HECO Exhibit 10.3(a)
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[HELCO LETTERHEAD]
January 5, 1995
Mr. James S. Andrasick
Chairman of the Board
Hilo Coast Processing Company
c/o C. Brewer and Company, Ltd.
827 Fort Street
Honolulu, Hawaii 96813
Re: HCPC Power Plant, Purchase Power Amendment
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Dear Jim:
HELCO wishes to submit for your consideration this counterproposal for an
amendment to the current purchase power agreement (PPA). This proposal is
substantially based on HELCOs proposal of December 22, 1994, the intervening
Bankruptcy Court proceedings, and subsequent discussions amongst the parties.
Again, for ease of reference the proposal is restated herein in its entirety.
This proposal supersedes all prior proposals relating to an amendment of the
PPA. This letter (the Letter Agreement), when accepted by you, is an
expression of the basis on which HELCO and HCPC are willing to enter into a
definitive agreement to amend the PPA.
1. Agreement
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HELCO offers to amend the PPA, as set forth herein and subject to
the terms and conditions herein, along with any other terms and conditions which
are customary for transactions of this type and consistent with this Letter
Agreement.
2. Term of Amendment
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From the effective date of the Definitive Agreement through
December 31, 1999.
3. HELCO Dispatch
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Minimum of 4,000 KW during 48 operating weeks.
Mr. James S. Andresick
January 5, 1995
Page 2
4. Capacity Guarantee
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HCPC shall furnish HELCO 20,000 KW of capacity up to May 31, 1995 and
22,000 KW of capacity thereafter. (Kilovars to be discussed.) This capacity
guarantee is based on the assumptions that such levels are within HCPCs permit
limitations and conditions, and any necessary substation upgrades (see
Substation Upgrades below) are completed by May 31, 1995 and, therefore, is
conditioned upon compliance with applicable PUC rules and actual completion of
the upgrades on or before that date. Accordingly, the effective date of the
increase to 22,000 KW shall be delayed if necessary until such time as those
conditions are met. HCPC must use its best efforts to meet these conditions in a
timely manner.
5. Plant Shutdown Period
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HCPC shall have the right to shut down for 4 consecutive weeks during
each twelve-month period. The period shall be mutually agreeable to HCPC and
HELCO.
6. Capacity Charge
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HELCO will pay HCPC for the Capacity Guarantee a graduated capacity
charge which would average out to $218/kw-yr over the contract term.
Specifically, HELCO will pay $167/kw-yr through December 31, 1995 and $231/kw-yr
during the remainder of the term. Such amount shall be payable monthly within
ten (10) days after the last day of the calendar month. Monthly repayment of the
cash advance will be calculated so that HCPCs cash flow from the Capacity
Charge net of such repayments is the same as that which would result from a
levelized capacity charge of $218/kw-yr and repayment in monthly installments
over the term of the Definitive Agreement.
7. Power Sales
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During each contract year, HELCO shall purchase at least 94% on a
weekly basis and at least 98% on an annual basis of the following amounts of
energy (subject to adjustment based on the effective date condition stated in
"Capacity Guarantee" above):
Projected Assumed Contract Contract
Time Period Capacity Guarantee Week Amount Year Amount
----------- ------------------ ----------- -----------
Effective Date
- 5/31/95 20,000 KW 2,025,500 KWH 97,222,000 KWH
6/1/95 - 12/31/99 22,000 KW 2,192,400 KWH 105,235,200 KWH
Mr. James S. Andresick
January 5, 1995
Page 3
8. Energy Rates
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The rate for energy shall be the same as provided in the PPA, except
that HELCO shall waive the energy rate discount provision.
9. Fuel Cost Differential
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It is anticipated that HCPC will exhaust its existing supply of coal
before it is able to order and receive another shipment of coal. Accordingly,
HCPC will be required to utilize diesel fuel to operate the plant from the time
the coal is exhausted and until receipt of the first shipment of new coal
supplies, approximately six weeks from the date of order (the Diesel Period).
