PIPELINE CONSTRUCTION AND OPERATING AGREEMENT

Exhibit 10.1

 

PIPELINE CONSTRUCTION

AND OPERATING AGREEMENT

 

BY AND BETWEEN

 

ATMOS PIPELINE - TEXAS,

 

a division of

 

ATMOS ENERGY CORPORATION

 

AND

 

ENERGY TRANSFER FUEL, LP

 

DATED

 

NOVEMBER 30, 2005

 

TABLE OF CONTENTS

 

 

i

 

ii

 

iii

 

LIST OF SCHEDULES

 

 

LIST OF EXHIBITS

 

 

iv

 

PIPELINE CONSTRUCTION & OPERATING AGREEMENT

 

THIS PIPELINE CONSTRUCTION & OPERATING AGREEMENT (this “Agreement”) is made and entered into on this 30 day of November, 2005, by and between ATMOS PIPELINE - TEXAS, a Division of Atmos Energy Corporation, a Texas and Virginia corporation (“Atmos”) and ENERGY TRANSFER FUEL, LP, a Delaware limited partnership (“ETF”). Atmos and ETF may sometimes be referred to collectively as “Parties” or individually as a “Party.”

 

PURPOSE

 

The Parties have agreed to construct a natural gas pipeline to serve gas distribution customers in developing areas of North Texas and to provide gas producers and other shippers in the Fort Worth Basin area of Texas with pipeline capacity to reach markets on both the Atmos and ETF pipeline systems. The Parties have agreed to construct a pipeline and to contribute portions of the capacity on each Party’s respective existing pipeline systems in order to achieve that purpose.

 

RECITALS

 

1. The Parties have agreed to construct, operate and own a 30-inch pipeline approximately 45 miles in length, running from an interconnection with Atmos’ Line W near Justin in Denton County, Texas to a point at or near the ETF Collin Line and the Atmos D17-9 pipeline, both of which are in Collin County, Texas (together with all appurtenances, real property interests and associated compression at or near Justin, Texas and Howard, Texas, the “NSL Pipeline”).

 

2. Each Party will own a 50% undivided interest in the NSL Pipeline.

 

3. This Agreement sets forth the terms and conditions governing the rights and relationship of the Parties in and to the NSL Pipeline.

 

4. Capitalized terms used in this Agreement, when not defined in context, are defined in the Accounting Procedures or other Schedules and Exhibits to this Agreement. The Schedule of Definitions attached hereto lists terms defined in this Agreement and the Section number where the definition may be found.

 

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Therefore, in consideration of the mutual agreements hereinafter set forth, together with other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

 

ARTICLE I

MANAGEMENT COMMITTEE

 

1.1

General .

 

(a) Within 15 days from the effective date of this Agreement, the Parties must form a committee (the “Management Committee”), composed of 4 members (each, a “Member”), 2 of whom will be appointed by Atmos, and 2 of whom will be appointed by ETF.

 

(b) The Management Committee must hold its initial meeting within 15 days from the effective date of this Agreement.

 

(c) If a Party makes a permitted transfer of all of its interest in the NSL Pipeline, the transferee of the interest is entitled to immediately assume the transferor’s membership on the Management Committee and vote on any issue, including replacement of the Constructor or Operator (as such terms are defined in Sections 3.1(b) and 3.1(d), respectively).

 

(d) Each Party has the power to replace, or substitute for, its respective member representatives, or either of them, as Members of the Management Committee, at will, by letter or facsimile to the other Party.

 

(e) The Operator, Constructor or any Party required or permitted to act may (but unless expressly so stated, is not required to) request instructions and guidance from the Management Committee and except in an emergency, may defer action pending receipt of instructions or guidance from the Management Committee.

 

(f) Unless otherwise specifically provided, wherever in this Agreement the consent or approval of the Parties is required or contemplated or referred to, such consent or approval may be evidenced by action of the Management Committee, and any action taken by the Management Committee will be binding upon each of the Parties hereto under this Agreement.

 

1.2	Meetings .

 

(a) The Management Committee must hold meetings no less than once in each successive 6 month period beginning on the date of the initial meeting required under Section 1.1(b) above. The Management Committee will determine the time and place for its regular meetings and establish procedures for calling special meetings.

 

(b) The Management Committee must hold special meetings:

 

(i)

upon the request of the Chairman or the Vice Chairman; or

 

(ii)

upon the request of either Party.

 

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(c) Meetings may be conducted by means of conference telephone or similar communications equipment, if so desired, so long as all Members participating in the meeting are able to hear each other.

 

1.3	Organizational Matters .

 

(a) The Management Committee must:

 

(i)

elect a Chairman and Vice Chairman; and

 

(ii)

must appoint a Secretary who is required to:

 

1.

keep reasonably detailed minutes of all meetings;

 

2.

keep a record of all other Management Committee actions; and

 

3.

perform other duties commonly incident to the office of Secretary.

 

(b)

The Management Committee must:

 

(i)

establish any other necessary procedures incident to its purpose and function under this Agreement; and

 

(ii)

establish the methods by which it will take the actions required of it under this Agreement.

 

1.4

Quorum .

 

(a) The Management Committee will be entitled to transact business at a meeting (will have a “quorum”) if at least one of the Members appointed by each Party is present.

 

(b) A Member may appoint a proxy to attend, and have voting rights at, any meeting which the Member is unable to attend.

 

(c) Action may be taken without a meeting, if each Member consents thereto in writing.

 

1.5	Voting, Action .

 

(a) Any action taken by the Management Committee must be unanimous to be effective and binding upon the Parties.

 

(b) If only one of a Party’s Members is present at a Management Committee meeting, the Member may cast votes on behalf of both of that Party’s Members.

 

(c) In the event the Management Committee is not able to approve of any action by unanimous consent, such dispute shall be, if requested by either of the Parties, resolved in accordance with the dispute resolution procedures set forth in Article XII.

 

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1.6	Sub-Committees .

 

(a) The Management Committee may create one or more sub-committees (each, a “Sub-Committee”) to perform certain of the Management Committee’s duties and responsibilities.

 

(b) A Sub-Committee may have any number of members.

 

(c) If the Management Committee delegates a responsibility to a Sub-Committee, the Sub-Committee must report back to the Management Committee with its recommendation within the designated period of time. If the Sub-Committee’s recommendation is not unanimous, the report must so state. The Management Committee has discretion to accept or reject the recommendation of the Sub-Committee.

