Exhibit
10.80


 


 


MODIFICATION AND EXTENSION AGREEMENT


 


 


THIS MODIFICATION AND EXTENSION AGREEMENT (herein
called “Agreement”) is made effective as of the 1st day of
October, 2003, by and between EDDINS-WALCHER
COMPANY, a Texas corporation  (“EWC”
or “Borrower”), CAP ROCK ENERGY
CORPORATION, a Texas corporation, successor-in-interest to CAP ROCK ELECTRIC COOPERATIVE, INC., a
Texas corporation (“Cap Rock”), and UNITED
FUEL & ENERGY CORPORATION, a Texas corporation (“United”)
(Cap Rock and United together, “Corporate  Guarantors”), THOMAS E. KELLY, GLENDA KELLY and RICHARD C. SKILLERN (each referred to
individually as an “Individual Guarantor” and together as “Individual
Guarantors”) (the Individual Guarantors and the Corporate Guarantors are
referred to herein collectively as the “Guarantors”) and WASHINGTON MUTUAL BANK, FA, a federal
association (“Lender”).


 


W  I  T
N  E  S  S  E  T  H:


 


WHEREAS, Lender made a loan (the “Loan”) to New
West Resources, Inc., predecessor-in-interest to NewCorp Resources Electric
Cooperative, Inc., a Texas electric cooperative (“NewCorp”), as of
July 12, 2000 in the original principal amount of FIFTEEN MILLION AND
NO/100 DOLLARS ($15,000,000.00);


 


WHEREAS, NewCorp, Cap Rock, Thomas E. Kelly, Richard
C. Skillern and Lender entered into that certain Loan Agreement (as renewed,
extended or modified, the “NewCorp Loan Agreement”) dated July 12,
2000, which Loan Agreement sets forth certain terms and conditions of the Loan;


 


WHEREAS, NewCorp executed and delivered to Lender that
certain Commercial Variable Rate Revolving or Draw Note (as renewed, extended
or modified, the “NewCorp Note”) dated July 12, 2000, payable to
the order of Lender, in the amount of and evidencing the Loan;


 


WHEREAS, Cap Rock, Thomas E. Kelly and Richard C.
Skillern each executed those respective Unconditional Guaranties (collectively,
the “Guaranty”) dated July 12, 2000, in which each jointly and
severally guaranteed NewCorp’s payment and performance under the Loan Documents
(as defined in the NewCorp Loan Agreement);


 


WHEREAS, as security for the Loan, NewCorp executed
that certain Security Agreement (as amended or otherwise modified prior to the
date hereof, the “Security Agreement”) dated as of July 12, 2000
pursuant to which NewCorp granted to Lender a security interest in the
collateral described therein, and NewCorp further granted to Lender a
collateral assignment (the “Collateral Assignment”) of the real,
personal and investment property described in the EW/FF Loan Agreement (as
hereinafter defined) (collectively, the “Collateral”), including,
without limitation, those certain Deeds of Trust (the “Deeds of Trust”)
executed in connection with the EW/FF Loan Agreement, which Deeds of Trust are
more particularly described in Exhibit A attached hereto and made a part
hereof;


 


WHEREAS, concurrently with NewCorp’s execution and
delivery of the Loan Documents to Lender, NewCorp made two loans (collectively,
the “EW/FF Loan”) in the aggregate principal amount of FIFTEEN MILLION
AND NO/100 DOLLARS ($15,000,000.00) to (i) EWC, evidenced by that certain
Eddins-Walcher Company Term Note in the original principal amount of TWELVE
MILLION AND NO/100 DOLLARS ($12,000,000.00), dated July 12, 2000 (the “EW
Note”), and (ii) Frank’s Fuels, Inc. (“FFI”), evidenced by that
certain Frank’s Fuels, Inc. Term Note in the original principal amount of


 

















 


THREE MILLION AND NO/100 DOLLARS ($3,000,000), dated July 12, 2000
(the “FF Note”) (the FF Note and the EW Note are collectively
referred to herein as the “EW/FF Notes”);


 


WHEREAS, as security for the EW/FF Loan, EWC and FFI
granted certain liens, security interests and pledged to NewCorp the Collateral
described in that certain Term Loan Agreement between NewCorp, EWC, FFI,
United, Thomas E. Kelly, Richard Skillern, Billy D. Grimes and Jonny B. Grimes
dated as of July 12, 2000 (the “EW/FF Loan Agreement”) (all
documents related to, pertaining to, evidencing, governing or securing the
EW/FF Loan are referred to herein as the “EW/FF Loan Documents”).