HELCO agrees to compensate HCPC for the Cost Differential incurred by HCPC
during this Diesel Period, unless otherwise provided by the Interim Operating
Agreement defined in Section20 herein. Such Cost Differential for this period
shall be the actual price of diesel utilized by HCPC less the cost which would
have been incurred by HCPC had it utilized an equivalent amount of coal for such
period. Such cost differential shall be payable weekly in advance and reconciled
within fifteen (15) days of the end of the Diesel Period.
Provided, however, that HELCO may, at its option, provide to HCPC the
diesel required to operate the plant during this period, in which case HELCO
shall offset the lower of: (a) its cost for such diesel or (b) through January
31, 1995, the cost which would have been incurred by HCPC had it utilized an
equivalent amount of coal against the next due energy payment and no other cost
differential shall be owed to HCPC. After January 31, 1995, during the Diesel
Period HELCO shall offset its cost for such diesel against the next due energy
payment and, in addition, shall pay HCPC one-half of the difference between the
energy payment and the cost which would have been incurred by HCPC had it
utilized an equivalent amount of coal for such period.
Furthermore, during such Diesel Period the minimum power sales levels
in Section 7, "Power Sales," shall not apply and HELCO shall have the right to
place the unit into standby reserve during periods in which the capacity is not
needed by HELCO, such as weekend shutdowns.
10. Substation Upgrades
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If necessary, and subject to compliance with applicable PUC rules,
HELCO shall upgrade the substation and transmission lines interconnecting the
HCPC Power Plant to HELCOs system in order to accommodate HCPC's supply of
22,000 KW of power. Any costs incurred by HELCO shall be prorated between HELCO
and HCPC in proportion to the relative value derived by each party from the
upgrade, pursuant to terms to be discussed. (For example, if the cost were
$500,000 for an upgrade with a 20-year life, and HCPC derived five years of
value from the upgrade, its share of the cost would be $125,000.)
Mr. James S. Andrasick
January 5, 1995
Page 4
11. Cash Advance
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HELCO shall advance to HCPC, upon execution of the Definitive Agreement
and related documentation, a cash advance of $6 million to be directed $3.5
million for payment of its employee severance payments and similar employee
benefit obligations and $2.5 million for power plant capital improvements. With
regard to the $2.5 million, HCPC shall be required to use such funds for items,
such as the stack extension, necessary for HCPC to continue power plant
operations. Such advance is to be appropriately documented, shall bear interest
at the rate of nine percent (9%), and shall be repaid in substantially equal
installments over the term of the Definitive Agreement through an offset of
payments owed by HELCO to HCPC for capacity. In addition, the making of such
advance shall be secured by and conditioned upon HCPCOs arranging for HELCO to
receive, contemporaneously with the making of the cash advance, security
satisfactory to HELCO consisting of: (i) at all times during the term of the
Definitive Agreement, agriculturally zoned lands having a fair market Ohighest
and best useO appraised value at least equal to the unpaid principal balance of
the cash advance (the "Land Security"), (ii) superpriority status pursuant to
Section 364 of the Bankruptcy Code and (iii) a security interest in the proceeds
of the PPA, to the extent not subject to the existing assignment of proceeds in
favor of the State. The appraised value of the initial 600 acres, as well as any
additional acreage necessary to meet the initial $6 million threshold, shall be
subject to confirmation by a mutually agreed upon independent appraiser. The
Land Security will be released by HELCO ratably as the principal on the cash
advance is repaid. Such security shall be evidenced by the execution and filing
of appropriate security agreements and other documents and shall have priority
over the claims of other HCPC creditors. Furthermore, in the event that HCPC
defaults on repayment of the cash advance and HELCO forecloses on the Land
Security, HCPC agrees to arrange for the liquidation, within 18 months of the
default, of a sufficient portion of such Land Security to cover HELCO's
remaining principal balance on the cash advance and to remit the proceeds from
such liquidation to HELCO in lieu of the Land Security itself. Should the
liquidation proceeds not be sufficient to cover HELCO's remaining principal
balance in full, HCPC shall cause to be contributed and liquidated additional
land to make up the shortfall. Should the power plant be sold or the PPA
otherwise terminate prior to December 31, 1999, or HCPC default on its
obligations to generate power under the PPA or this amendment, any unpaid
balance of the cash advance shall be immediately due and payable.