 

(d) The Management Committee will, at its first meeting, appoint an Engineering Sub-Committee (the “Engineering Sub-Committee”). The Engineering Sub-Committee must:

 

(i)

perform the tasks designated by the Management Committee; and

 

(ii)

during Construction, report weekly to the Management Committee concerning the progress of Construction.

 

1.7

Notices .

 

(a) The Secretary must notify each Member of the time and place of each meeting of the Management Committee, not later than 10 days before the date of the meeting.

 

(b) Any notice required by this Article must be addressed to the Member as provided in Section 13.7.

 

(c) A written waiver of any required notice, signed by a Member, whether before or after the time the notice was required, will be deemed to be the equivalent of notice.

 

1.8	Poll of Committee Members .

 

(a) The Constructor or Operator is authorized to poll the Management Committee if:

 

(i)

a circumstance requires Management Committee approval, but is too urgent to be delayed until the next scheduled Management Committee meeting; or

 

(ii)

a circumstance arises which requires Management Committee approval, but the Chairman, the Constructor or the Operator believe it may be disposed of by poll.

 

(b) A poll of the Management Committee:

 

(i)

may be by telephone or other electronic means;

 

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(ii)

must be recorded in writing by the Secretary; and

 

(iii)

must be submitted by written report to all Management Committee Members immediately after the poll is taken.

 

ARTICLE II

CONTRIBUTIONS AND OWNERSHIP

 

2.1 Atmos Contributions .

 

(a) As its contribution under this Agreement, Atmos will:

 

(i)

contribute:

 

1.

the rights to utilize certain pipeline line rights-of-way that are owned by it, and that are described on the exhibit to Exhibit F hereto, to facilitate Construction;

 

2.

all engineering and other work completed to date concerning pipeline routing and design;

 

3.

any work performed by Atmos pursuant to Section 4.8; and

 

4.

the cost of outside legal counsel reasonably acceptable to both Parties, in connection with the review and negotiation of easements and rights-of-way by ETF under Section 4.2(a)(iv) and 4.2(b), below, with the exception of costs under Section 4.2(a)(iv)4 (which costs shall remain the responsibility of ETF).

 

(ii)

provide an amount of money that is equal to:

 

1.

50% of that portion of the Construction Costs described in Section 4.5(a), for Construction of the pipeline portion of the NSL Pipeline. This portion of Atmos’ contribution is limited to a total of $42,500,000.00; and

 

2.

50% of that portion of the Construction Costs described in Section 4.5(b), for constructing compression, without regard to the limit set forth in sub-paragraph 2.1(a)(ii)1 above.

 

(b) The Management Committee will, no later than January 10, 2006, determine:

 

(i)

the portion of the NSL Pipeline that was in service and capable of flowing gas as of December 31, 2005, based upon any Segment Certificate of Completion issued pursuant to Section 4.11(d) or by issuing a Segment Certificate of Completion effective as of December 31, 2005; and

 

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(ii)

the portion of the Construction Costs attributable to any such Segment (the “Segment Cost”).

 

(c) In order to make the contribution set forth in paragraph (a)(ii), above, Atmos will pay:

 

(i)

50% of Atmos’ share of the Segment Cost. This payment will be made no later than 10 days following Atmos’ receipt of ETF’s invoice setting forth the Segment Cost as determined by the Management Committee; and

 

(ii)

subject to being “trued-up” pursuant to Section 2.4(a), 50% of the balance of Atmos’ portion of the Construction Costs, no later than 10 days following the Operational Date.

 

2.2	ETF Contributions . As its contribution under this Agreement, ETF will provide an amount of money that is equal to the difference between:

 

(a) the Construction Costs (as defined in Section 4.5(c)); and

 

(b) Atmos’ contribution under Section 2.1.

 

2.3	System Ownership . Subject to the provisions of this Agreement, Atmos and ETF shall each have and own an undivided 50% ownership interest in the NSL Pipeline.

 

2.4	Valuation of Atmos Contribution and Final True-up .

 

(a) As soon as reasonably practicable following the Operational Date, but not later than 60 days following the Operational Date, the Management Committee will assign a monetary value to the portion of Atmos’ contribution that is described in Section 2.1(a)(i).

 

(b) No later than 90 days following the Operational Date, the Management Committee will perform an audit to “true-up” Atmos’ portion of the actual Construction Costs against the contributions made by Atmos pursuant to Section 2.1.

 

(c) Upon such “true-up,” 50% of the agreed-upon value will be credited toward payment of Atmos’ share of the Construction Costs as determined pursuant to paragraph (b) of this Section 2.4. For example, if the Management Committee determines that the value of 100% of such contribution is $5,000,000 and the Management Committee determines, pursuant to the audit performed under the terms of paragraph (a), that Atmos owes ETF $10,000,000, Atmos will only be required to pay ETF $7,500,000 ($10,000,000, less 50% of $5,000,000 or $2,500,000 equals $7,500,000).

 

(d) No later than 10 days following the release of the results of the audit performed pursuant to paragraph (b) of this Section 2.4, the Party owing the greater amount, according to the results of the audit, will pay the other Party the net amount.

 

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ARTICLE III

OPERATIONAL CONTROL OF THE NSL PIPELINE

 

3.1	Operational Control .

 

(a) Subject to the direction of the Management Committee as herein provided, ETF will construct, and exercise control over, the NSL Pipeline until the Operational Date (as defined in Section 4.11(c)).

 

(b) The Party constructing, and exercising control over, the NSL Pipeline prior to the Operational Date may sometimes be referred to herein as the “Constructor.”

 

(c) Upon the Operational Date, the Parties will cooperate to have Atmos designated to the Railroad Commission of Texas as the Operator of the NSL Pipeline and Atmos will assume, subject to the direction of the Management Committee as herein provided, actual operational control of the NSL Pipeline.

 

(d) The Party exercising operational control of the NSL Pipeline after the Operational Date (as defined in Section 4.11(c)), will be known as the “Operator.”

 

(e) If there are one or more Segment Operational Dates (as defined in Section 4.11(d)), Atmos will exercise operational control over any Segment (as defined in Section 4.11(d)) that is operational, and ETF will construct and exercise control over the remaining portions of the NSL Pipeline until the Segment Operational Date or the Operational Date, whichever is applicable.