 


WHEREAS, United and each of Thomas E. Kelly, joined by
Glenda Kelly; Richard Skillern; Billy D. Grimes, joined by Myra Grimes; and
Johnny B. Grimes, joined by Melissa Grimes (collectively, the “EW/FF
Guarantors”) executed those respective Guaranties of Debt (collectively,
the “EW/FF Guaranty”) and Pledge Agreements (collectively, the “Pledge
Agreements”) dated July 12, 2000, to secure EWC and FF’s payment and
performance of the EW/FF Notes and the EW/FF Loan Documents.


 


WHEREAS, EWC is the successor by merger to FFI and is
fully obligated to perform each of FFI’s obligations under the EW/FF Loan
Documents, including without limitation, repayment in full of the FF Note;


 


WHEREAS, NewCorp has requested that Lender cancel all
of NewCorp’s obligations under the NewCorp Note and release the security
interests in the Collateral granted in the Collateral Assignment, and Lender
has agreed to provide such cancellation and release upon (i) NewCorp’s absolute
transfer and assignment to Lender of all of NewCorp’s right, title and interest
in the EW/FF Loan Documents, including, without limitation, the EW/FF Loan
Agreement, the EW Note, the FF Note, the EW/FF Guaranty, the Pledge Agreements,
the Deeds of Trust and all of the other EW/FF Loan Documents, (ii) the
execution and delivery by Guarantors of Guaranty Agreements in form and
substance satisfactory to Lender, and (iii) certain modifications to the EW/FF
Loan Documents.


 


WHEREAS, in order to
satisfy one of Lender’s conditions described above, Lender and Borrower now
propose to modify certain terms and provisions of the EW/FF Notes, EW/FF Loan
Agreement and other EW/FF Loan Documents pursuant to the terms and conditions
contained herein.


 


WHEREAS, the Guarantors
have joined herein to evidence their respective ratification and consent to the
provisions of this Agreement; and


 


NOW THEREFORE, for and in consideration of the
premises and the mutual covenants and agreements contained herein, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:


 


1.                                       Upon payment of the Principal Payment
(hereinafter defined), Borrower, Guarantors and Lender hereby acknowledge that
the unpaid principal balance of the EW/FF Notes is THREE MILLION FIVE HUNDRED
THOUSAND AND 00/100 DOLLARS ($3,500,000.00).


 


2.                                       The
EW/FF Loan Agreement is hereby
amended as follows:


 


(a)          The
defined term “Contract Interest Rate” (as defined in Section 1.1 of the
EW/FF Loan Agreement) shall mean a fixed rate of nine percent (9%) per annum.


 


(b)         The
defined term “Corporate Guarantor” (as defined in Section 1.1 of the EW/FF
Loan Agreement) shall mean collectively United Fuel & Energy Corporation
and Cap Rock


 


2

















 


Energy Corporation and
any subsidiary of each not a “Borrower” hereunder, excluding, however, Three D
Oil Co. of Kilgore, Inc..


 


(c)          The
defined term “EWC Term Note Maturity Date” (as defined in Section 2.1(b)
of the EW/FF Loan Agreement) shall mean September 30, 2004.


 


(d)         Section 2.1 (d) is
deleted in its entirety and the following shall be substituted therefore:


 


On the earlier to occur of (i) May 1, 2004 or
(ii) five business days after Borrower has delivered to The CIT Group/Business
Credit, Inc. the 2003 annual audited financial statements of UFEC and Borrower,
a principal payment in the amount of $144,000.00 shall be due and payable to
Lender.


 


(e)          The
following shall be added to the beginning of Section 2.1(e):


 


Interest on the EWC Term Note shall be due and payable
monthly as it accrues on the first Business Day of each month, beginning
November 1, 2003, and continuing regularly thereafter until and including
the EWC Term Note Maturity Date.


 


(f)            The
“FFI Term Note Maturity Date” (as defined in Section 2.2(b) of the EW/FF
Loan Agreement) shall mean September 30, 2004.


 


(g)         Section 2.2 (d) is
deleted in its entirety and the following shall be substituted therefore:


 


On the earlier to occur of (i) May 1, 2004 or
(ii) five business days after Borrower has delivered to The CIT Group/Business
Credit, Inc. the 2003 annual audited financial statements of UFEC and Borrower,
a principal payment in the amount of $36,000.00 shall be due and payable to
Lender.