12. Revolving Fuel Line of Credit
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HELCO agrees to provide a revolving line of credit to HCPC of up to
$2 million, bearing interest at the rate of nine percent (9%) per annum, to
facilitate HCPC's purchase of fuel to operate the Power Plant and to finance
other operating expenses currently incurred in the operation of the Power Plant.
Such drawings under this revolving line of credit shall be restricted to such
use and shall be repaid
Mr. James S. Andresick
January 5, 1995
Page 5
through an offset of energy payments owed by HELCO to HCPC until such time as
the drawing is repaid in full; provided, however, that in the event energy
payments are not projected by HELCO to be sufficient to repay the revolving line
of credit within a reasonable revolving line of credit within a reasonable time,
HELCO shall have the right to offset the balance against capacity payments. The
outstanding balance under this revolving fuel line of credit shall be secured by
and conditioned upon HCPC's granting HELCO, contemporaneously with HELCOs
issuance of the line of credit, a lien on such fuel and superpriority status
pursuant to Section 364 of the Bankruptcy Code. Such security shall be evidenced
by the execution and filing of appropriate security agreements and shall have
priority over the claims of other HCPC creditors. Should the power plant be sold
or the PPA otherwise terminate prior to December 31, 1999, or HCPC default on
its obligations to generate power under the PPA or the Definitive Agreement, any
unpaid balance of the revolving fuel line of credit shall be immediately due and
payable.
13. Option to Purchase Power Plant
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HELCO shall waive the purchase option under Section XVI.B of the PPA.
14. PUC Approval
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HELCO shall seek a decision and order from the PUC approving the
Definitive Agreement. HELCO shall have the right to terminate this amendment if
the PUC disapproves, or if the PUC does not approve by interim or final decision
and order, acceptable to HELCO in its sole discretion, which shall not be
unreasonably invoked, within 180 days of the execution of the Definitive
Agreement, inclusion of the energy and capacity costs incurred by HELCO pursuant
to this amendment in its revenue requirements for ratemaking purposes or for the
purpose of determining the reasonableness of HELCO's rates, upon 45 days written
notice to HCPC.
15. Sugar Provisions
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HELCO to waive other PPA provisions relating to sugar, subject to a
more detailed review of the PPA to determine exactly which provisions would be
affected.
16. Agreement Approval
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Any amendment shall be contingent on obtaining all necessary final
approvals of the Definitive Agreement and the proposed transaction, including
without limitation, approvals by the Bankruptcy Court and by the respective
Boards of Directors of HELCO and HCPC. For purposes of this provision, as well
as any other provision herein requiring the parties to obtain certain approvals
(including, but not limited to, PUC approval), the parties shall use their good
faith efforts to obtain such approvals.
Mr. James S. Andrasick
January 5, 1995
Page 6
17. Termination of Offer
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The offer set forth in this Letter Agreement terminates if not signed
by HCPC and delivered to HELCO by the close of business today, January 5, 1995
(the Acceptance Date), or upon revocation in writing by HELCO at its sole
discretion (Revocation), or upon rejection by HCPC, whichever is earlier. The
offer shall be deemed rejected by HCPC and the offer shall thereupon terminate
(a) if HCPC gives notice of rejection to HELCO, (b) if HCPC counters the offer
set forth in this Letter Agreement, (c) if HCPC ceases production of power or
otherwise defaults on its obligations under the PPA, or (d) for any other
reasons deemed by law to be a rejection of an offer.
18. Termination of Letter Agreement
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After acceptance on or before the Acceptance Date, this Letter
Agreement shall terminate (a) in the event that a Definitive Agreement is not
executed on or before thirty (30) calendar days of the Acceptance Date, or (b)
if HCPC ceases production of power or otherwise defaults on its obligations
under the PPA.