 

3.2	Insurance .

 

(a) The Parties will comply with the terms of the Insurance Schedule at all times during the term of this Agreement.

 

(b) Notwithstanding the above, it is the Parties’ intent that each Party has an insurable interest in the NSL Pipeline at all times during the term of this Agreement.

 

3.3	Voluntary Withdrawal of the Constructor or Operator .

 

(a) The Constructor or Operator will be discharged and its powers, rights, and duties terminated upon the selection of a successor Constructor or Operator by the Management Committee if the Constructor or Operator:

 

(i)

resigns; or

 

(ii)

transfers its interest in the NSL Pipeline pursuant to the provisions of Article IX, other than a transfer:

 

1.

to an Affiliate;

 

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2.

as a result of merger, corporate reorganization, consolidation or conversion; or

 

3.

in connection with the sale of substantially all of a Party’s gas transmission assets located in the State of Texas.

 

(b) From the date the Constructor or Operator notifies the Management Committee in writing of its intention to do either of items (i) or (ii), above, the Management Committee will have 120 days in which to select a successor Constructor or Operator. The current Constructor, or Operator, as applicable, will continue to serve in that capacity until the Management Committee has selected a successor.

 

(c) The Constructor’s or Operator’s withdrawal under this Section 3.3 does not affect a Party’s, or its permitted assignee’s, right to vote as a Member of the Management Committee.

 

3.4	Removal of the Constructor or Operator .

 

(a) The Constructor or Operator will be discharged and its powers, rights, and duties terminated if the Constructor or Operator:

 

(i)

becomes insolvent as defined in §101.32 of the U.S. Bankruptcy Code.;

 

(ii)

is unable to pay its debts as they fall due;

 

(iii)

voluntarily has or is subject to an order requiring a receiver, provisional liquidator, custodian, trustee or other similar official appointed with respect to it or substantially all of its assets, or one is appointed involuntarily and the receiver is not removed within 30 days;

 

(iv)

terminates its legal existence, other than as a result of a merger, share exchange, corporate reorganization, consolidation or conversion;

 

(v)

forfeits its right to transact business within the State of Texas and fails to promptly prosecute remedial actions to restore such right within a reasonable time; or

 

(vi)

fails to construct or operate the NSL Pipeline in accordance with the material terms and provisions of this Agreement.

 

Each of (i) through (vi) being a “Default Event.”

 

(b) If a Party states its intention to remove the Constructor or Operator under this Section 3.4 as the result of the occurrence of a Default Event, and the Management Committee does not approve the removal, the dispute must be submitted to the dispute resolution procedures of Article XII. The Constructor or Operator may not be discharged before the final resolution of the dispute once submitted to the dispute resolution procedures of Article XII.

 

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(c) Upon the decision of the Management Committee to remove the Constructor or Operator, or upon the decision of the dispute resolution panel under the dispute resolution procedures of Article XII to remove the Constructor or Operator, as the case may be:

 

(i)

the Management Committee must immediately select a successor Constructor or Operator (who may be a Party or any other competent person, firm or corporation); and

 

(ii)

unless the current Constructor or Operator has terminated its legal existence or forfeited its right to transact business (as stated above), the current Constructor or Operator must continue to serve as the Constructor or Operator until the Management Committee appoints a successor.

 

ARTICLE IV

NSL PIPELINE CONSTRUCTION

 

4.1

Construction . Subject to the supervision and direction of the Management Committee, the Constructor will perform or cause to be performed, in a good and workmanlike manner, in accordance with good industry practice for transmission pipelines, standard engineering practices and in compliance with all applicable laws, rules and regulations of all governmental authorities having jurisdiction, all the tasks required in connection with the Construction of the NSL Pipeline.

 

4.2	Scope of Construction .

 

(a) At the direction of the Management Committee, the Constructor will perform, or cause to be performed, the Construction of the NSL Pipeline, including all of the following tasks:

 

(i)

design, supervise and perform or cause to be performed all work necessary to make the NSL Pipeline operational;

 

(ii)

conduct and supervise a route survey for the NSL Pipeline such that the route of the NSL Pipeline is as efficient and advantageous as reasonably possible in order to accommodate the interconnections set forth in item (viii);

 

(iii)

draft, or cause the drafting, of alignment sheet drawings and plats;

 

(iv)

in compliance with all applicable laws, rules, orders and regulations of governmental authorities having jurisdiction, perform all work required to obtain the necessary real property rights (other than those real property rights, rights-of-way and easements contributed by Atmos as set forth in Section 2.1) for the NSL Pipeline, including:

 

1.

obtaining all necessary rights-of-way, easements and other interests in land for all above and below ground facilities, including any temporary construction easements that may be

 

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required and any other land and access related services necessary or advisable during the Construction;

 

2.

conducting negotiations with landowners, including settling right of way damage claims;

 

3.

using commercially reasonable efforts to acquire easements and right of way agreements providing for multiple line rights and a minimum right-of-way width of 50 feet;

 

4.

arranging for and conducting all condemnation and other legal proceedings in accordance with applicable law and pay all related court costs and fees;

 

5.

submitting reports to keep the Management Committee informed of the progress of the real property work and condemnation proceedings;

 

6.

placing of record in the appropriate counties all rights-of-way, easements and other documents that are customarily so recorded; and

 

7.

providing the other Party with copies of all recorded right of way documents as well as copies of any other agreements and documents which are not customarily recorded (e.g., railroad permits, licenses and road crossing permits);

 

(v)

specify and procure all materials and supplies to be used in the Construction;

 

(vi)

secure all necessary licenses, permits, franchises and other authorizations or approvals necessary for Construction;

 

(vii)

provide all necessary supervisory, administrative, technical and other services required for Construction, and doing all other things that are necessary or appropriate to the accomplishment of the purposes of this Agreement;

 

(viii)

construct interconnections with the following pipelines:

 

1.

Atmos’ Line W near Justin, Texas;

 

2.

ETF’s Collin Line near Frisco, Texas (the “Collin Point”);

 

3.

