WOOD CHIP SUPPLY AGREEMENT
THIS AGREEMENT is made as of this 14th day of May, 1999 by and between CHAMPION INTERNATIONAL CORPORATION, a New York corporation (“Seller”) and BLUE RIDGE PAPER PRODUCTS INC., a Delaware corporation (“Buyer”).
WHEREAS, under that certain Asset Purchase Agreement dated as of March 29, 1999 between the Buyer and Seller, (the “Asset Purchase Agreement’), Buyer has purchased the pulp and paper mill formerly owned by Seller in Canton, North Carolina (the “Canton Paper Mill”) and desires to purchase certain volumes of Chips (as defined below) from Seller, and Seller desires to sell the Chips to Buyer;
NOW, THEREFORE , in consideration of the above premises and mutual covenants and agreements contained herein, the parties agree as follows:
1. Definitions . For purposes of this Agreement, the following terms shall have the meanings set forth below:
(a) “Average Log Cost” shall mean the average price paid by Seller for pine logs and hardwood logs purchased from third parties and delivered to each respective Chip Mill during each calendar month. Buyer acknowledges that Seller shall use logs from its own lands and from long-term contracts held by Seller to supply the Chip Mills and that all such logs shall be valued at Average Log Cost.
(b) “Chip Mills” shall mean Seller’s chip producing facilities at Royal Blue, Tennessee and Newberry, South Carolina (the “Chip Mills”).
(c) “Chip Specifications” shall mean the wood chip specifications set forth on Schedule A.
(d) “Chips” shall mean Hardwood Chips and Pine Chips purchased by Buyer hereunder.
(e) “Contract Year” shall mean each twelve month period during the term of this Agreement with the first Contract Year beginning on the Closing Date and ending on the first anniversary.
(f) “FOB” shall mean free on board.
(g) “Hardwood Chips” shall mean hardwood chips purchased by Buyer hereunder meeting the specifications set forth on Schedule A.
(h) “Pine Chips” shall mean pine wood chips purchased by Buyer hereunder meeting the specifications set forth on Schedule A.
(i) “Ton” shall mean 2,000 pounds.
(j) “Transition Period” shall mean the first Contract Year.
2. Purchase and Sale . Each Contract Year, Seller agrees to sell and Buyer agrees to purchase five hundred and fifty thousand (550,000) Tons of Pine Chips and one hundred ninety thousand (190,000) Tons of Hardwood Chips on the terms and conditions stated herein. Buyer may increase the volume of Hardwood Chips to be produced by Seller at the Royal Blue Chip Mill and sold to Buyer by providing Seller with six (6) months prior notice. Seller shall produce such additional volume and sell same to Buyer on the terms and conditions set forth herein unless Seller is unable to do so because of contracts to sell hardwood chips to third parties or lack of capacity. Seller shall notify Buyer whether it can meet Buyer’s request for additional volume within ten (10) business days after receipt of Buyer’s notice.
3. Term . This Agreement shall commence on May 14, 1999 and shall terminate on May 14, 2004 (five (5) years thereafter), provided, however, that so long as Buyer is not in material default hereunder, Buyer may elect to extend this Agreement for an additional five (5) years on the terms and conditions set forth herein by giving Seller written notice of extension on or before November 14, 2004. If Buyer exercises its option for the five-year term commencing May 14, 2004 date] and Buyer is not in material default hereunder, Buyer may elect to extend this Agreement for an additional five (5) years on the terms and conditions set forth herein by giving Seller written notice of extension on or before November 14, 2008.