 


(h)         The
following shall be added to the beginning of Section 2.2(e):


 


Interest on the FFI Term Note shall be due and payable
monthly as it accrues on the first Business Day of each month, beginning
November 1, 2003, and continuing regularly thereafter until and including
the FFI Term Note Maturity Date.


 


(i)             The reference to
“Bank One” in Section 6.1.2 is deleted, and a reference to “CIT” is
substituted in lieu thereof.


 


(j)             The reference to
“Bank One” in Section 6.1.3(a) is deleted, and a reference to “CIT” is
substituted in lieu thereof.


 


(k)          Section 6.1.3(b) is
deleted in its entirety, and the following shall be substituted in lieu
thereof:


Intentionally deleted.


 


(l)             The following shall
be added to the end of Section 6.1.4:


 


In addition to obtaining the prior written consent of
Lender, in the event Borrower or UFEC sells, assigns or otherwise disposes of
any property of UFEC or Borrower directly related to the supply and sale by
UFEC or Borrower of propane fuel to their residential


 


3

















 


and commercial propane fuel customers, UFEC or
Borrower shall apply all of the proceeds of such disposition to prepayment of
the outstanding balance of the Loans.


 


(m)       Section 8.1(ix) shall
be modified to substitute “TWO HUNDRED FIFTY THOUSAND


AND NO/100” for “ONE
HUNDRED THOUSAND AND NO/100.”


 


(n)         Section 9.4 is
hereby deleted and replaced with the following:


 


This Loan Agreement, the Notes and each of the Loan
Documents shall be deemed to be contracts under the laws of the State of Texas
and for all purposes shall be construed in accordance with the laws of the
State of Texas, except to the extent that federal law may apply.


 


Any suit, action or proceeding arising out of the Loan
or with respect to the Loan Documents or any judgment entered by any court in
respect thereof, may be brought in the courts of the State of Texas, County of
Harris, or in the United States courts located in the State of Texas, County of
Harris as Lender, in its sole discretion, may elect and Borrower, Corporate
Guarantors and Individual Guarantors hereby submit to the non-exclusive
jurisdiction of such courts for the purpose of any such suit, action or
proceeding.  The Borrower, Corporate
Guarantors and Individual Guarantors hereby irrevocably waive any objection
which they may now or hereafter have to the laying of venue of any suit, action
or proceeding arising out of or relating to any Loan Document brought in the
courts located in Harris County, Texas; and hereby further irrevocably waives
any claim that such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum.


 


3.                                       The
Loan Documents are hereby amended as follows:


 


(a)          The
maturity date shall mean September 30, 2004; subject, however, to the
right of acceleration as provided in the EW/FF Loan Agreement and as provided
elsewhere in the EW/FF Loan Documents.


 


(b)         All
payments made by Borrower under the EW/FF Loan Documents shall be made to
Lender at its offices located at 3200 Southwest Freeway, Suite 1600, Houston,
Texas 77027, Attn: Energy Lending Group.


 


4.                                       The
effectiveness of this Agreement is expressly conditioned upon Lender’s receipt
of (i) an absolute transfer and assignment of the EW/FF Notes, all liens and
security interests securing the EW/FF Notes and all other EW/FF Loan Documents;
(ii) execution and delivery by Guarantors of a Guaranty Agreement in form and
substance satisfactory to Lender; (iii) an extension fee in the amount of
THIRTY-FIVE THOUSAND AND NO/100 DOLLARS ($35,000.00); (iv) a principal
payment (“Principal Payment”) in the amount sufficient to reduce the
outstanding principal balance of the EW/FF Loan to THREE MILLION FIVE HUNDRED
THOUSAND AND NO/100 ($3,500,000.00); (v) a fully executed Intercreditor
and Subordination Agreement by and among The CIT Group/Business Credit, Inc.
(“CIT”), Lender, Borrower, United and Three D Oil Co. of Kilgore, Inc. (“Intercreditor
Agreement”); and (vi) this Agreement, fully executed by the appropriate
parties and properly notarized.


 


5.                                       EWC
expressly assumes, confirms and ratifies all of the obligations and
indebtedness of FFI arising in connection with the EW/FF Loan (including,
without limitation the FF Note), as evidenced by the EW/FF Loan Documents, as
amended.  Cap Rock expressly assumes all
of the obligations of a Corporate Guarantor described in the EW/FF Loan
Agreement and the other EW/FF Loan Documents.