Atmos’ Line D17-9 near Frisco, Texas;

 

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4.

construct an interconnection between Atmos Line V North and the Bethel Howard Pipeline, near Howard Texas (the “Howard Point”); and

 

5.

other points determined by the Management Committee; and

 

(ix)

create and maintain engineering and construction files, drawings, alignment maps and similar records, and, upon completion of Construction, turn over such files, drawings, maps and records (or copies thereof) to Operator.

 

(b) At the direction and discretion of the Management Committee, the Constructor will perform, or cause to be performed, the construction of compression required to make the NSL Pipeline function in connection with the pipeline systems of the Parties, as determined by the Management Committee, including all of the following tasks:

 

(i)

acquiring the real property rights required in connection with compressor sites (substantially according to the applicable procedures set forth in (a)(iv), above);

 

(ii)

constructing compression at the interconnection of Atmos’ Line W and the NSL Pipeline at or near Justin, Texas and at the Howard Point;

 

(iii)

constructing any other compression determined by the Management Committee; and

 

(iv)

performing that portion of any of the tasks set forth in paragraph (a), above required to accomplish the purposes of this paragraph (b).

 

(c) The tasks set forth in this Section 4.2 collectively comprise the “Construction.”

 

4.3	Construction Related Contracts .

 

(a) The Management Committee may authorize Atmos or ETF employees to perform Construction related work. Except as provided herein, any Construction related work not performed by employees of Atmos or ETF or their Affiliates must be submitted for competitive bids, and awarded as determined by the Management Committee.

 

(b) Before the Constructor solicits any bids from prospective contractors, the Management Committee must approve:

 

(i)

the engineering design, specifications and general plans for Construction;

 

(ii)

the contracts that will be utilized for Construction; and

 

(iii)

all prospective contractors. Constructor and the applicable Sub-Committee shall only consider contractors that:

 

1.

maintain a program for complying with all applicable provisions of 49 Code of Federal Regulations (“CFR”) Part 192;

 

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2.

have an Experience Modification Ratio (as reported by the federal Occupational Safety and Health Administration or by an insurance provider) of less than 1; and

 

3.

maintain a program for complying with all applicable provisions of 49 CFR Part 199, including, without limitation, as pertains to drug and alcohol awareness and testing.

 

(c) The Constructor may not enter into any contract in connection with the Construction, or make any purchase of an individual item in connection therewith, in excess of $100,000.00 without the Management Committee’s prior approval.

 

(d) Pursuant to the recommendations of the applicable Sub-Committee, if any, and subject to the approval of the Management Committee, the Constructor must obtain bids (sealed or not, as recommended by the Sub-Committee and approved by the Management Committee) from prospective contractors on all contracts or purchases in excess of $500,000.00. The Constructor must give the other Party a reasonable opportunity to review the bid comparisons. The applicable Sub-Committee must approve any bid award that is not awarded to the low bid.

 

(e) Contracts for various portions of the Construction may, at the Constructor’s election, be bid and let at different times.

 

(f) All contracts entered into in connection with the Construction must be in a form, and contain terms and conditions, acceptable to the Management Committee. Except as otherwise expressly provided herein, the Constructor has direct charge and supervision of all matters arising under the contracts for Construction.

 

(g) Constructor must hire the number of third-party inspectors specified by the Engineering Sub-Committee, and such inspectors will submit reports of their findings to the Engineering Sub-Committee.

 

4.4	Management Committee To Be Kept Informed .

 

(a) The Constructor must keep an accurate and itemized record of all expenditures made or incurred during the Construction, in reasonably sufficient detail to support normal regulatory filings by either Party.

 

(b) In addition to the reports required by Section 1.6(d)(ii), the Constructor must submit to the Management Committee, when requested by the Management Committee, a report including at least the following information:

 

(i)

the progress of the Construction since the last report;

 

(ii)

updated estimates of the Construction Costs; and

 

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(iii)

any other information reasonably required by the Management Committee relating to the Construction.

 

(c) The Constructor should immediately inform the Management Committee of any accidents, injuries, work slowdowns or work stoppages that materially affect the timeline or cost of the Construction.

 

(d) The other Party not serving as Constructor (the “non-Constructor Party”) has the right, during normal business hours and at its sole expense, to inspect and copy all documents and records maintained by the Constructor relating to the Construction. Records will be made available at the Constructor’s main place of business. The Constructor must make reasonable accommodation in providing all documents and records.

 

(e) The non-Constructor Party has the right, at its sole risk and expense, to assign representatives to witness and observe all Construction activities.

 

(f) At the non-Constructor Party’s request, the Constructor will furnish the non-Constructor Party with copies of Constructor’s regularly-prepared weekly construction progress reports.

 

4.5	Construction Expenses .

 

(a) The Constructor will prepare, for approval by the Management Committee, a budget for the Construction of the pipeline portion of the NSL Pipeline as set forth in Section 4.2(a), setting forth a reasonable estimate of all of the direct and indirect expenses expected to be incurred in order to complete Construction and allowed to be charged under the terms of the Accounting Procedure (the “Pipeline AFE”).

 

(b) The Constructor will prepare, for approval by the Management Committee, a separate budget covering the cost of that portion of the Construction described in Section 4.2(b) (the “Compression AFE”), conforming in all respects to the requirements for the Pipeline AFE.

 

(c) The amounts set forth on the Pipeline AFE and the Compression AFE, collectively, will be referred to herein as the “Construction Costs.”

 

(d) The Construction Costs do not include, and Atmos will bear 100% of, the cost and expense (including any necessary additional land acquisition) of installing Tee’s and valves on the NSL Pipeline at the following additional interconnections at or near:

 

(i)

the FM 2449 crossing east of Robinson Road near the City of Ponder, Texas;

 

(ii)

the FM 1173 crossing west of Hopkins road near the City of Krum, Texas;

 

(iii)

the US I-35 crossing north of the US 77/I-35 junction near Denton, Texas;

 

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(iv)

the Line F crossing west of Green Valley Circle near the City of Denton, Texas;

 

(v)

the FM 2931 crossing north of Redfearn Road near the City of Aubrey, Texas;

 

(vi)

the FM 1835 crossing south of FM 428 near the City of Mustang, Texas; and

 

(vii)

the crossing of Fishtrap Road (CR 3) west of CR 27 near the City of Prosper, Texas.

