. Nothing herein shall be construed
to allow or require the payment to ADAC of any amount that is
considered usurious under applicable law.
6. Equity Participation Option. Notwithstanding any provision to the
contrary contained either in this Agreement or in any of the documents
comprising or executed in connection with the Term Note, the parties hereto
agree:
(a) Option on or Prior to Maturity Date. ADAC shall have the sole
and exclusive option to pay off the unpaid principal balance of the
Term Note on or before the Maturity Date. Gateway hereby stipulates and
agrees that it will not pay off the Term Note prior to the Maturity
Date, nor shall Gateway solicit or permit any third party to pay off
the Term Note prior to the Maturity Date, except with the prior written
consent of ADAC. At all times the obligation to pay interest owed on
the Term Note shall remain the sole obligation of Gateway.
(i) Notice. In order to elect the option to pay off the unpaid
principal balance of the Term Note, ADAC must notify Gateway of its
election in writing ninety (90) days prior to the date ADAC will pay
off the balance of the Term Note, but in no event later than ninety
(90) days prior to the Maturity Date. Failure of ADAC to so notify
Gateway at least ninety (90) days prior to the Maturity Date shall
be conclusively deemed a waiver by ADAC of this option.
(ii) Effect of Payment of Term Note. In the event that ADAC
elects to pay off the unpaid principal balance of the Term Note on
or before the Maturity Date, then effective the date the Term Note
is paid off by ADAC ("Pay Off Date") ADAC shall receive thirty three
and one-third percent (33 1/3%) ownership interest in the Pipeline
Facilities with
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the remaining interest of sixty six and two thirds percent (66 2/3%)
owned by Gateway, as further described below.
(iii) Organization of LLC. In the event that ADAC elects this
Equity Participation Option, the parties agree that on or before the
Pay Off Date Gateway shall cause to be organized under the laws of
the State of Texas a limited liability company (the "LLC"). The LLC
shall be owned thirty three and one-third percent (331/3%) by ADAC
and sixty six and two-thirds percent (662/3%) by Gateway. Gateway
will transfer to the LLC the Pipeline Facilities and related
agreements, together with the Restated Master Agreement, subject
only to the Southwest Bank Term Loan. The Pipeline Facilities shall
be subject to no liens or encumbrances whatsoever other than: (i)
the Southwest Bank Term Loan; and (ii) any other lien or encumbrance
incurred by Gateway in the ordinary course of business and directly
related to or arising out of the construction or operation of the
Pipeline Facilities, provided such lien or encumbrance was first
approved by ADAC, which approval shall not be unreasonably withheld.
The LLC shall own and operate the Pipeline Facilities and have the
obligation to perform all obligations of Gateway under and pursuant
to the Restated Master Agreement and other agreements related to the
Pipeline Facilities and to pay the principal and interest payments
and perform all other terms of the Southwest Bank Term Loan.
Attached hereto as Exhibit 3 are the major terms and conditions
under which the LLC shall be organized, which terms and conditions
shall be incorporated in the Articles of Organization and the
Operating Agreement of the LLC. The Articles of Organization and the
Operating Agreement shall contain such other terms as shall be
agreeable to the parties, and shall be reasonable and consistent
with transactions of similar size and magnitude.
(iv) No Target Return. In the event that ADAC elects to exercise
its option to pay off the unpaid principal balance of the Term Note
at any time on or before the Maturity Date and to acquire an
ownership interest in the Pipeline Facilities as set forth in this
paragraph 6(a), ADAC shall be entitled to retain any and all Price
Upside Payments previously paid to ADAC pursuant to the terms of
this Agreement, but ADAC shall not be entitled to the Target Return
nor shall ADAC be entitled to receive any lump sum amount from
Gateway.
(b) Extension of Maturity Date. Gateway and Southwest Bank shall
have the right to change the Maturity Date to a date beyond the
Maturity Date (the "Modified Maturity Date"), provided, however, that
the Maturity Date of the Term Note may not be extended or modified
without
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ADAC's prior written approval. In the event the Maturity Date of the
Term Note is so extended, then:
(i) Option on or Before Modified Maturity Date. ADAC may elect
to exercise its option to pay off the unpaid principal balance of
the Term Note on or before the Modified Maturity Date and to acquire
an ownership interest in the Pipeline Facilities effective on the
Pay Off Date. All of the provisions of paragraph 6(a) except as set
forth specifically in this paragraph 6(b) shall apply to the
exercise of such option. ADAC shall be entitled to retain any and
all Price Upside Payments previously paid to ADAC pursuant to the
terms of this Agreement; provided, however, that it is agreed that
if and only if ADAC pays off the unpaid principal balance of the
Term Note after the Maturity Date but on or before the Modified
Maturity Date, then ADAC shall in that event be entitled to the
Target Return.