 


4

















 


6.                                       Except
as otherwise specified herein, the terms and provisions hereof shall in no
manner impair, limit, restrict or otherwise affect the obligations of Borrower,
Corporate Guarantors, Individual Guarantors or any third party to Lender, as
evidenced by the EW/FF Loan Documents. 
Borrower, Corporate Guarantors and Individual Guarantors hereby
acknowledge, agree, and represent that (a) Borrower is indebted to Lender
pursuant to the terms of the EW/FF Notes, as modified hereby; (b) the liens,
security interests and assignments created and evidenced by the EW/FF Loan
Documents are, respectively, valid and subsisting liens, security interests and
assignments of the respective dignity and priority recited in the EW/FF Loan Documents;
(c) the EW/FF Loan Documents are validly existing and are in full force and
effect and the liens of the Deeds of Trust have been renewed and extended so as
to secure the payment of the EW/FF Notes; (d) there are no claims or offsets
against, or defenses or counterclaims to, the terms or provisions of the EW/FF
Loan Documents and the obligations created or evidenced by the EW/FF Loan
Documents; (e) neither Borrower, Corporate Guarantors nor Individual Guarantors
have any claims, offsets, defenses or counterclaims arising from any of
Lender’s acts or omissions with respect to the Collateral, the EW/FF Loan
Documents or Lender’s performance under the EW/FF Loan Documents or with
respect to the Collateral; (f) the representations and warranties contained in
the EW/FF Loan Documents, including, without limitation, any representations
and warranties regarding title or ownership of the Collateral (other than
Collateral consisting of those certain Pledge Agreements executed by each of
Billy D. Grimes, Myra Grimes, Johnny B. Grimes and Melissa Grimes in favor of
NewCorp), are true and correct representations and warranties of Borrower,
Guarantors and third parties, as of the date hereof; and (g) Borrower is not in
default and no event has occurred which, with the passage of time, giving of
notice, or both, would constitute a default by Borrower of Borrower’s
obligations under the terms and provisions of the EW/FF Loan Documents.  To the extent Borrower, Corporate Guarantors
or Individual Guarantors now have any claims, offsets, defenses or
counterclaims against Lender or the repayment of all or a portion of the EW/FF
Loan, whether known or unknown, fixed or contingent, same are hereby forever
irrevocably waived and released in their entirety.  For purposes of this Paragraph, “Lender” shall include the
Lender’s predecessors, successors, assigns, agents, present and former
officers, directors, employees and representatives.


 


7.                                       Borrower,
Corporate Guarantors and Individual
Guarantors, upon request from Lender, agree to execute such other and
further documents as may be reasonably necessary or appropriate to consummate
the transactions contemplated herein or to perfect the liens and security
interests intended to secure the payment of the EW/FF Loan, including specifically
without limitation (a) one or more financing statements showing Borrower as
debtor and (b) Notice and Agreement under Section 26.02 of the Texas and
Business Commerce Code.


 


8.                                       Except
as provided herein and in the Intercreditor Agreement, the terms and provisions of the EW/FF Note, the EW/FF Loan
Agreement, and the other EW/FF Loan Documents shall remain unchanged and shall
remain in full force and effect.  Any
modification herein of the EW/FF Note, the EW/FF Loan Agreement, and the other
EW/FF Loan Documents shall in no way affect the security of the Collateral, and
the other EW/FF Loan Documents for the payment of the EW/FF Note.  The “Notes” described in the EW/FF Loan
Agreement and other EW/FF Loan Documents as the “Notes” secured thereby shall
hereafter mean the EW/FF Notes as modified by this Agreement.  The EW/FF Note, the EW/FF Loan Agreement,
and the other EW/FF Loan Documents as modified and amended hereby are hereby
ratified and confirmed in all respects. 
All liens, security interests, mortgages and assignments granted or
created by or existing under the EW/FF Loan Documents remain unchanged and
continue, unabated, in full force and effect, to secure Borrower’s obligation
to repay the EW/FF Notes except as modified under the terms of the Intercreditor
Agreement.


