Exhibit No. 10.1
Confidential Materials omitted and filed
separately with the
Securities and Exchange Commission. Asterisks denote
omissions.
TEXAS GENCO II, LP
September 21,
2005
Texas
Westmoreland Coal Co.
P.O. Box 915
Jewett, Texas 75846
Attn: Mr. Mark Seglem, Vice President and General
Manager
Re: Letter
Agreement Regarding Lignite Supply Agreement
Dear Mr.
Seglem:
Reference is made to that certain
Lignite Supply Agreement, dated as of August 29, 1979 (the “
Original LSA ”), between Texas Westmoreland Coal Co.
(f/k/a Northwestern Resources Co.) (“ TWCC ”)
and Texas Genco II, LP (party to the agreement as a result of its
merger with Texas Genco, LP (successor to Utility Fuels, Inc.))
(“ Texas Genco ”), as modified by: (i) that
certain Construction and Operation Agreement, dated December 17,
1985 (the “ C&O Agreement ”); (ii) that
certain Settlement Agreement and Amendment of Existing Contracts,
dated August 2, 1999 (the “1999 Settlement Agreement
”); (iii) that certain Letter Agreement, dated June 18, 2002
(the “ 2002 Supplemental Agreement ”); (iv) that
certain Supplemental Settlement Agreement, dated January 30, 2004
(the “ 2004 Supplemental Agreement ”); (v) that
certain Letter Agreement dated March 11, 2005 (the “
Surcharge Agreement ”); and (vi) that certain Letter
Agreement dated July 26, 2005 (the “ Interim Agreement
” and collectively with the Original LSA, C&O Agreement,
the 1999 Settlement Agreement, the 2002 Supplemental Agreement, the
2004 Supplemental Agreement, and the Surcharge Agreement, the
“ LSA ”). Capitalized terms used but not defined
herein shall have the respective meanings set forth in the
LSA.
Whereas, the Parties are in
discussions about restructuring the LSA, and
Whereas, TWCC has informed Texas
Genco that certain capital expenditures must be funded immediately
to assure necessary production levels of lignite at the Jewett Mine
pursuant to the current agreed production schedule, and
Whereas, Texas Genco desires to
ensure continuous delivery of lignite to the Limestone Electric
Generating Station (“LEGS”), and
Whereas, the Parties entered into
the Interim Agreement to memorialize certain agreements regarding
such capital expenditures and other matters through September 10,
2005, and
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Whereas, this letter agreement
(this “ Letter Agreement ”) is intended to
memorialize certain agreements regarding such capital expenditures
and other matters,
Now,
therefore, Texas Genco and TWCC, for good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, hereby mutually agree as follows:
1.
Certain Capital Expenditures .
(a) With
respect to TWCC’s performance of its obligations under the
LSA consistent with the standard of care of a reasonable mine
operator, Texas Genco agrees to pay (i) reasonable third party cash
expenses, including applicable sales taxes; and (ii) all of
TWCC’s cash costs (“ TWCC Costs ”), in
each case as incurred or payable by TWCC for the capital projects
and expenditures described in the current forecast on Exhibit A for
the Second Interim Period (collectively, the “ Covered
Capital Expenses ”). In the event of new or unforeseen
capital requirements, such as those resulting from major dragline
repair or equipment failure, the parties will make reasonable
adjustments to Covered Capital Expenses on Exhibit A.
(b)
TWCC shall continue to supervise all work related to the Covered
Capital Expenses as described in Exhibit A. Texas Genco (or its
representatives) shall have the right to monitor the progress of
the projects described in Exhibit A and TWCC shall provide Texas
Genco (or its representatives) with reasonable access to the work
site and subcontractors or employees performing the work as
reasonably necessary to conduct such monitoring; specifically, TWCC
shall designate representatives at the Mine through whom Texas
Genco shall communicate any and all requests and coordinate any and
all on site visits provided the visits shall not impede work at the
Mine. TWCC shall confer with Texas Genco, if requested, to review
the work performed or to be performed and TWCC shall give due
consideration to recommendations of Texas Genco (including its
consultants) and to the extent such recommendations do not result
in additional expense or Texas Genco agrees to reimburse TWCC for
such expense, and such requests are commercially reasonable, TWCC
shall give effect to such recommendations, subject to the right of
TWCC, as owner of the mine, to control all matters affecting health
and safety, regulatory compliance, environmental protection, hiring
and terminating employees and contractors, reputation and standing
in the community and the mining industry, meeting obligations to
parties other than TGN, and prudent management of operations and
resources. Texas Genco representatives shall at all times be
escorted at the Mine by TWCC designated personnel (unless otherwise
agreed to by a TWCC designated representatives) and on-site visits
and other requests shall not impede work at the Mine. TWCC shall
solicit competitive bids to perform such work, except as otherwise
agreed by the parties. TWCC shall not be required to obtain Texas
Genco’s prior approval for any specific Covered Capital
Expense related to any capital project so long as the projected
total expenditures for such capital project does not exceed 110% of
the estimated amount of Covered Capital Expenses specified in
Exhibit A for such capital project. In the event that the projected
Covered Capital Expenses related to a capital project would exceed
110% of the estimated Covered Capital Expenses for such capital
project as specified in Exhibit A, TWCC shall provide Texas Genco
with revised cost projections for such capital project, and Texas
Genco shall not be obligated to pay such additional expenses unless
and until it expressly agrees in writing to do so; provided,
however, that TWCC may exceed 110% of the estimated Covered Capital
Expenses with respect to a capital project without the consent of
Texas Genco if TWCC bears the cost of such excess
amount.