(ii) Calculation of Target Return. It is specifically understood
by the parties that if ADAC pays off the Term Note after the
Maturity Date but on or before the Modified Maturity Date then (i)
the Nine Hundred Thousand Dollar ($900,000) principal payment made
by ADAC will be deemed to have been repaid to ADAC and thus be a
Deemed Repayment solely for the purposes of calculating the lump sum
amount, if any, to be paid by Gateway to ADAC in order for ADAC to
achieve the Target Return; and (ii) Gateway shall have no obligation
to pay the Deemed Repayment to ADAC.
(c) Payoff of Term Note by Gateway:
(i) Default. Notwithstanding anything to the contrary contained
in this Agreement, ninety (90) days prior to the Maturity Date, ADAC
may demand that Gateway pay the Term Note in full and cause the
release of the entire amount of the credit enhancement provided by
ADAC. If ADAC makes such demand, Gateway shall have until the
Maturity Date to pay off the Term Note and cause the release to ADAC
of the credit enhancement. If Gateway does not pay off the Term Note
and cause the release of the credit enhancement on the Maturity Date
and provided that the Maturity Date is extended by Southwest Bank,
then for a period of ninety (90) days or the number of days by which
the Maturity Date has been extended, whichever is less, Gateway
agrees to pay to ADAC the amount of Nine Hundred Twenty Five Dollars
($925) for each and every calendar day after the Maturity Date
during which Gateway has failed to pay off the Term Note and cause
the release of the credit enhancement. If ADAC does not elect the
Equity Participation Option and if Gateway does not pay off the Term
Note and cause the release of the credit enhancement on
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the Maturity Date, then ADAC may deem the ADAC Loan to be in default
and may take any and all legal action and pursue any and all
available remedies to which it may be entitled. Notwithstanding the
foregoing, if for any reason Southwest Bank declares the Term Note
to be due and payable prior to the Maturity Date or prior to any
Modified Maturity Date, and if Gateway fails to pay off the Term
Note and cause the release of the credit enhancement on or before
the earlier date by which Southwest Bank demands payment, then ADAC
may also deem the ADAC Loan to be in default on such earlier date.
(ii) Satisfaction of Improper Liens or Encumbrances. If ADAC
exercises the Equity Participation Option under any of the
circumstances allowed in this Agreement, and if upon the transfer of
the Pipeline Facilities to the LLC there exists any lien or
encumbrance whatsoever upon the Pipeline Facilities other than the
Southwest Bank Term Loan and such other liens or encumbrances as
have been previously and specifically approved in writing by ADAC,
then any such lien or encumbrance shall be satisfied wholly out of
Gateway's interest in distributions of cash from the LLC; provided,
that ADAC shall have the sole and exclusive option to pay whatever
amount may be necessary to cause the release and satisfaction of
such lien or encumbrance, in which event all cash distributions from
the LLC and attributable to Gateway's interest in the LLC shall be
paid to ADAC until ADAC shall have received distributions equal to
the amount paid by ADAC to release and satisfy the lien or
encumbrance plus interest on such amount at the prime rate of
interest reported by The Wall Street Journal, plus three percent
(3%); provided, however, that ADAC shall not have the right to pay
and cause the release and satisfaction of any lien or encumbrance
which is being contested in good faith by Gateway for so long as
Gateway continues to contest the lien or encumbrance in good faith,
and for so long as the interest of ADAC is not thereby jeopardized
in ADAC's reasonable discretion.
7. Additional Agreements of the Parties. The parties hereto further
agree as follows:
(a) As soon as is reasonably practicable, and in all events within
thirty (30) days of the funding of the Term Note as provided in this
Agreement and in the separate Loan Agreement between Gateway and
Southwest Bank, Gateway will execute such collateral documents as are
necessary to provide ADAC a security interest and liens on the Pipeline
Facilities and on Gateway's Waxahachie Pipeline System in Xxxxx County,
Texas. The liens shall be subordinate only to a lien granted by Gateway
in favor of Southwest Bank.