4. Delivery .
4.1 Annual Volumes . The parties shall make reasonable efforts to order and deliver the annual volumes of Hardwood Chips and Pine Chips required hereunder in fifty (50) equal weekly installments (the parties contemplate scheduling two weeks of maintenance and down time at the Chip Mills and Canton Paper Mill). Deliveries required in any week may be decreased due to weather conditions as provided in Sections 12 and 13. A tentative weekly delivery schedule through June 30, 1999 is attached as Schedule B. At least two weeks prior to July 1, 1999 and each October 1, January 1, April 1 and July 1 thereafter, the parties shall establish a tentative delivery schedule for the upcoming three month period. Scheduled maintenance and down time at both the Chip Mills and the Canton Paper Mill shall be taken into
account in determining the schedule. The parties shall confirm each week’s tentative delivery schedule prior to the start of such week and shall make reasonable efforts to accommodate changes to such weekly schedule.
4.2 Delivery Point . Chips shall be delivered by rail or truck FOB the Chip Mill.
4.3 Scaling . Chips shall be weight-scaled at the Canton Paper Mill. Buyer shall provide Seller with a copy of all weight-scale tickets.
4.4 Unloading . Buyer shall use commercially reasonable efforts to receive and unload trucks and rail cars promptly.
4.5 Title . Except as set forth in Section 4.6, title and risk of loss shall pass to Buyer when the Chips -re loaded onto carriers at the Chip Mills.
4.6 Non-Conforming Loads .
(a) Buyer shall promptly provide Seller with written notice (“Buyer’s Notice”) of any load of Chips that does not meet the applicable Chip Specifications and Seller shall use its best efforts to correct the problem with respect to future deliveries within twenty-four (24) hours (the “Correction Period”). Buyer shall take delivery of all loads that are out of specification shipped prior to the expiration of the Correction Period, provided, however, that if Seller is unable to cure an identified problem within the Correction Period, Buyer may elect to reject future deliveries that are out of compliance due to the identified problem, and further provided that Buyer may immediately reject any load contaminated with plastic or other non-wood contaminants affecting the paper making process. Upon Buyer’s rejection or revocation of acceptance of any delivery of Chips, title to such Chips shall revert to Seller and all costs of disposal and removal of such Chips shall be borne by Seller.
(b) Notwithstanding the foregoing, (i) nothing in this Section will relieve Seller of its obligation under this Agreement to sell and deliver Chips meeting the Chip Specifications and the failure of Buyer to reject a delivery of Chips not meeting the Chip Specifications shall not constitute a waiver of Buyer’s rights hereunder, including, without limitation, the right to reject, or revoke acceptance of, future deliveries not meeting the Chip Specifications and (ii) any Buyer’s Notice made in good faith shall not (A) be deemed to be a repudiation of this Agreement and (B) give any right to Seller to cancel or otherwise terminate this Agreement.
4.7 Transportation . During the Transition Period, Seller shall continue to enter into and administer truck and rail transportation contracts for the delivery of Chips from the Chip Mills to the Canton Mill, and at Buyer’s request, Seller shall in good faith assist Buyer in establishing Buyer’s own transportation arrangements. The costs of transportation, as described in Section 6.1(c), incurred during the Transition Period shall be charged to Buyer on a pass-through basis.
4.8 Specifications . On the second and fourth anniversaries hereof, Buyer shall
have the right to propose reasonable changes to the specifications of the Chips and Seller shall use commercially reasonable efforts, using its existing equipment, to meet such proposed specifications.
5. Price . The purchase price for Chips shall be the sum of the following costs:
(a) all processing costs associated with the processing of chips at the Chip Mills (whether or not related to chips produced for Buyer’s account);
(b) an overhead fee of five percent (5%) of the processing costs which shall include running the scale house, accounting services, human resources, safety training, purchasing support and Chip quality consultation services;
(c) the wood procurement costs (e.g., salaries, benefits, equipment and expenses);
(d) the cost of all logs converted into Chips; and
(e) an inventory carrying cost of .5% per month (of the cost of the month end log and chip inventory).
The costs and fees under Section 5(b) (overhead fee), Section 5(c) (procurement costs) and Section 5(e) (inventory costs) shall be pro-rated based on the weight of Chips delivered to Buyer each month in proportion to the total weight of chips delivered to Buyer, Seller and third parties during such month.