 


9.                                       Upon
execution and delivery hereof, each Corporate Guarantor and Individual
Guarantor hereby (a) acknowledges and consents to the terms and provisions
hereof, (b) ratifies, confirms, and agrees that each respective Guaranty is and
shall remain in full force and effect as of the date hereof, except as modified
by the terms of any new Guaranty Agreement(s) entered into as of the date
hereof at


 


5

















 


the request of and in favor of Lender, (c) acknowledges that there are
no claims or offsets against, or defenses or counterclaims to, the terms and
provisions of and the obligations created and evidenced by any Guaranty, (d)
certifies that the representations and warranties contained in each respective
Guaranty remain true and correct representations and warranties of each
respective Corporate Guarantor and Individual Guarantor as of the date hereof,
and (e) agrees to execute a new Guaranty Agreement in form satisfactory to
Lender if so requested by Lender.  Any
limitation of liability of any Individual Guarantor described in the EW/FF Loan
Agreement (including without limitation Section 3.3(b) of the EW/FF Loan
Agreement) is hereby terminated and no longer in effect.


 


10.                                 Lender
acknowledges that NewCorp and its agents in the past may have accepted, without
exercising the remedies to which NewCorp was entitled, payments and performance
by Borrower that constituted defaults under the EW/FF Notes and the EW/FF Loan
Documents.  In addition, Lender hereby
waives any and every default by Borrower or Guarantors which exists as of the
date of this Agreement known to Lender, provided, all conditions described in
paragraph 4 are satisfied. Borrower, Corporate Guarantors and Individual
Guarantors acknowledge that no such acceptance or grace granted by Lender or
its agents in the past, or Lender’s agreement to the modifications evidenced
hereby, has in any manner diminished Lender’s right in the future to insist
that Borrower strictly comply with the terms of the EW/FF Note, the EW/FF Loan
Agreement, and the other EW/FF Loan Documents, as modified by the terms hereof.
Furthermore, Borrower, Corporate Guarantors and Individual Guarantors
specifically acknowledge that any future grace or forgiveness of default by
Lender shall not constitute a waiver or diminishment of any right of Lender
with respect to any future default of Borrower, Corporate Guarantors or
Individual Guarantors whether or not similar to any default with respect to
which Lender has in the past chosen, or may in the future choose, not to
exercise all of the rights and remedies granted to it under the EW/FF Note, the
EW/FF Loan Agreement and the other EW/FF Loan Documents.


 


11.                                 This
Agreement supersedes and merges all
prior and contemporaneous promises, representations and agreements with respect
to the subject matter hereof.  No
modification of this Agreement, the EW/FF Note, the EW/FF Loan Agreement, or
any other EW/FF Loan Document, or any waiver of rights under any of the
foregoing, shall be effective unless made by supplemental agreement, in
writing, executed by Lender and Borrower. 
Lender and Borrower further agree that this Agreement may not in any way
be explained or supplemented by a prior, existing or future course of dealings
between the parties or by any prior, existing, or future performance between
the parties pursuant to this Agreement or otherwise.


 


12.                                 Any
notice or communication required or
permitted hereunder or under the EW/FF Note, EW/FF Loan Agreement or any other
EW/FF Loan Document shall be given in writing, sent by (a) personal delivery,
or (b) expedited delivery service with proof of delivery, or (c) United States
mail, postage prepaid, registered or certified mail, or (d) prepaid telegram,
telex or telecopy, addressed as follows:


 


	
  To Borrower/United:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  To Cap Rock:

  	
   

  	
  500 West Wall, Suite 400

  
	
   

  	
   

  	
  Midland, Texas 79701

  



 


6

















 


	
  With a copy to:

  	
   

  	
  Ronnie Lyon

  
	
   

  	
   

  	
  115 South Travis

  
	
   

  	
   

  	
  Sherman, Texas 75090

  
	
   

  	
   

  	
   

  
	
  To Individual Guarantors:

  	
   

  	
  405 North Marienfeld

  
	
   

  	
   

  	
  Midland, Texas 79701

  
	
   

  	
   

  	
   

  
	
  To Lender:

  	
   

  	
  3200 Southwest Freeway, Suite 1600

  
	
   

  	
   

  	
  Houston, Texas 77027

  
	
   

  	
   

  	
  Attn: Energy Lending Group / Mr. Gardner Cannon

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Thompson & Knight LLP

  
	
   

  	
   

  	
  333 Clay Street, Suite 3300

  
	
   

  	
   

  	
  Houston, Texas 77002

  
	
   

  	
   

  	
  Attention: David W. Jones, Esq.