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(b) As soon as is reasonably practicable, and in all events within
thirty (30) days of the funding of the Term Note as provided in this
Agreement and in the separate Loan Agreement between Gateway and
Southwest Bank, Gateway will execute such collateral documents as shall
be necessary to provide ADAC with a security interest and lien on the
assets of Gateway's Fort Xxxx Fuel Authority, LLC ("FCFA") subsidiary,
including giving a lien to ADAC on the ownership unit(s) of FCFA. This
lien shall be subordinate only to a lien granted by Gateway in favor of
Legacy Bank (the "Legacy Bank Loan"). Gateway warrants, covenants and
agrees, on behalf of itself and on behalf of FCFA, that it will take
whatever action may be necessary to obtain any necessary approval or
consent to the granting of the security interests herein described, if
such approval or consent be required from the Oklahoma Corporation
Commission or from any other agency or entity. ADAC acknowledges
receipt of a complete copy of an appraisal dated in March of 2001, and
prepared by Business Valuations and Appraisers, LLC, which lists and
indicates the appraised value of all of the assets of FCFA. Gateway
covenants, warrants and agrees that, other than the security interests
and liens existing as of the date hereof in favor of Legacy Bank and to
be granted to ADAC, Gateway shall not allow any liens or encumbrances
to be placed against the assets of FCFA or the membership units of FCFA
which are senior to the lien of ADAC.
(c) As used in this Agreement, the documents necessary to grant a
security interest and lien on assets shall include all documents as
shall be reasonably required, including, but not limited to, a Deed of
Trust or Deeds of Trust, Security Agreement, Pledge Agreement,
Financing Statement, Assignment, or such other collateral documents as
shall be necessary to grant to the secured party a security interest
and subordinated lien on all specified assets.
(d) Upon request by ADAC, and upon submission of a statement
generally describing legal services rendered and out-of-pocket expenses
incurred, Gateway will reimburse ADAC for its reasonable attorneys'
fees incurred by ADAC associated with the review, drafting and filing
of documents related to this transaction, not to exceed, however, the
aggregate amount of Twelve Thousand Five Hundred Dollars ($12,500).
(e) Notwithstanding anything in this Agreement to the contrary, if
the collateral documents necessary to provide ADAC with the security
interests and liens contemplated in subparagraphs (a), (b) and (c)
above are not executed within said thirty (30) day period and if the
collateral documents as prepared and requested by ADAC are identical to
the collateral documents executed by Gateway in favor of Southwest Bank
and
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Legacy Bank in all material respects, and if the delay in executing
such documents is fairly attributable in material part to Gateway, then
in that event Gateway agrees that ADAC shall have the sole and
exclusive option to assume control and operation of the Pipeline
Facilities, and all related assets and agreements, upon five (5) days'
written notice to Gateway. Gateway shall have the right to resume
control and operation of the Pipeline Facilities at such time as (i)
all collateral documents necessary to provide ADAC with the security
interests and liens contemplated herein have been executed and filed to
ADAC's satisfaction and (ii) Gateway reimburses ADAC for the reasonable
costs, fees and expenses ADAC incurred and for any damages suffered by
ADAC in connection with the delay in obtaining such security interests
and liens.
(f) The cross-collateralization provisions of the Term Note and the
Southwest Bank Term Loan shall include the provision that a default
under the terms of the Southwest Bank Term Loan, the Term Note or the
Legacy Bank Loan shall constitute a default under the terms of the ADAC
Loan.
(g) It is also specifically understood by the parties that: (i) if
Gateway defaults in the performance of any of its obligations under the
Term Note, the Southwest Bank Term Loan or the Legacy Bank Loan
(defined below), then ADAC will be entitled to consider any such
default a default under the terms of the ADAC Loan, thereby entitling
ADAC to pursue any and all remedies that may be available with respect
to such default.
8. Closing. The parties agree that immediately upon execution of this
Agreement a copy thereof shall be submitted by Gateway to Southwest Bank so that
Southwest Bank will proceed to document, finalize and fund the Term Note at the
earliest practicable date . Each party will proceed with deliberate speed to
review documents prepared by Southwest Bank in order to facilitate funding of
the Term Note at the earliest practicable time.
9. ADAC's Audit Right. ADAC, at ADAC's expense, may audit the books and
records of Gateway relating to the Pipeline Facilities to the extent necessary
to verify the accuracy of any statement related to or computation of the Price
Upside Payments made by Gateway to ADAC upon the following terms:
(a) ADAC shall provide notice of its intent to audit no more often
than annually during the term of the Term Note.
(b) The audit shall be performed by a reputable Certified Public
Accountant.
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(c) The audit must be commenced no later than thirty days after the
date of ADAC's notice to Gateway of its intent to audit, and must be
concluded no later than ninety days after the date of ADAC's notice to
Gateway of its intent to audit.
(d) In the event an error is discovered in the amount of any Price
Upside Payment paid by Gateway to ADAC, such error shall be adjusted
within thirty (30) days after the amount thereof is determined. Claims
for errors shall be made promptly upon discovery, but in any event,
within twelve (12) months of the date of the Price Upside Payment.