6. Payment .
6.1 Invoice . Each week Seller shall invoice Buyer for:
(a) Estimated Production and Procurement Costs . Prior to the start of each Contract Year, Seller shall in good faith reasonably determine its projected total cost of chip production (including a five percent (5%) overhead charge) and log procurement at each Chip Mill for the Contract Year and divide that amount by 52. The result shall be the weekly invoiced amount for chip production and log procurement.
(b) Log Cost . Log costs related to Chips delivered to the Canton Mill the previous week. Log costs shall be calculated as follows:
(i) pine: the number of Tons of Pine Chips delivered shall be divided by .8700 (pine conversion). The result shall be multiplied by the Average Wood Cost for pine for the prior calendar month.
(ii) hardwood: the number of Tons of hardwood chips delivered shall be
divided by .8621 (hardwood conversion). The result shall be multiplied by the Average Wood Cost for hardwood for the prior calendar month.
(c) Transportation Costs . During the Transition Period, the actual transportation costs for Chips delivered to Buyer during the prior week plus the $. 10/Ton administration fee.
(d) The inventory carrying cost.
6.2 Payment . The amount of each invoice shall be paid by Buyer in immediately available funds within seven (7) days from the date of invoice.
6.3 Reconciliation .
(a) Processing Costs . At the end of each month, Seller shall determine its actual processing costs plus the pro-rated five percent (5%) overhead, pro-rated procurement and pro-rated inventory costs for such month. This amount shall be reconciled to the invoiced amounts for such month. Any difference shall be credited to Buyer or Seller, as the case may be, on the next week’s invoice.
(b) Log Costs . The parties recognize that the conversion factors used to establish log costs in section 6.1 are estimates only. Every six months, the parties shall compare and reconcile the total weight of logs delivered to the Chip Mills to the weight of Chips delivered to Buyer and chips delivered for Seller’s account. Beginning and ending log and chip inventories at the Chip Mill shall also be taken into account. Log Costs, including logs delivered from Seller’s lands, shall be adjusted to reflect bark and other by-product sales and then prorated based on the chips produced for each party’s account. If the reconciliation establishes that an adjustment should be made, a credit or debit shall be made in favor of Seller or Buyer, as the case may be.
6.4 Audit . Buyer and its attorneys and accountants shall, upon reasonable written notice and during business hours, have the right to audit the books and records of the Chip Mills to review the costs charged hereunder. Buyer’s right to audit costs charged during a Contract Year shall terminate on the one-year anniversary of such Contract Year. Unless Buyer provides Seller with a notice of claim prior to the end of such one-year period, any claim regarding the price charged during such period shall be extinguished.
6.5 Historical Informational and Hypothetical Example . The information provided to Purchaser by Seller set forth in Schedule C hereto illustrates how Seller developed its transfer price in 1998 for pine and hardwood primary chips to the Canton Mill and contains actual historical costs and estimated allocations. Such historical costs are accurate in all material respects and the estimated allocations are reasonable in all material respects. The example provided under the heading “Royal Blue Hardwood Chips, 1998 Re-Stated Using Proposed Contract” however, uses a hypothetical volume to the Canton Mill of 190,000 Tons and a
hypothetical sale of chips to third parties of 36,442 Tons and is presented for illustrative purposes only.
7. Use of Wood By Seller .
7.1 Payment . Provided Seller can meet the volume commitments set forth herein, Seller may produce chips for its own account.
7.2 Rebate . For each Ton of chips sold by Seller to third parties or consumed by Seller for its own account, Buyer shall be entitled to a rebate of:
(a) $1.50/Ton for each Ton of chips exceeding 190,000 Tons of Chips produced by Seller at the Royal Blue Chip Mill.
(b) $2.50/Ton for each Ton of chips exceeding 240,000 Tons produced