 

4.6	Accounting for Construction Costs .

 

(a) The Constructor will establish a segregated book account for each of the Pipeline AFE and the Compression AFE, showing the charges and credits accruing in the course of Construction and the status of such charges and credits as compared to the Pipeline AFE or the Compression AFE, as applicable.

 

(b) Once the Pipeline AFE and the Compression AFE are approved by the Management Committee, the Constructor is authorized to incur the expenses contained in each, subject to the limitations set forth in Section 4.3.

 

(c) The Constructor will pay the Construction Costs as they arise, including all local, state and federal taxes incurred during Construction (other than income taxes, corporate franchise taxes and ad valorem taxes). The Constructor will endeavor to minimize expenses related to the Construction, including taking advantage of trade and cash discounts.

 

(d) The Constructor will update the Pipeline AFE and the Compression AFE as necessary when making reports to the Management Committee.

 

(e) The Pipeline AFE, the Compression AFE and the related book accounts may be audited in the same manner as provided for the Operating Account in Section 6.7.

 

(f) The Pipeline AFE and the Compression AFE are estimates, and, subject to Section 2.1(a)(ii), each Party will be responsible for paying its share of the actual Construction Costs in accordance with the provisions of this Agreement, whether more or less than the amount shown in the original Pipeline AFE and the original Compression AFE.

 

4.7	Construction-Related Work Performed by Employees of ETF . Construction-related work performed by employees of ETF or its Affiliates must be accounted for in the manner provided for work performed by employees of the Operator in Article 2 of the Accounting Procedure, attached hereto as Exhibit A .

 

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4.8	Construction-Related Work Performed by Atmos .

 

(a) Any Construction-related work approved by the Management Committee and performed by Atmos or its Affiliates will be a part of Atmos’ contribution under Section 2.1(a)(i).

 

(b) Any such Construction-related work will be accomplished according to the following procedures:

 

(i)

Atmos will prepare, and forward to ETF, an estimate (the “Estimate”) of the costs Atmos expects to incur in the succeeding 3 months (or such shorter period as may remain before the Operational Date), in order to complete the assigned work;

 

(ii)

as Atmos performs the work, Atmos will prepare and forward to ETF monthly statements setting forth the work performed that month, the cost of the work as shown in the Estimate, the actual cost of the work and Atmos’ construction overhead charge of 3.0%, to which overhead charge Atmos is entitled with respect to the work performed pursuant to this Section 4.8;

 

(iii)

Atmos will periodically provide ETF with further Estimates to cover additional work, or work that cannot be accomplished in a single 3 month period;

 

(iv)

Atmos will perform the work in compliance with the requirements of Sections 4.1, 4.3, 4.4 and 4.9, as applicable.

 

4.9

Changes .

 

(a) The Parties recognize that from time to time it may be necessary or advisable to change previously approved plans and specifications for Construction, or the contracts related to the Construction.

 

(b) The Constructor may make any changes in such plans, specifications and related contracts as it deems necessary from time to time so long as the change does not involve the expenditure of more than $100,000.00 more than the original plan, specification or contract.

 

(c) Any single change involving an additional expenditure in excess of $100,000.00, or any series of changes which in the aggregate is reasonably estimated to be in excess of $100,000.00, must have the prior approval of the Management Committee.

 

(d) Notwithstanding anything to the contrary herein, the Constructor may not make any changes that materially change the engineering or operational characteristics of the NSL Pipeline without the written approval of the Management Committee.

 

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4.10	Operational Capacity .

 

(a) The Management Committee will determine the operational specifications to be met by the NSL Pipeline, including:

 

(i)

the initial gas transportation capacity of the NSL Pipeline;

 

(ii)

the Maximum Allowable Operating Pressure (“MAOP”) of the NSL Pipeline; and

 

(iii)

the overall capacity to move gas within the NSL Pipeline Zone (as defined in Section 7.2(a)) as a result of constructing the NSL Pipeline.

 

(b) The operational specifications determined by the Management Committee under paragraph (a) will be set forth in Exhibit B , Operational Specifications.

 

(c) The Parties contemplate that custody transfer meters will be installed at the Collin Point, the Howard Point and any future interconnections with third parties. Other non-custody transfer measurement stations and associated facilities may be established as determined by the Management Committee.

 

4.11	Procedure for Certification of Completion .

 

(a) When the Constructor considers Construction to be complete, it will so notify the non-Constructor Party.

 

(b) Within 30 days of Constructor’s notification under paragraph (a), above, the non-Constructor Party will inspect and evaluate the state of completion of the NSL Pipeline according to the standards for completion shown on the Certificate of Completion, attached hereto as Exhibit C .

 

(c) When the NSL Pipeline has successfully met the standards on the Certificate of Completion, including Line Pack (as hereafter defined), the non-Constructor Party will so certify upon the Certificate of Completion, specifying the date on which the NSL Pipeline became operational and capable of transporting gas (such date being the “Operational Date”).

 

(d) The Management Committee may direct the issuance of Certificates of Completion for segments of the NSL Pipeline that are in service and capable of flowing gas (“Segments”) before the Operational Date (a “Segment Operational Date”). If a Segment Operational Date is established, Atmos will assume the operational control of the completed Segment, and the portions of this Agreement relating to the “Operator” will apply to that completed segment.

 

(e) When Atmos completes the construction of compression at the Howard Point pursuant to Section 4.2(b)(ii), it will so notify the Constructor. Within 30 days of Atmos’ notification, the Constructor will inspect and evaluate the state of completion of the work according to the standards for completion shown on the Certificate of Completion. When

 

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the work has met the standards on the Certificate of Completion, the Constructor will so certify upon the Certificate of Completion, specifying the date on which the compression at the Howard Point became operational.

 

4.12	Line Pack .

 

(a) The Engineering Sub-Committee will determine the volume of natural gas necessary for the physical operation of the NSL Pipeline (the “Line Pack”). The initial operating pressure will be determined by the Management Committee.

 

(b) Atmos will supply the initial Line Pack. The Management Committee will determine the total quantity of natural gas, in MMBtu’s, comprising the initial Line Pack, and ETF will make available to Atmos a quantity of natural gas equal to 50% of the total MMBtu in the initial Line Pack. Atmos’ cost to furnish the initial Line Pack is not subject to the limit on Atmos’ liability for Construction Costs set forth in Section 2.1(a)(ii). All gas supplied for Line Pack must meet the gas quality specifications set forth on Exhibit D (Gas Quality, Measurement and Testing).