(e) All books of accounts and records of Gateway relating to the
Price Upside Payments shall be preserved for a period of two (2) years.
10. Representations and Warranties. Each Party represents and warrants
to the other Party as follows:
(a) Such Party is duly organized, validly existing and in good
standing under the laws of the state of its formation and has all
requisite corporate or partnership power and authority to enter into
this agreement and the transactions herein contemplated. Such Party is
duly qualified to do business in Texas and is in good standing in the
State of Texas and in the other jurisdictions in which it transacts
business.
(b) Such Party has all requisite corporate or partnership power and
authority to execute and deliver this Agreement and the agreements
contemplated herein, to consummate the transactions contemplated by
this Agreement and by all other agreements contemplated herein, and to
perform all of its obligations under this Agreement and under all other
agreements contemplated herein. This Agreement constitutes the valid
and binding obligations of such Party, enforceable against it in
accordance with its terms, except as such enforceability may be limited
by bankruptcy, insolvency or other laws relating to or affecting the
enforcement of creditors' rights and general principles of equity
(regardless of whether such enforceability is considered in a
proceeding at law or in equity).
(c) Such Party's execution and delivery of this Agreement and the
other agreements contemplated herein, and the consummation of the
transactions contemplated hereby and thereby, will not:
(i) conflict with or require the consent of any person under any
of the terms, conditions or provisions of the charter, certificate
of formation or other organizational document of such Party;
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(ii) conflict with, result in a breach of, constitute a default
under or constitute an event that with notice or lapse of time, or
both, would constitute a default under, accelerate or permit the
acceleration of the performance required by, or require any consent,
authorization or approval under: (a) any mortgage, indenture, loan,
credit agreement or other agreement evidencing indebtedness for
borrowed money to which such Party is a party or by which such Party
is bound except, where such conflict, breach or default would not
materially affect such Party's ability to consummate the
transactions contemplated hereby and thereby; or (b) any order,
judgment or decree of any governmental authority; or
(iii) result in the creation or imposition of any lien or
encumbrance on any assets of such Party in the Pipeline Facilities,
except for liens described herein in favor of Southwest Bank and
ADAC.
(d) There are no third party claims, disputes or litigation pending
or to such Party's knowledge, threatened against such Party that would
prevent the consummation of the transactions contemplated by this
Agreement or the other agreements contemplated herein.
(e) There are no bankruptcy, reorganization or receivership
proceedings pending, being contemplated by or, to such Party's
knowledge, threatened against such Party.
(f) No person claiming by, through or under such Party is entitled
to any broker's, finder's or similar fee by reason of the transactions
contemplated by this Agreement.
11. No Waiver. No delay, failure or discontinuance of either party in
exercising any right, power or remedy under this Agreement or any of the
agreements specified herein shall affect or operate as a waiver of such right,
power or remedy, except that failure of ADAC to give notice of its exercise of
its option pursuant to paragraph 6, in the time specified in paragraph 6, shall
conclusively constitute a waiver of that option by ADAC; nor shall any single or
partial exercise of any such right, power or remedy preclude, waive or otherwise
affect any other or further exercise thereof or the exercise of any other right,
power or remedy. Any waiver, permit, consent or approval of any kind of any
breach of or default under any of said agreements must be in writing and shall
be effective only to the extent set forth in such writing.
12. Notices. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
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Xxxxxxx: Xxxxxxx Energy Corporation
Attn: Xxxxxxx Xxxxxx
One Xxxxx Center, Suite 2615
000 Xxxxxx Xxxxxx
Xxxxxxx, Xxxxx 00000
ADAC: Xxxxx Drilling Acquisition Corporation
Attn: Xxxxxxx Xxxxxxxxxx
0000 Xxxxxxxxxx
Xxxxxxx, Xxxxxx 00000
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
13. Successors, Assignment. This Agreement shall be binding upon and
inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; PROVIDED, HOWEVER, that
neither party may assign or transfer its interest hereunder without the other
party's prior written consent, which consent shall not be unreasonably withheld.
14. Entire Agreement; Amendment. This Agreement and the other
agreements described herein constitute the entire agreement between Gateway and
ADAC with respect to the subject of this Agreement and supersede all prior
negotiations, communications, discussions and correspondence concerning the
subject matter hereof. This Agreement may be amended or modified only in writing
signed by each party hereto.
15. No Third Party Beneficiaries. This Agreement is made and entered
into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the agreements to
which it is not a party.
16. Time. Time is of the essence of each and every provision of this
Agreement.
17. Severability of Provisions. If any provision of this Agreement
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
Agreement.
