Item
1.01 Entry into a Material
Definitive Agreement
Sale
of 80% Interest in the Burgos Hub Import/Export Project
On
September 28, 2007, Tidelands Oil & Gas Corporation (the “Company”) and it
subsidiary, Terranova Energia S. de R.L. de C.V. entered into an Equity Purchase
Agreement (the “Purchase Agreement”) with Grand Cheniere Pipeline LLC
(“Cheniere”), pursuant to which the Company has sold an 80% interest in the
Company’s “Burgos Hub Project”, which, as described in greater detail in the
Company’s annual report filed on Form 10-K, involves the development and
construction of an integrated pipeline project traversing the United States
and
Mexico border and the construction of a related subterranean storage facility
in
Mexico.
In
connection with the Purchase Agreement, the Company formed a new subsidiary,
Frontera Pipeline, LLC, a Delaware limited liability company (“Frontera”), and,
agreed, upon approval of applicable governmental authorities, to transfer
all
rights, permits and assets of the Burgos Hub Project to Frontera. The
Company then sold 80% of the equity interest in Frontera to Cheniere,
effectively providing Cheniere with an 80% ownership stake in the Burgos
Hub
Project.
Pursuant
to the sale of the 80% equity interest in Frontera, the Company (i) received
an
up-front payment of $1 million and (ii) is eligible to earn three additional,
separate earn-out payments of $4.8 million, $1.2 million, and $2.0
million. The Company is also entitled to receive royalty payments
based on the capacity of transportation or storage service subscribed with
the
Burgos Hub Project, ranging from $0.008 per Mmbtu/d for Phase I to $0.002
per
Mmbtu/d for Phase II to $0.02 per Mmbtu/year for Phase III, subject to
certain
caps. The earn-out payments are dependent upon Cheniere electing to
proceed with development of the Burgos Hub Project, which is divided into
three
phases, as set forth in Frontera’s Limited Liability Company Agreement (the
“Operating Agreement”), which is filed as an exhibit to this report on Form
8-K.
Under
the
Operating Agreement, Cheniere will be the manager of Frontera, with sole
decision-making and management control of the Burgos Hub Project. If
Cheniere elects to proceed with development of the Burgos Hub Project,
it will
be responsible for funding the development costs of the three phases; the
Company is not required to provide any additional funding other than payment
for the Company’s 20% interest in construction expenditures through
additional capital contributions to Frontera. Should the Company not
have sufficient funds, it may make such additional capital contributions
to fund
construction expenses by borrowing such funds from Cheniere on terms agreed
to
prior to closing and as more fully described in the form of Promissory
Note
attached as an exhibit to the Operating Agreement. The Company is not
obligated to make any further development-oriented expenses. The
parties entered into the Purchase Agreement and Operating Agreement with
the
expectation that Cheniere will proceed with, and fully fund, all three
phases of
the Burgos Hub Project; however, Cheniere retains sole discretion regarding
whether to proceed with any of the development phases. Subject to
certain terms and conditions, if Cheniere enters into definitive financing
agreements with third parties with a debt to capitalization ratio of at
least
80% for a specific phase of the Project, but elects not to move forward
with the
development of such phase, then the Company has certain repurchase rights
for
Cheniere’s 80% equity interest.
The
three
phases are generally described as follows:
Phase
I –
construction of the portion of a pipeline extending from the Valero Gilmore
Plant, located at Hidalgo County, Texas to Estacion Arguelles, located in
Tamaulipas, Mexico, to Station 19 of Pemex Gas y Petroquimica
Basica to Monterrey, Mexico;
Phase
II
- construction of the portion of a pipeline extending from the Donna Station
to
Brazil Storage to Station 19 of Pemex Gas y Petroquimica Basica;
Phase
III
- construction of the Brazil Storage Facility (underground natural gas storage
facility to be located in Rio Bravo, Mexico).
Concurrently
with the execution of the Purchase Agreement, Frontera executed an Independent
Consulting Agreement (the “Consulting Agreement”) with the Company, pursuant to
which the Company will be paid $25,000 per month for 24 months for consulting
services in connection with the Burgos Hub Project. The key personnel
under the Consulting Agreement are designated as James Smith, Julio Bastarrachea
and Robert Dowies. If the services of one or two of such individuals
become unavailable, the consulting payments are reduced. If all three
become unavailable, the Consulting Agreement may be terminated for cause
by
Frontera. Upon a for cause termination, no further payments would be
made under the Consulting Agreement and the Company would forfeit its 20%
equity
stake in Frontera (and thus, in the Burgos Hub Project). The Consulting
Agreement also provides that the Company will not compete with the Burgos
Hub
Project for a period of three years after termination or expiration of
the
Consulting Agreement.
The
foregoing summary of the terms of the Purchase Agreement, the Operating
Agreement and the Consulting Agreement is qualified in its entirety by reference
to the full and complete terms of such agreements, which are attached hereto
as
Exhibits 10.1, 10.2 and 10.3.
Item
2.01 Completion of
Acquisition of Disposition of Assets
See
disclosure above in Item 1.01 regarding the Company’s sale of an 80% stake in
its Burgos Hub Project.
Item
9.01 Financial Statements
and Exhibits.