 

(c) At the request of either Party, the Management Committee will make the necessary modifications to the NSL Pipeline to establish it as a separate balancing zone, such that the Operator will be able to calculate the gain or loss of gas on the NSL Pipeline. The Management Committee will determine the cost of accomplishing this task, which will be borne 50% by each Party.

 

4.13	Title to the NSL Pipeline .

 

(a) Except as set forth in paragraph (b), below, during the period of Construction, each Party (to the extent it formally takes title to any interest in its name during Construction) will hold title to the properties constituting the NSL Pipeline in its own name.

 

(b) Atmos has executed the assignment, a copy of which is attached hereto as Exhibit F (the “Assignment to ETF”), assigning to ETF its undivided interest in all rights of way, easements and other real property interests described on the exhibit to such assignment, as its portion of the contribution described in Section 2.1(a)(i)1.

 

(c) ETF will execute an assignment, substantially in the form attached hereto as Exhibit G (the “Assignment to Atmos”), assigning to Atmos a 50% undivided interest in and to:

 

(i)

the Segment or Segments, and compression, if any, including all associated rights-of-way, easements and other real property interests, determined to be complete as of December 31, 2005 (pursuant to Section 2.1(b)), to be executed no later than 5 days following the date on which Atmos makes the payment pursuant to Section 2.1(c)(i); and

 

(ii)

the remaining portion of the NSL Pipeline and compression, including all rights-of-way, easements and other real property interests acquired for

 

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Construction, to be executed no later than 5 days following the date on which Atmos makes the payment pursuant to Section 2.1(c)(ii).

 

(d) If either Party constructs additional portions of the NSL Pipeline after the date of the assignments executed in paragraphs 4.13(b) and (c), above, that Party will promptly assign to the other Party the interest in the addition to which it is entitled according to the provisions of this Agreement.

 

(e) Each Party will be responsible for recording in the applicable counties any assignment it receives pursuant to this Section 4.13.

 

4.14	Ad Valorem Assessment .

 

(a) Unless the Management Committee determines otherwise, the Operator will administer the NSL Pipeline as a single unit for ad valorem tax purposes. At the direction of the Management Committee, the Operator will employ a property tax consultant for the purpose of minimizing ad valorem tax liability and contesting, if necessary, any valuation of the NSL Pipeline.

 

(b) The Operator will timely pay all ad valorem taxes due on the NSL Pipeline, and will bill the other Party for its 50% share of the ad valorem taxes, independent of the procedure for payment of operating costs as established in Section 6.2.

 

ARTICLE V

PIPELINE OPERATIONS

 

5.1	General Duties of the Operator . From and after the Operational Date, or any Segment Operational Date, as applicable:

 

(a) the Operator will perform the duties assigned to it in this Agreement in a good and workmanlike manner, subject to the authority of the Management Committee, in accordance with all applicable state and federal laws, rules and regulations; and

 

(b) the Operator must exercise the same care and judgment as would a reasonably prudent operator under the same or similar circumstances.

 

5.2	Responsibilities of the Operator . From and after the Operational Date, or any Segment Operational Date, as applicable, and subject to the authority and direction of the Management Committee, as expressly provided herein, the Operator will:

 

(a) operate, maintain and repair the NSL Pipeline for the mutual benefit of the Parties;

 

(b) procure and furnish all materials, equipment, services, supplies and labor necessary to carry out the Operator’s responsibilities under this Agreement;

 

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(c) receive, transport and deliver gas to be transported through the NSL Pipeline:

 

(i)

by receiving natural gas, at the inlet side of the metering facilities located at the receipt points the Operator establishes from time to time;

 

(ii)

at operating pressures that do not exceed the MAOP of the NSL Pipeline as determined by the Management Committee in accordance with all applicable regulations;

 

(iii)

in conformity with the gas quality and measurement specifications set forth in Exhibit D (Gas Quality, Measurement and Testing); and

 

(iv)

for delivery at the outlet side of the metering facilities (if such metering facilities are owned by the Operator or Operator has the contractual right to access such metering facilities) or at the inlet side of metering facilities owned or controlled by others located at the delivery points the Operator establishes from time to time;

 

(d) determine, for the effective operation of the NSL Pipeline, consistent with the manner of performing its other pipeline operations:

 

(i)

the number of employees necessary; and

 

(ii)

the hours of labor, compensation and benefits to be paid to the employees;

 

(e) select and hire the employees and pay their wages and salaries. Any or all of the employees may be employees of the Operator or of any affiliate of the Operator;

 

(f) perform the accounting, legal, tax, engineering, construction, planning, budgeting, and regulatory reporting and compliance (including reporting and compliance with pipeline integrity regulations) functions associated with operation of the NSL Pipeline;

 

(g) supervise and administer all contracts, easements and covenants which may have been entered into in connection with operation of the NSL Pipeline including the collection or payment on behalf of the Parties of amounts due or payable thereunder, subject in each case to the provisions of the Accounting Procedure;

 

(h) subject to the terms of the Accounting Procedure, make sales, exchanges or other dispositions of materials, equipment and supplies not needed for operation of the NSL Pipeline (including pipe or other equipment salvaged from or constituting a part of the NSL Pipeline);

 

(i) retain the services and determine the compensation of such outside contractors, consultants and attorneys as may be necessary from time to time in performance of the Operator’s obligations under this Agreement;

 

(j) file returns and pay taxes (other than ad valorem taxes and corporate franchise and income taxes) and other charges, assessments and other similar payments due or payable from time to time upon or in connection with any facilities or properties constituting a part of the NSL Pipeline;

 

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(k) prepare and file for the Parties all reports required in conjunction with the operation of the NSL Pipeline, which are required by regulatory bodies or agencies having jurisdiction over the NSL Pipeline or the operation thereof;

 

(l) maintain the engineering and construction files, drawings, alignment maps and similar records turned over to it by the Constructor; and

 

(m) do all other things which it shall deem necessary or appropriate to the accomplishment of the purposes of this Agreement.