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18. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, and all of which when taken together shall constitute one and the same
Agreement.
19. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas.
20. Term. This Agreement shall remain in full force and effect until
the first to occur of the following: (i) the mutual agreement of the parties to
terminate this Agreement; (ii) the Maturity Date unless the Maturity Date is
extended, in which case termination shall occur on the Modified Maturity Date;
or (iii) the Pay Off Date. Termination shall not affect the right of either
party to enforce obligations accrued prior to termination.
GATEWAY ENERGY CORPORATION
By: /s/ Xxxxxxx X. Xxxxxx
-------------------------------------
GATEWAY PROCESSING COMPANY
By: /s/ Xxxxxxx X. Xxxxxx
-------------------------------------
GATEWAY PIPELINE COMPANY
By: /s/ Xxxxxxx X. Xxxxxx
-------------------------------------
XXXXX DRILLING ACQUISITION COMPANY
By: /s/ Xxxxxxx X. Xxxxxxxxxx
-------------------------------------
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XXXXXXXXXX XXXX
Xxxxxxx, Xxxxx
March 31, 2003
$900,000.00
FOR VALUE RECEIVED, the undersigned, GATEWAY ENERGY CORPORATION, a
Delaware corporation, GATEWAY PIPELINE COMPANY, a Texas corporation, and GATEWAY
PROCESSING COMPANY, a Texas corporation, (herein called "Makers"), jointly and
severally promise to pay to the order of XXXXX DRILLING ACQUISITION COMPANY, a
Nebraska Corporation, (herein called "Payee," which shall include in every
instance any holder of this Note) the sum of NINE HUNDRED THOUSAND AND NO/000ths
DOLLARS ($900,000.00) pursuant to the terms of that certain Agreement dated
March 6, 2003 between Makers and Payee (the "Agreement"). Reference is hereby
made to the Agreement for a description of the rights and obligations of Makers
to Payee in connection with this Note. Capitalized terms in this Note which are
not defined in this Note shall have the meaning set forth in the Agreement.
Payment of this Note shall be made in lawful money of the United States of
America to Payee at 0000 Xxxxxxxxxx, Xxxxxxx, Xxxxxx 00000, or at such other
place as Payee may designate hereafter in writing.
Payment of this Note is due and payable as specified in that Agreement.
This Note shall be deemed paid, satisfied and released upon the happening of the
first to occur of: (i) The full and complete release to ADAC of the Credit
Enhancement; (ii) The exercise of the Equity Participation Option by ADAC, such
payment, release and satisfaction to occur as of the Pay Off Date; (iii) payment
by Makers to Payee of the full amount of this Note, in the event that the Credit
Enhancement is not released on or before the Maturity Date, or the Modified
Maturity Date, as the case may be, and on the further condition that ADAC has
not exercised the Equity Participation Option; provided, however, that in the
event Makers pay the full amount of this Note to Payee as described in this
clause (iii), the Credit Enhancement shall be assigned to Gateway, with Gateway
to pay all costs and expenses which may be associated with such assignment.
Otherwise, this Note will remain in full force and effect.
All past due principal and accrued interest shall bear interest from
and after maturity until paid at a rate equal to the lesser of (a) eighteen
percent (18 %) per annum, or (b) the Highest Lawful Rate.
Prepayment of this Note is governed by the terms of the Agreement.
If any of Makers file a voluntary petition in bankruptcy, or are
adjudicated a bankrupt or insolvent, or file any petition or answer seeking any
arrangement, composition, readjustment, or similar relief for any of Makers
under any present or future statute, law or regulation, or file any answer
admitting the material allegations of a petition filed against Makers in any
such proceeding, or seek or consents to or acquiesce
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in the appointment of any trustee or receiver, on all or any substantial part of
the properties of either of Makers, or if a decree or order has been entered by
a court having jurisdiction in the premises adjudging either of Makers to be
bankrupt or insolvent under the federal bankruptcy laws or any applicable law of
the United States of America or any state law, or appointing a receiver or
trustee or assignee in bankruptcy or insolvency of any of Makers of any of
Makers' properties, and such decree or order is not discharged or stayed within
a period of sixty (60) days, or if Makers make an assignment for the benefit of
creditors, or if Makers fail to pay this Note or any installment hereof, whether
principal or interest, when due, then Payee shall have the option, to the extent
permitted by applicable law, to declare this Note due and payable, whereupon the
entire unpaid principal balance of this Note (and all accrued unpaid interest
hereon) shall mature and become due and payable at once without presentment,
demand, protest or notice of any kind (including, but not limited to, notice of
intention to accelerate or notice of acceleration), all of which are hereby
expressly waived by Makers. The time of payment of this Note also is subject to
acceleration in the same manner provided in this paragraph in the event Makers
default under the Agreement or any of the instruments securing payment hereof or
relating hereto.
