EXHIBIT 10.1
July 13, 1998
Via Facsimile and Federal Express
H. Rickey Wells
President and Chief Operating Officer
KN Interstate Gas Transmission Company
370 Van Gordon Street
P.O. Box 281304
Lakewood, Colorado 80228
Dear Rick:
Re: Letter of Understanding on Issues Relating to Phase II of TransColorado
This letter is to memorialize discussions and negotiations that
you and I have had since June 26, 1998, through today, regarding the
construction of Phase II of TransColorado. You and I have agreed upon
the following points, which have been affirmed by our respective
managements:
1. Questar TransColorado (Questar) will continue to have an
election to sell its partnership interest in TransColorado to KN
TransColorado (KN) pursuant to Section 10.3 of the Partnership
Agreement, but the terms of Section 10.3 will be modified to fix the
amount KN will be obligated to pay Questar, if Questar exercises its
election to sell, at $121,000,000, or if the project is completed at a
cost of less than $242,000,000, an amount equal to 50% of the total
project cost, assuming both partners have each paid 50% of the costs
and are responsible for 50% of the debt of Phase II of TransColorado.
The $121,000,000 sale price shall be decreased by depreciation
determined by applying the FERC authorized depreciation schedule to
the $121,000,000 and by any debt obligations assumed or refinanced as
is contemplated by Section 10.3 of the Partnership Agreement. The
$121,000,000 sale price shall be increased by 50% of any cash held by
the partnership.
2. An affiliate of each of Questar and KN will each commit to
subscribe for 100,000 Dth/day of firm transportation service at $0.20
per Dth for a minimum three-year term. The term of the affiliate
capacity subscriptions will, by mutual agreement, be extended to the
minimum number of years necessary to secure a mutually agreeable level
of project financing. The parties hereto agree to exercise their best
efforts to obtain project financing for Phase II of TransColorado and
to obtain additional capacity commitments from third parties at the
highest possible rate. In the event that Questar exercises its
election to sell pursuant to Section 10.3 of the Partnership
Agreement, Questar's affiliate's capacity will remain at $0.20 per Dth
and KN shall have the option at such time to recall any and all of the
capacity subscribed by Questar's affiliate pursuant to this paragraph;
additionally KN shall have a second option two years after Questar
exercises its election to sell pursuant to Section 10.3 of the
Partnership Agreement, to recall any and all remaining capacity
subscribed by Questar's affiliate pursuant to this paragraph.
3. KN will grant to Questar a right of first refusal to
purchase KN's 18% interest in the Overthrust Pipeline partnership
(currently owned by NGPL). Questar and KN will cooperate to work out
reasonable details to implement Questar's right of first refusal and
agree to enter into a separate agreement on this issue within 60 days
after the execution of this letter by both partners.
4. If Questar does not elect to sell its TransColorado
partnership interest to KN under Section 10.3 of the Partnership
Agreement (as modified by this letter) and to the extent that the
partnership has secured project financing for at least one-third of
the total cost of Phase II, Questar will have an option to purchase
50% of KN's interest at that time in the Coyote Gulch plant,
exercisable at any time during the same 12-month period in which
Questar may exercise its election to sell its partnership interest in
TransColorado to KN. The purchase price will be set at 50% of the
book value of KN's interest in the Coyote Gulch plant at the time
Questar notifies KN that it will exercise its option. Questar's
option to purchase 50% of KN's interest in the Coyote Gulch plant
shall be subject to receipt of any necessary third party consents and
preferential rights. To the extent a third party exercises, any
preferential right in existence on the date of this letter, KN may
withdraw the option granted in this paragraph and pay to Questar 50%
of the difference between the book value and the market value of KN's
interest in the Coyote Gulch plant as determined at the time Questar
would have exercised its option. KN shall not sell or otherwise
transfer its present interest in the plant so as to impair the option
granted to Questar to acquire 50% of KN's interest in the Coyote Gulch
plant.
5. KN will execute and return to Questar by facsimile by 3:00
p.m. July 13, 1998, the below described Unanimous Consents that were
previously sent to you, that will allow Phase II of the TransColorado
Project to go forward. KN will return the originals of the Consents
to Questar by overnight mail.
(a) Unanimous Consent to mobilize contractors during the
pendency of appeal.
(b) Unanimous Consent to enter into all construction
contracts necessary for the construction of the
pipeline and for the compression facilities.
6. KN agrees to rescind its statement of revocation of consent
to go forward with Phase II of the TransColorado Project dated June
24, 1998, and to remove any conditions to consents that KN had
previously executed.
7. Questar and KN agree that this letter is effective upon its
execution by both parties and that this Letter of Understanding will
be incorporated into the TransColorado Partnership Agreement within 60
days of the date of this letter.
I appreciate the opportunity to have worked through this matter
with you and look forward to the construction of Phase II of
TransColorado and its successful operation.
Sincerely,
/s/M. E. Benefield
Michael E. Benefield
Accepted by:
KN TransColorado, Inc.
/s/H. Rickey Wells
By: H. Rickey Wells
Its: Vice President