 

5.3	Reports to the Management Committee . Following the Operational Date, the Operator must report to the Management Committee, no less often that once each 6 months, regarding its operation of the NSL Pipeline. The reports must include at least the following information:

 

(a) as of the date of each meeting, a report on the status of expenditures (both capital and expense) as compared, since the last report, to the budget prepared under Section 5.4;

 

(b) a detailed report of the operations and maintenance of the NSL Pipeline since the last report; and

 

(c) the date any new facilities are added to or removed from the NSL Pipeline and placed in service or removed from service.

 

5.4	Operating Budget .

 

(a) The Operator must prepare an operating budget prior to the beginning of each calendar year. The budget must:

 

(i)

show the estimated operating and maintenance expenses for the coming year;

 

(ii)

show any projected or proposed capital expenditures for the coming year;

 

(iii)

allocate expenditures according to the month in which they are expected to be incurred;

 

(iv)

be submitted to the Management Committee for approval prior to November 1 st of each year or such other date as determined by the Management Committee; and

 

(v)

be approved by the Management Committee in order for it to become effective.

 

(b) For any period of time less than 12 calendar months between the Operational Date, or any Segment Operational Date, as applicable, and the next succeeding January 1, the Operator will prepare, and submit for Management Committee

 

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approval, a stub-period budget, conforming as closely as possible to the requirements of paragraph (a), above.

 

(c) Once approved by the Management Committee, the Operator is authorized to incur the expenditures contained in the budget.

 

(d) Operator may not, without the approval of the Management Committee:

 

(i)

incur expenditures on any single item that are 50% or $100,000.00 (whichever is the greater) in excess of the amount budgeted for that item; or

 

(ii)

undertake any single unbudgeted expense exceeding $100,000.00; or

 

(iii)

incur expenditures on any single item of unbudgeted repair, construction or other expense that would cause the cumulative total of unbudgeted repairs, construction or other expenses to exceed $500,000.00 in any calendar year; or

 

(iv)

incur expenditures on unbudgeted items that, in the aggregate, exceed $500,000.00 in any single calendar year.

 

(e) If it becomes necessary or desirable for the Operator to incur an expenditure in excess of the limits described in Paragraph (d) of this Section 5.4, the Operator must:

 

(i)

submit an authorization for expenditure to the Management Committee, describing the anticipated budget overrun or unbudgeted expense and the reason the expense is necessary; and

 

(ii)

secure the approval of the Management Committee to the budget overrun or unbudgeted expense prior to incurring it.

 

(f) Without regard to Paragraphs (c), (d) or (h) of this Section 5.4, in the case of emergency, including explosion, fire, storm or line breaks, the Operator must:

 

(i)

take all actions and incur all expenses reasonably necessary to deal with the emergency and to safeguard life and property; and

 

(ii)

as promptly as possible, notify the Management Committee and the non-operating Party in writing of the emergency and of all actions taken and expenses incurred as a result thereof.

 

(g) The other Party not serving as Operator (the “non-Operator Party”) must supply the Operator, on a timely basis, any information the Operator reasonably requests in order to assist the Operator in preparation of the budget.

 

(h) If the Management Committee cannot agree upon a budget for any year prior to the date that the budget would become effective:

 

(i)

the dispute will be submitted to the dispute resolution procedures of Article XII; and

 

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(ii)

the Operator will continue to operate under the existing budget until the new budget is approved, except that the items in the existing budget will be increased by an amount that is equal to the percentage difference between the seasonally unadjusted Consumer Price Index for All Urban Consumers (all items), U.S. City Average (1982-84 = 100), as published by the U.S. Department of Labor, Bureau of Labor Statistics (the “CPI-U”) for the month of May of the year prior to the year of the dispute and the seasonally unadjusted CPI-U for the month of May in the year of the dispute. For example, if the budget for the year 2007 is not agreed to before January 1, 2007, the Operator will operate under the budget for 2006, adjusted by the percentage difference between the CPI-U for the month of May 2005 and the month of May, 2006, until such time as a budget for 2007 is finally determined.

 

5.5	Access . The non-Operator Party will have the right at all reasonable times, during usual business hours and at its own risk and expense, to inspect the NSL Pipeline and any related records (other than financial accounting records, access to which is subject to Section 6.7).

 

ARTICLE VI

OPERATING ACCOUNT

 

6.1

Operating Account . The Operator will establish a segregated book account showing the charges and credits accruing in the course of operating the NSL Pipeline, which charges and credits are to be shared by the Parties in proportion to each Party’s interest in the NSL Pipeline (the “Operating Account”).

 

6.2	Payment of Operating Expenses .

 

(a) Subject to Section 7.1, each Party will pay its 50% share of the NSL Pipeline operating costs to the Operating Account by paying, on or before the last day of each month after the Operational Date, the amount of the expected expenditures (both capital and operational) set forth in the budget for that month.

 

(b) Not later than 60 days after the end of each calendar year, the Operator will supply to each Party a statement reconciling the actual expenditures from the Operating Account for the prior year against the amounts paid by the Party to the Operating Account. If one Party owes the other Party an amount determined after such reconciliation, the owing Party must pay that amount to the other Party not later than 90 days following the end of the applicable calendar year.

 

6.3	Advances .

 

(a) If, in the course of any year, the Management Committee determines the need to perform work (either of a capital or operational nature) that was not included in the

 

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budget and that is reasonably expected to cost more than $50,000.00 to complete, the Operator may require the non-Operator Party to pay its proportionate share of the cost of the expected expenditure in accordance with paragraph (b), below.

 

(b) Each Party must pay any such cash call within 30 days of the receipt of the of the invoice(s) therefor, in addition to paying its regular share of the expected expenditures, as set forth in Section 6.3(a), above.

 

(c) If a Party fails to timely pay an invoice under this Section 6.3, the owing Party’s deficiency will accrue interest at the interest rate set forth in Section 6.4 from the due date until the date the owing Party pays the amount thus due.

 

6.4	Interest on Late Payments .

 

(a) All payments due under the terms of this Agreement, including those due under Section 6.3 but excluding disputed amounts pursuant to Section 6.6, are subject to the interest charges for non-payment, and the limitations thereon, as provided in this Section 6.4.

 

(b) The interest rate for late payments will be equal to the Bank Prime Loan Rate announced by the Federal Reserve, plus 3 percent and will change simultaneously with each announced change in the Bank Prime Loan Rate.

 

(c) Interest will be compounded daily and computed for the actual number of days elapsed on the basis of a year consisting of 365, or, when appropriate, 366 days.