Makers and any and all sureties, guarantors and endorsers of this Note and
all other parties now or hereafter liable hereon, severally waive grace, demand,
presentment for payment, protest, notice of any kind (including, but not limited
to, notice of dishonor, notice of protest, notice of intention to accelerate and
notice of acceleration) and diligence in collecting and bringing suit against
any party hereto, and agree (a) to all extensions and partial payments, with or
without notice, before or after maturity, (b)'to any substitution exchange or
release of any security now or hereafter given for this Note, (c) to the release
of any party primarily or secondarily liable hereon, and (d) that it is not
necessary for Payee to first institute or exhaust Payee's remedies against
Makers (or any other party liable therefor), or against any security for this
Note, in order to enforce payment of this Note.
If default occurs hereunder (or under the Agreement or any of the
instruments securing payment hereof) and this Note is placed in the hands of an
attorney for collection (whether or not suit is filed), or if this Note is
collected by suit or legal proceedings or through the probate court or
bankruptcy proceedings, Makers agree to pay all reasonable attorney's fees and
all expenses of collection and costs of court.
It is the intention of the Parties to strictly comply with applicable
usury Laws, if any; accordingly, it is agreed that notwithstanding any
provisions to the contrary in this Note or any other Loan Document (as defined
in the Agreement), in no event shall any Loan Document permit or require the
payment, taking, reserving, receiving collection or charging of interest in
excess of the Highest Lawful Rate. If any such excess of interest is called for,
contracted for, charged, taken, reserved or received under any Loan Document (or
in any communication by Payee or any other Person to Makers) or if all or a part
of the principal or interest thereof is accelerated, prepaid or repaid, so that
under any of such circumstances (or any other circumstances) the amount of
interest contracted for, charged, taken, reserved or received under any Loan
Document on the amount of
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principal actually outstanding from time to time thereunder shall exceed the
Highest Lawful Rate, then in any such event (a) the provisions of this paragraph
shall govern and control, (b) no Person now or hereafter liable for the payment
of the Note shall be obligated to pay the amount of such interest to the extent
that it is in excess of the Highest Lawful Rate, (c) any such excess which is or
has been collected or received notwithstanding this paragraph shall be credited
against the then unpaid principal balance of the Note or, if the Note has been
or would be repaid in full by that credit, refunded to the Person paying the
excess, and (d) the provisions of the applicable Loan Documents, and any
communication to Makers, shall immediately be deemed reformed and the excess
interest reduced, without the necessity of executing any other document, to the
Highest Lawful Rate under the applicable usury Laws as now or hereafter
construed by the courts having jurisdiction thereof., Without limiting the
foregoing, all calculations of the rate of interest contracted for, charged,
collected, taken, reserved or received in connection with the Loan Documents
which are made for the purpose of determining whether that rate exceeds the
Highest Lawful Rate shall be made to the extent permitted by applicable Laws by
amortizing, prorating, allocating and spreading during the period of the full
term of the loans made pursuant to the Loan Documents, including all prior and
subsequent renewals and extensions, all interest at any time contracted for,
charged, taken collected, reserved or received. The terms of this paragraph
shall be deemed to be incorporated in every Loan Document and communication
relating thereto.
To the extent the interest rate Laws of the State of Texas are
applicable to the Loan Documents for purposes of determining the "Highest Lawful
Rate," the applicable interest rate ceiling is the weekly ceiling (formerly the
indicated rate ceiling) determined in accordance with Texas Revised Civil
Statutes, Title 79, Article 5069-1D.003 (also codified at Texas Finance Code,
Section 303.301, and formerly Texas Revised Civil Statutes, Article 5069-1.01),
as amended. Makers and Payee agree that Texas Finance Code, Chapter 346
(formerly Texas Revised Civil Statutes, Title 79, Chapter 150, which regulates
certain revolving loan accounts and revolving tri-party accounts, shall not
govern or in any manner apply to the, Loan Documents or the Obligations.
This Note shall be governed by and construed under the applicable laws
of the State of Texas and the laws of the United States of America.
Any check, draft, money order or other instrument given in payment of
all or any portion hereof may be accepted by Payee and handled in collection in
the customary manner, but the same shall not constitute payment hereunder or
diminish any rights of Payee except to the extent that actual cash proceeds of
such instrument are unconditionally received by Payee.