  
	
   

  	
   

  	
  Telecopy: (713) 654-1871

  



 


or to such other address or to the attention of such other person as
hereafter shall be designated in writing by the applicable party sent in
accordance herewith.  Any such notice or
communication shall be deemed to have been given either at the time of personal
delivery or, in the case of delivery service or mail, as of the date of first
attempted delivery at the address and in the manner provided herein, or in the
case of telegram, telex or telecopy, upon receipt; provided that, service of a
notice required by Texas Property Code 51.002 shall be considered complete when
the requirements of that statute are met.


 


13.                                 Borrower,
Corporate Guarantors and Individual
Guarantors acknowledge that the execution of this Agreement by Lender is
not intended nor shall it be construed as (i) an actual or implied waiver
of any subsequent default under the EW/FF Notes, the EW/FF Loan Agreement, or
any other EW/FF Loan Document or (ii) an actual or implied waiver of any
condition or obligation imposed upon Borrower pursuant to the EW/FF Notes, the
EW/FF Loan Agreement, or any other EW/FF Loan Document, except to the extent
expressly set forth herein.


 


14.                                 Contemporaneously
with the execution and delivery hereof, Borrower shall pay, or cause to be
paid, all costs and expenses incident to the preparation hereof and the
consummation of the transactions related hereto, including without limitation,
recording fees and fees and expenses of legal counsel to Lender.


 


15.                                 Borrower
and Guarantors hereby release, remise, acquit and forever discharge Lender,
together with its employees, agents, representatives, consultants, attorneys,
fiduciaries, servants, officers, directors, partners, predecessors, successors
and assigns, subsidiary corporations, parent corporations, and related
corporate divisions (all of the foregoing hereinafter called the “Released
Parties”), from any and all actions and causes of action, judgments, executions,
suits, debts, claims, demands, liabilities, obligations, damages and expenses
of any and every character, known or unknown, direct and/or indirect, at law or
in equity, of whatsoever kind or nature, heretofore accruing, for or because of
any matter or things done, omitted or suffered to be done by any of the
Released Parties prior to and including the date hereof, and in any way
directly or indirectly arising out of or in any way connected to this
Agreement, the EW/FF Notes, the EW/FF Loan Agreement or any other EW/FF Loan
Document, or any of the transactions associated therewith, or the Collateral,
including specifically but not limited to claims of usury.


 


16.                                 This
Agreement may be executed in any
number of counterparts with the same effect as if all parties hereto had signed
the same document.  All such
counterparts shall be construed together and shall constitute one instrument,
but in making proof hereof it shall only be necessary to produce one such counterpart.


 


7

















 


17.                                 If
any covenant, condition, or provision herein contained is held to be invalid by
final judgment of any court of competent jurisdiction, the invalidity of such
covenant, condition, or provision shall not in any way affect any other
covenant, condition or provision herein contained.


 


18.                                 It
is expressly agreed by the parties
hereto that time is of the essence with respect to this Agreement.


 


19.                                 The
parties acknowledge and confirm that
each of their respective attorneys have participated jointly in the review and
revision of this Agreement and that it has not been written solely by counsel
for one party.  The parties hereto
therefore stipulate and agree that the rule of construction to the effect that
any ambiguities are to or may be resolved against the drafting party shall not
be employed in the interpretation of this Agreement to favor either party
against the other.


 


20.                                 This
Agreement and the rights and duties of the parties hereunder shall be governed
for all purposes by the law of the State of Texas and the law of the United
States applicable to transactions within said State.


 


21.                                 The
terms and provisions hereof shall be
binding upon and inure to the benefit of the parties hereto, their heirs,
representatives, successors and assigns.


 


