Document:

Exhibit
10(f)(2)

 

Amendment

 

To

 

First
Amended and Restated Master Agreement

 

There is in existence by and among Redwood Energy
Production, L.P., Gateway Processing Company and Hanover Compression Limited
Partnership a First Amended and Restated Master Agreement dated September 12,
2002 (“Restated Master Agreement”).

 

The Parties hereby mutually agree to amend the
Restated Master Agreement as follows effective February 14, 2003:

 

•                  3.5  Construction of the Gathering and
Transportation System. 
The third and fourth sentences are deleted in their entirety and the
following sentence substituted therefor:

 

“Subject to the aforesaid
and events of Force Majeure, Gateway will commence construction not later than
February 17, 2003 and Gateway’s portion of the Acid Gas disposal line referred
to in Section 3.4 will be installed and operational not later than April 1,
2003 and the gathering and transportation pipelines will be installed and
operational not later than April 16, 2003.

 

•                  6.2  Amendment to Gas Purchase Agreement.  Subsection (b) is deleted in its entirety
and the following substituted therefor:

 

(b) Section 7.2 (d) of the
Gas Purchase Agreement is hereby deleted in its entirety and the following
substituted therefor:

 

(d)         Floating Monthly Treating Fee -

 

(i)  If the Resale Price for the
month is four dollars ($4.00) per MMBtu or less, then the Floating Monthly
Treating Fee will be equal to the Fixed Monthly Treating Fee.

 

(ii)  If the Resale Price for
the month is more than four dollars ($4.00) per MMBtu, then the Floating
Monthly Treating Fee will be the sum of (x) and (y):

 

(x)            Fixed Monthly Treating Fee; and

 

(y)           An amount equal to thirty percent (30%) of the Resale
Price in excess of four dollars ($4.00) per MMBtu multiplied by the MMBtus
Delivered during the month.

 

With
regard to the Floating Monthly Treating Fee, if the Treatment Plant is
installed and operational on or before May 10, 2003 and Buyer’s, or its
designee’s, pipelines are ready to receive Seller’s gas at the Point of
Delivery and transport the treated gas on or before May 10, 2003, then a price
of three dollars and seventy-five cents ($3.75) per MMBtu will be substituted
for four dollars ($4.00) per MMBtu wherever the latter price appears, except
in the next sentence.  The Parties agree
that if in any month the Resale Price exceeds four dollars ($4.00) per MMBtu,
then the Resale Price-based component of the Floating

 

 

Monthly Treating Fee (i.e.
an amount equal to thirty percent (30%) of the Resale Price in excess of
four dollars ($4.00) per MMBtu multiplied by the MMBtus Delivered during the
month) shall be subject to and bear its share of the landowner and overriding
royalties which are recorded in the Official Records of Madison County, Texas
and in effect as of September 12, 2002 (which burdens shall not exceed in the
aggregate twenty-seven percent (27%) across any applicable unit) with same
remitted monthly to the appropriate royalty owners through Redwood.  With respect to the May 10, 2003 date mentioned
above, the Parties agree that Hanover and Buyer may invoke Force Majeure only
for events occurring subsequent to the date hereof.

 

With
respect only to the first month of gas deliveries hereunder, if the date of the
initial gas deliveries at the Point of Delivery under this Agreement is after
the first day of the month, the Fixed or Floating Monthly Treating Fee, as
applicable, shall be adjusted downward by multiplying the actual Fee by a
fraction, the numerator of which is the number of days remaining in said month,
and the denominator of which is the total number of days in said month.

 

•                  A new Section 3.7 is added
to the Restated Master Agreement as follows:

 

3.7 Contingency Plan.  The Parties have agreed that Hanover will
acquire and install, at a cost not to exceed $200,000, the equipment and
facilities required to implement the overall contingency plan for all the
producing and injection wells and their wellheads, Treatment Plant and
pipelines required by the Texas Railroad Commission, and that Redwood, Hanover
and Gateway will each pay one-third of the costs for said equipment and
facilities and their installation.

 

Except as indicated above, all other terms and conditions of the
Restated Master Agreement shall remain in full force and effect.

 

Accepted and agreed to this 14th day of February 2003:

 

 

	
   

  	
  Redwood Energy Production, L.P.

  
	
   

  	
   

  
	
  By:

  	
  Redwood
  Energy Company, 

  its General Partner

  
	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Hanover Compression Limited 

  Partnership

  	
  Gateway Processing Company

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Title:Exhibit 10(g)

 

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 Allen 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:

 

2

 

(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.

 

(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 (33a%)
ownership interest in the Pipeline Facilities with 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 (33a%) by ADAC and sixty six and two-thirds
percent (66b%)
by Gateway.  Gateway will transfer to
the LLC the Pipeline Facilities and related agreements, together with 

 

3

 

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
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

 

4

 

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 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
Ellis County, Texas.  The liens shall be
subordinate only to a lien granted by Gateway in favor of Southwest Bank.

 

(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 

 

5

 

lien on the assets
of Gateway’s Fort Cobb 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 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.

 

6

 

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.

 

(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;

 

7

 

(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:

 

	
  Gateway:

  	
   

  	
  Gateway Energy Corporation

  
	
   

  	
   

  	
  Attn:  Michael Fadden

  
	
   

  	
   

  	
  One Allen
  Center, Suite 2615

  
	
   

  	
   

  	
  500 Dallas
  Street

  
	
   

  	
   

  	
  Houston,
  Texas 77002

  
	
   

  	
   

  	
   

  
	
  ADAC:  Allen Drilling Acquisition Corporation

  
	
   

  	
   

  	
  Attn:
  Charles Holtgraves

  
	
   

  	
   

  	
  5425
  Martindale

  
	
   

  	
   

  	
  Shawnee,
  Kansas 66218

  

 

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

 

8

 

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.

 

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:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  GATEWAY
  PROCESSING COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  

 

9

 

	
   

  	
  GATEWAY
  PIPELINE COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ALLEN
  DRILLING ACQUISITION COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  

 

10

 

EXHIBIT 1

 

 

PROMISSORY NOTE

 

Houston, Texas

March      , 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 ALLEN 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                
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 5425 Martindale, Shawnee,
Kansas 66218, 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 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 

 

11

 

(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 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

 

12

 

Texas Revised Civil Statutes,
Title 79, Article 5069-ID.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).

 

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 Ellis 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 Cobb Fuel Authority, LLC’s
interest in the assets of Fort Cobb Fuel Authority, LLC, and (iv) security
agreement-pledge from Gateway Energy Corporation covering all of the ownership units in Fort Cobb
Fuel Authority, LLC owned by Gateway Energy Corporation.

 

MAKERS:

 

	
  GATEWAY
  ENERGY CORPORATION

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Michael T. Fadden, President

  
	
   

  	
   

  
	
  GATEWAY
  PIPELINE COMPANY

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Michael T. Fadden, President

  
	
   

  	
   

  
	
  GATEWAY
  PROCESSING COMPANY

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  
	
   

  	
  Michael T. Fadden, President

  

 

13

 

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.

Notes:

(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.

 

14

 

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 § 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

 

15

 

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

 

16

 

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.

 

17

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