 

(d) In no event may the interest rate provided for in this Agreement ever exceed the maximum lawful interest rate allowed by the laws of the State of Texas and if at any time or under any circumstances the interest rate calculated herein exceeds the maximum rate allowed by law, the amount due will be limited to the maximum lawful interest rate.

 

6.5

Other Effects of Late Payment . Without limiting the other remedies available to the Operator, if a Party is more than 30 days late in making any payment due under the terms of this Agreement, the Operator may file the Recording Memorandum, attached hereto as Exhibit H , or any other documents it deems necessary as a lien or mortgage in the applicable real estate records or a financing statement with the proper officer under the Uniform Commercial Code (the “Code”), or both, and will be entitled to exercise the rights and remedies of a secured party under the Code. The Party filing the lien or mortgage must promptly place of record a release of the lien or mortgage if the owing Party makes payment in full of the amounts due.

 

6.6	Payment Disputes .

 

(a) If a Party has a bona fide dispute about the amount of any payment required by any invoice issued under the terms of this Agreement, it must notify the other Party of the dispute prior to the date that the payment is due.

 

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(b) The Party owing any amount must pay the un-disputed amounts, if any, according to the terms of this Agreement, in full, prior to the due date of the applicable payment.

 

(c) If the Parties do not resolve the dispute within 30 days after the applicable due date, the Parties will submit the dispute to the dispute resolution procedures set forth in Article XII.

 

(d) If it is ultimately determined, through the dispute resolution procedures of ARTICLE XII or by subsequent agreement, that the disputing Party owes the disputed amount, or any part thereof, interest will accrue on the amount due from the date that the amount should have originally been paid under the terms of the invoice.

 

6.7	Books and Records, Audit .

 

(a) Upon reasonable request, the non-Operator Party may, at its sole cost and expense, audit the Operating Account and related books and records of the Operator or its applicable Affiliates relating to the costs, expenses and expenditures incurred pursuant to this Agreement.

 

(b) Either Party may request that the Management Committee:

 

(i)

conduct, or cause to be conducted, not more often than once each year, an audit of the Operating Account by an independent certified public accounting firm chosen by the Management Committee;

 

(ii)

require that each audit cover the period intervening since the last audit;

 

(iii)

require that the auditor prepare a written report of the results of the audit;

 

(iv)

provide the audit report to the Parties; and

 

(v)

charge the costs of the audit to the Operating Account.

 

ARTICLE VII

GAS TRANSPORTATION

 

7.1	Atmos Use of the NSL Pipeline .

 

(a) Atmos will have the right to call upon and make use of up to 100% of the gas transportation capacity of the NSL Pipeline in order to provide services to its distribution customers, in accordance with the provisions of the Capacity Recall and Exchange Provisions attached hereto as Exhibit E .

 

(b) Pursuant to Exhibit E , the Parties acknowledge that ETF will require the delivery of a quantity of gas (the “Transportation Quantity”) in order to satisfy ETF’s obligations with respect to contracts for gas transportation within the NSL Pipeline Zone. Exhibit E provides the terms under which Atmos may call upon and make use of the transportation

 

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capacity of the NSL Pipeline to transport quantities of gas up to, but not in excess of, the Transportation Quantity.

 

(c) If Atmos makes use of the NSL Pipeline to transport quantities of gas in excess of the Transportation Quantity, Atmos must bear the incremental cost, if any, including any incremental use of natural gas as compressor fuel, incurred with respect to the NSL Pipeline solely in effecting the delivery of that excess quantity.

 

7.2	NSL Pipeline Zone .

 

(a) Atmos has dedicated the use of portions of its larger pipeline system to be used in conjunction with the NSL Pipeline to create a receipt and delivery area for gas transported within the North Texas area (the “NSL Pipeline Zone”).

 

(b) Gas will enter the NSL Pipeline Zone at points of receipt on the Atmos pipeline system, which points of receipt, as described below, will be referred to herein individually as a “Receipt Point,” and collectively as the “Receipt Points”:

 

(i)

at the tailgate of the Dynegy Chico Plant in Wise County, Texas;

 

(ii)

at the interconnection of the ETF and Atmos pipeline systems at or near Springtown, Texas;

 

(iii)

at the tailgate of the Enbridge Springtown Plant;

 

(iv)

at the J-W Denton Creek interconnection in Denton County, Texas;

 

(v)

at the J-W Sweetwater Creek interconnection in Wise County, Texas; and

 

(vi)

any other points determined by the Management Committee.

 

(c) Gas will leave the NSL Pipeline Zone at the points of delivery described below, which points of delivery will be referred to herein individually as a “Delivery Point,” and collectively as the “Delivery Points”:

 

(i)

the interconnections with various pipelines described in Section 4.2(a)(viii), other than the interconnection with Atmos Line W near Justin, Texas;

 

(ii)

the interconnections designed to service Atmos’ distribution customers, set forth in Section 4.5(d) (and future interconnections for this purpose constructed pursuant to Section 8.2(b)); and

 

(iii)

the outlet side of the compression facilities constructed, or improved, pursuant to this Agreement, as described in Section 4.2(b), at the Howard Point.

 

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7.3	Marketing Capacity .

 

(a) If no agreement is reached whereby the capacity of the NSL Pipeline is handed off to another party (a “Pipeline Access and Transportation Agreement”) by the Operational Date, or if any Pipeline Access and Transportation Agreement entered into by the Parties thereafter ceases to be effective for any reason, ETF will be responsible for marketing the natural gas transportation capacity in the NSL Pipeline Zone and the remaining provisions of this Section 7.3 will apply.

 

(b) The Management Committee will approve a form of contract covering the various gas transportation services to be offered on the NSL Pipeline. In addition to any other provisions determined by the Management Committee, the form contract will provide for each Shipper to make two payments for each month’s transportation services, one half of each month’s total charges to be paid directly to each of Atmos and ETF.

 

(c) In connection with marketing the natural gas transportation capacity in the NSL Pipeline Zone:

 

(i)

ETF will be responsible for:

 

1.

contacting potential customers for gas transportation services (each, a “Shipper,” and collectively, the “Shippers”);

 

2.

negotiating the terms of contracts for gas transportation services;

 

3.

subject to the Management Committee’s approval of the final form of th