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(c) TWCC
shall use commercially reasonable efforts to cause all
subcontractors and vendors to perform their work in conformity with
all provisions hereof. No subcontractor or vendor is intended to
be, or shall be deemed to be, a third-party beneficiary of this
Letter Agreement. Nothing contained herein shall create any
contractual relationship between any subcontractor or vendor and
Texas Genco with respect to the work, products or services being
provided to TWCC by such subcontractor or vendor.
(d) TWCC
shall cause its subcontractors and vendors to issue invoices in the
name of TWCC for the portion of the work performed by such
subcontractor or provided by such vendor. TWCC shall review the
payment (including the identification of any disputes regarding
such requested payment) of all invoices for services performed by
such subcontractors and vendors. TWCC shall not approve any invoice
for payment that is not otherwise due and payable in accordance
with the terms of the applicable subcontract (including, without
limitation, the applicable milestone or progress payment schedule,
if any, set forth in such subcontract).
(e)
TWCC will pay invoices in respect of Covered Capital Expenses
directly to the applicable subcontractor or vendor in accordance
with the terms of such invoice. Twice each month during the Second
Interim Period, TWCC shall forward such invoices to Texas Genco,
and Texas Genco will reimburse TWCC for the payment on the invoices
by wire transfer within 15 days from the date of receipt of
relevant documentation by Texas Genco. In the case of TWCC Costs,
TWCC will send an invoice to Texas Genco as such expenses are
incurred but no more frequently than twice a month, and Texas Genco
will pay such invoices by wire transfer within 15 days from the
date such invoices are received by Texas Genco. Texas Genco shall
have, and TWCC shall afford to Texas Genco, reasonable audit rights
with respect to all Covered Capital Expenses invoiced to or paid or
reimbursed by Texas Genco.
(f) Notwithstanding
anything to the contrary herein or in the LSA (including the
Interim Agreement), Texas Genco shall not be responsible for paying
or reimbursing TWCC’s expenses in connection with its
performance under the LSA (including the Covered Capital Expenses)
except as expressly provided above, unless the parties hereto shall
mutually agree otherwise in their sole and absolute discretion.
Without limiting the foregoing sentence, and notwithstanding
anything herein to the contrary, the following are specifically
excluded from Covered Capital Expenses and shall remain the
liability of TWCC with no right to collect any portion thereof from
Texas Genco: (i) any liabilities, expenses or obligations of TWCC
(or any of its affiliates) incurred prior to July 1, 2005 or in
connection with goods or services rendered prior to July 1, 2005;
(ii) any liability to a third party in connection with litigation
or settlement in anticipation of litigation of any type of claim at
any time; (iii) any costs incurred as a result of the negligence,
gross negligence or willful misconduct of TWCC; (iv) any penalty or
fine imposed by any governmental authority for any failure of TWCC
to comply with any applicable law; or (v) any liability, expense or
loss incurred by TWCC or any of its affiliates in connection with
any Covered Capital Expenses other than expenses payable to third
parties and TWCC Costs.
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2. The
Parties agree to extend the Lignite Fuel Surcharge Term (as defined
in the Surcharge Agreement) to include the period from September
11, 2005 to December 31, 2005 (the “ Second Interim
Period ”), with the Lignite Fuel Surcharges (as defined
in the Surcharge Agreement) with respect to the Second Interim
Period to be calculated in accordance with the Surcharge Agreement;
provided, however, that, with respect the Second Interim Period,
(a) the “actual” PPI component (both preliminary and
final) used in the calculation of the Lignite Fuel Surcharge shall
be equal to 105% of such actual PPI, as provided by and defined in
the Surcharge Agreement; (b) Section 13 of the “Lignite
Surcharge Calculation Notes” to Annex A of the Surcharge
Agreement shall be disregarded when calculating the Lignite Fuel
Surcharge for any month or partial month in the period from
September 11, 2005 and December 31, 2005; and (c) notwithstanding
anything to the contrary in the Surcharge Agreement, or the
exhibits thereto, the actual escalation multiplier for the lignite
fuel inventory component of the Lignite Fuel Surcharge (as set
forth in Annex A to the Surcharge Agreement and the notes thereto)
shall be deemed to be 0.10 for each of the months (or partial
months) in the period from August 1, 2005 to December 31, 2005.
Except as expressly provided in the proviso to the preceding
sentence, all penalties associated with deliveries specified in the
LSA (including the Surcharge Agreement) shall remain in effect
during the Second Interim Period. The payments to be made by Texas
Genco pursuant to this paragraph are referred to hereafter as the
“ Interim Surcharge Payments ”.
3. TWCC
acknowledges and agrees that Texas Genco is under no obligation
under the LSA to agree to pay the Covered Capital Expenses, the
Interim Surcharge Payments, or the Special Management Fee (defined
below) and that Texas Genco’s agreement to pay such amounts
is being made entirely in its discretion in response to statements
from TWCC that it is unwilling to incur such expenses and in
consideration of the representations, warranties and covenants of
TWCC contained in this Letter Agreement, the Surcharge Agreement
and the Interim Agreement. TWCC further acknowledges and agrees
that, except as expressly stated in the LSA, it is not entitled to,
and Texas Genco is under no obligation whatsoever to grant, any
increase or renegotiation of amounts payable to TWCC under the LSA
(or modification of the agreed upon formulae or procedures for
calculating such amounts), and this Letter Agreement, the Surcharge
Agreement and the Interim Agreement shall not under any
circums