Makers represent and warrant to Payee that all loans evidenced by this
Note are for business, commercial, investment or other similar purposes, and are
not primarily for personal, family, household or agricultural use (as such terms
are used or defined in Section 303.501 of the Texas Finance Code, as amended,
and Regulation Z promulgated by the Board of Governors of the Federal Reserve
System and under Titles I and V of the Consumer Credit Protection Act).
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This Note is entitled to all of the benefits and obligations of the
Agreement, and the payment of this Note is secured by (i) a deed of trust of
even date covering Gateway Pipeline Company's interests in the Waxahachie
Pipeline System in Xxxxx County, Texas, (ii) a security agreement and collateral
assignment covering Gateway Processing Company's interests in the Pipeline
Facilities, (iii) a security agreement and collateral assignment covering
Gateway Energy Corporation's and Fort Xxxx Oklahoma Irrigation Fuel Authority
L.L.C.'s interest in the assets of Fort Xxxx Oklahoma Irrigation Fuel Authority
L.L.C., and (iv) security agreement-pledge from Gateway Energy Corporation
covering all of the ownership units in Fort Xxxx Oklahoma Irrigation Fuel
Authority L.L.C. owned by Gateway Energy Corporation.
MAKERS:
GATEWAY ENERGY CORPORATION
By: /s/ Xxxxxxx X. Xxxxxx
----------------------------------
Xxxxxxx X. Xxxxxx, President
GATEWAY PIPELINE COMPANY
By: /s/ Xxxxxxx X. Xxxxxx
----------------------------------
Xxxxxxx X. Xxxxxx, President
GATEWAY PROCESSING COMPANY
By: /s/ Xxxxxxx X. Xxxxxx
----------------------------------
Xxxxxxx X. Xxxxxx, President
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EXHIBIT 2
EXAMPLE CALCULATION OF 15% TARGET RETURN
PROJECT YEAR
1 2 3
------------------------------------------------
Letter of credit(1) (900,000)
Price Upside Payments(2) 92,100 92,100 92,100
Deemed Repayment(3) 900,000
-------------------------------------------------------------
Subtotal cash flows (900,000) 92,100 92,100 992,100
-------------------------------------------------------------
INITIAL IRR(4) 10.2%
Additional Gateway lump-sum payment 148,968
-------------------------------------------------------------
Total cash flows (900,000) 92,100 92,100 1,141,068
-------------------------------------------------------------
TARGET RETURN IRR(4) 15.0%
THIS EXAMPLE IS FOR ILLUSTRATIVE PURPOSES ONLY TO DEMONSTRATE
THE CALCULATION OF IRR.
Note:
(1) $900,000 is deemed to have been loaned to Gateway by ADAC on
the first day of the Term Note.
(2) Monthly Price Upside Payments are calculated based on Section
7.2 (d) (ii) (y) of the Gas Purchase Agreement and Section 4.3
of the Treating Agreement. For this example, the following are
assumed:
- Resale Price - $4.29 per MMBtu
- MMBtu's Delivered - 12,000 MMBtu per day
- Assumed Royalty burden
above $4.00 per MMBtu - 25%
- Gateway share of price upside
payment to Hanover/Gateway - 30%
- ADAC share of price upside
payment to Gateway - 50%
- Average Days in a Month - 30.4
Thus
.30 x ($4.29-$3.75) x 12,000 x 30.4 = $59,098 Gross payment to Hanover/Gateway
$59,098 - (.25 x 31,738) = $51,164 Net payment to Hanover/Gateway after deducting royalty
$51,164 x .30 = $15,349 Net payment to Gateway
$15,349 x .5 = $7,675 Monthly Price Upside Payment to ADAC
$7,675 x 12 = $92,100 Annual Price Upside Payment to ADAC
(3)$900,000 is the Deemed Repayment to ADAC when Gateway pays off the
principal of the Term Note on the Maturity Date and the letter of credit is
canceled or released.
(4)IRR (Internal Rate of Return) is calculated using the built-in Excel
spreadsheet function in which cash receipts and payments are deemed to occur at
the end of each year even though they may actually occur during the year.
EXHIBIT 3
ADDENDUM TO AGREEMENT
MAJOR TERMS AND CONDITIONS FOR
CREATION OF LIMITED LIABILITY COMPANY (L.L.C.)
If a limited liability company is to be created under the terms of the
Agreement, then unless otherwise mutually agreed by ADAC and Gateway during the
90-day notice period, a Texas limited liability company ("Company") will be
created pursuant to appropriate documents filed with the State of Texas and an
Operating Agreement executed by the parties. The Operating Agreement will
contain the following major terms and conditions, and such other terms as shall
be agreeable to the parties, provided, however, that the terms and conditions
set forth herein shall be subject to the terms and conditions of the Agreement.