19. Effect of Bankruptcy
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(a) In the event any cash advance, or drawing under the revolving
fuel line of credit, is made pursuant to the Definitive Agreement and to the
extent they are not repaid from payments under the PPA, as amended, repayments
of such amounts shall constitute a superpriority expense of the HCPC bankruptcy
estate, pursuant to Section 364 of the Bankruptcy Code.
(b) At the same time as HCPC seeks Bankruptcy Court approval of the
Definitive Agreement it shall also seek authorization from the Bankruptcy Court
to assume the PPA, as amended by the Definitive Agreement. HELCOs agreement to
the terms herein is made on the condition that HCPC also assumes the PPA.
(c) In the event there is an occurrence of total default by HCPC as
defined under Section XV of the PPA, HELCO shall have the right but not any
obligation immediately to take possession of the HCPC Power Plant for the
remaining term specified under the Definitive Agreement and to generate power
regardless of whether or not it exercises its Default Purchase Option under the
PPA. To the extent any automatic stay may apply, the parties agree that HELCO
will be entitled to immediate relief from any automatic stay to permit it to
take immediate possession of the HCPC Power Plant and generate power. The
parties agree that in the event of such total default by HCPC, HELCO would have
good cause, within the meaning of Section 362 of the Bankruptcy Code, to
exercise its right to take immediate possession of the HCPC Power Plant and to
generate power, in order to protect its interests under the PPA or the
Definitive Agreement, to protect the
Mr. James S. Andrasick
January 5, 1995
Page 7
public interest and to preserve the value of the HCPC Power Plant for the
purposes of an effective reorganization of HCPC.
20. Interim Operating Agreement
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During the period between the execution of this Letter Agreement by
HCPC and the receipt of the cash advance described in Section 11 herein (the
Interim Period), HCPC shall continue to operate the plant and furnish HELCO
20,000 KW of capacity. HELCO and HCPC shall enter into an Interim Period
Operating Agreement on or before the date of acceptance by HCPC of this Letter
Agreement, or as soon thereafter as practicable thereafter, but not more than 14
days, which defines the rights and obligations of the parties during the Interim
Period. HELCO may request an interim decision and order from the PUC allowing
the recovery of energy payments in excess of that under the current PPA.
21. Definitive Agreement
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Notwithstanding any language herein to the contrary, the completion of
each of the transactions contemplated herein shall be subject to negotiation and
execution of a definitive agreement and of all documents related to the
transactions incorporated therein, providing for an amendment to the PPA
pursuant to the terms of this Letter Agreement and containing terms and
provisions satisfactory to HELCO (the Definitive Agreement). Promptly
following the execution and return to HELCO of this Letter Agreement both
parties agree to instruct their respective legal counsel to prepare the
Definitive Agreement.
22. Extension of Temporary Restraining Order
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Pending finalization and court approval of the Interim Operating
Agreement, the parties agree to extend the temporary restraining order until
such finalization and court approval occurs, except that the extension shall be
on the same terms relating to capacity charge and fuel cost differential set
forth in this Letter Agreement.
In the event that, pursuant to the Definitive Agreement, HELCO is to pay to
the State of Hawaii, in connection with HCPCs loan from the Department of
Agriculture, an amount other than the $100,000 currently payable under the
Assignment of Proceeds from the Sale of Electric Energy, HCPC shall obtain any
necessary consents, including any consent from the State of Hawaii.
Mr. James S. Andrasick
January 5, 1995
Page 8
If the foregoing is acceptable, please so indicate by executing and
returning the enclosed copy of this Letter Agreement by today, January 5, 1995,
the Acceptance Date.
Very truly yours,
/s/ Warren H. W. Lee
ACCEPTED AND AGREED TO
on January 5 , 1995
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HILO COAST PROCESSING COMPANY
By /s/ James S. Andrasick
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Its Chairman