If any term or condition set forth in this Exhibit 3 is inconsistent with the
Agreement, the term or condition of the Agreement shall control and shall
supercede the inconsistent term or condition set forth in this Exhibit 3.
PURPOSE
The Company will be organized to construct, own and operate the
Pipeline Facilities, to fulfill the duties and obligations and receive the
income and pay the expenses under the Restated Master Agreement, and to receive
revenue of any other type or nature derived from and pay any and all expenses
associated with the operation of the Pipeline Facilities.
"Pipeline Facilities" shall mean the gathering lines, Acid Gas disposal
line and Transportation System and ancillary equipment described in the Restated
Master Agreement.
"Restated Master Agreement" means the First Amended and Restated Master
Agreement dated September 12, 2002 among Redwood Energy Production, L.P.,
Gateway Processing Company and Hanover Compression Limited Partnership and the
ancillary agreements contained therein, as the same may be amended from time to
time, provided such amendment is made pursuant to the terms of the Agreement.
DURATION
50 years
INITIAL CAPITAL CONTRIBUTIONS
(a) Gateway - will contribute all rights and obligations of the
Restated Master Agreement, together with the Pipeline
Facilities and related rights-of-way and easements. This
Capital Contribution will be valued at $1,800,000.
(b) ADAC - will pay off the principal of the Term Note. This
Capital Contribution will be valued at $900,000.
(c) Capital accounts will be maintained in accordance with Section
704 of the Internal Revenue Code of 1986, as amended from time
to time.
OWNERSHIP INTERESTS
Gateway - 1,800,000 Membership Units
ADAC - 900,000 Membership Units
"Ownership Ratio" with respect to any Owner means a fraction (expressed
as a percentage), the numerator of which is that Owner's Membership Units and
the denominator of which is the sum of the Membership Units of all Owners.
SUBSEQUENT CAPITAL CONTRIBUTIONS
Each Owner shall contribute to the Company that Owner's Ownership Ratio
of additional capital required by the Company to operate and maintain its assets
and to discharge its costs, expenses, obligations and liabilities. Capital calls
will be the decision of the Board of Directors.
ALLOCATIONS
All items of income, gain, loss, deduction and credit of the Company
shall be allocated among the Owners in accordance with their Ownership Ratios.
DISTRIBUTIONS
Cash on hand in excess of current and anticipated needs shall be
distributed monthly to the Owners in accordance with their Ownership Ratios.
Distributions will be made at the discretion of the Board of Directors.
DIRECTORS
There will be a Board of Directors consisting of three (3) persons.
Gateway shall elect two Directors and ADAC shall elect one Director. The
business affairs of the Company shall be directed and controlled by the
Directors. The consent of a majority of Directors is required to take any
action; provided, however, that the consent of all Directors shall be required
to take the following actions:
(a) the sale of all, or substantially all, of the assets
of the Company;
(b) the merger, consolidation, dissolution or liquidation
of the Company;
(c) the acquisition of a new business deemed significant
or material;
(d) the discontinuance of a significant or material
portion of the business of the Company;
(e) the borrowing of money in the Company name or use of
Company assets as collateral.
(f) the appointment of any and all successors to Gateway
as the Manager of the Company.
MANAGEMENT
Gateway shall be the Manager of the Company. The Manager shall control
the day-to-day business of the Company. The Manager shall only be removed for
Cause. Cause shall mean failure of Gateway to conduct all work required of it in
a good, workmanlike manner as a prudent operator in conformity with the usual
practices of the industry and in accordance with all valid and applicable laws,
rules and regulations of governmental authorities. The non-Gateway Director
shall determine Cause for removal. If Gateway disputes termination for Cause,
the matter shall be resolved pursuant to the Alternate Dispute Resolution
process set forth in the Operating Agreement. Furthermore, if at any time
Gateway owns less than thirty percent (30%) of the Ownership Interests in the
Company, its right to manage the Company will terminate. As Manager, Gateway
shall (i) provide administrative services for an administrative fee to be
determined when the Operating Agreement is executed and to be paid by the
Company to Gateway, which fee shall not exceed the usual and customary fee for
such services, and (ii) perform or cause to be performed the operating duties,
the cost of which will be charged directly to the Company, which cost shall not
exceed the usual and customary costs.
RIGHT OF FIRST REFUSAL
In the event of a proposed sale, each party shall have a right to
purchase any interest being offered for sale by the other party by matching a
third party offer.
ALTERNATE DISPUTE RESOLUTION
The agreement will set forth a process of negotiation, mediation and
finally arbitration to resolve any disputes under the agreement which shall be
identical to section 8.2 of the Restated Master Agreement.