22.                                 The
EW/FF Loan Documents have been executed under, and shall be construed and
enforced in accordance with, the laws of the State of Texas, except as such
laws are preempted by federal law.  The
EW/FF Loan Documents are intended to be performed in accordance with, and only
to the extent permitted by, all applicable usury laws.  If any provision hereof or of any of the
EW/FF Loan Documents or the application thereof to any person or circumstance
shall, for any reason and to any extent, be invalid or unenforceable, neither
the application of such provision to any other person or circumstance nor the
remainder of the instrument in which such provision is contained shall be
affected thereby and shall be enforced to the greatest extent permitted by law.  It is expressly stipulated and agreed to be
the intent of Borrower and Lender to at all times comply with the usury and
other applicable laws now or hereafter governing the interest payable on the
EW/FF Loan.  If the applicable law is
ever revised, repealed or judicially interpreted so as to render usurious any
amount called for under the EW/FF Notes or under any of the other EW/FF Loan
Documents, or contracted for, charged, taken, reserved or received with respect
to the EW/FF Loan, or if Lender’s exercise of the option to accelerate the
maturity of the Loan, or if any prepayment of the EW/FF Loan results in the
payment of any interest in excess of that permitted by law, then it is the
express intent of Borrower and Lender that all excess amounts theretofore
collected by Lender be credited on the principal balance of the EW/FF Notes
(or, if the EW/FF Notes and all of such other indebtedness due under the EW/FF
Loan have been paid in full, refunded), and the provisions of the EW/FF Notes
and the other EW/FF Loan Documents immediately be deemed reformed and the
amounts thereafter collectable hereunder and thereunder reduced, without the
necessity of the execution of any new document, so as to comply with the then
applicable law, but so as to permit the recovery of the fullest amount
otherwise called for hereunder or thereunder. 
All sums paid, or agreed to be paid, for the use, forbearance,
detention, taking, charging, receiving or reserving on the EW/FF Loan shall, to
the extent permitted by applicable law, be amortized, prorated, allocated and
spread throughout the full term of such EW/FF Loan until payment in full so
that the rate or amount of interest on account of such indebtedness does not
exceed the usury ceiling from time to time in effect and applicable thereto for
so long as debt is outstanding under the EW/FF Loan.  To the extent federal law permits Lender to contract for, charge
or receive a greater amount of interest, Lender will rely on federal law
instead of such article, as amended, for the purpose of determining the maximum
rate of interest.  Additionally, to the
extent permitted by applicable law now or hereafter in effect, Lender may, at
its option and from time to time, implement any other method of computing the
maximum rate of interest under such article, as amended, or under other
applicable law by giving notice, if required, to Borrower as provided by


 


8

















 


applicable law now or hereafter in effect.  In no event shall the provisions of Chapter 346 of the Texas
Finance Code (which regulates certain revolving credit loan accounts and
revolving tri-party accounts) apply to the EW/FF Loan.  Notwithstanding anything to the contrary
contained herein or in any of the EW/FF Loan Documents, it is not the intention
of Lender to accelerate the maturity of any interest that has not accrued at
the time of such acceleration or to collect unearned interest at the time of
such acceleration.


 


23.                                 Borrower,
Corporate Guarantors, Individual Guarantors
and Lender hereby take notice of and agree to the following:


 


A.                                   PURSUANT
TO SUBSECTION 26.02(b) OF THE TEXAS BUSINESS AND COMMERCE CODE, A CREDIT
AGREEMENT IN WHICH THE AMOUNT INVOLVED THEREIN EXCEEDS $50,000 IN VALUE IS NOT
ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE
BOUND OR BY THAT PARTY’S AUTHORIZED REPRESENTATIVE.


 


B.                                     PURSUANT
TO SUBSECTION 26.02(c) OF THE TEXAS BUSINESS AND COMMERCE CODE, THE RIGHTS
AND OBLIGATIONS OF THE PARTIES TO THE LOAN DOCUMENTS SHALL BE DETERMINED SOLELY
FROM THE LOAN DOCUMENTS, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE
SUPERSEDED BY AND MERGED INTO THE LOAN DOCUMENTS.


 


C.                                     THE
NOTE, THE LOAN AGREEMENT, THE SECURITY AGREEMENT, AND THE OTHER LOAN DOCUMENTS,
EACH AS AMENDED HEREBY, AND THIS AGREEMENT REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES
THERETO.  THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.


 


24.                                 WAIVER OF JURY TRIAL.  THE PARTIES HERETO EACH ACKNOWLEDGE THAT THE RIGHT TO
TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED.  EACH PARTY HERETO, AFTER CONSULTING OR
HAVING HAD THE OPPORTUNITY TO CONSULT, WITH COUNSEL OF THEIR CHOICE, KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT ANY OF THEM MAY HAVE TO A
TRIAL BY JURY IN ANY LITIGATION BASED UPON OR ARISING OUT OF ANY LOAN DOCUMENT
OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS OR ANY COURSE OF
CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTION OF ANY OF
THEM.  THESE PROVISIONS SHALL NOT BE
DEEMED TO HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY ANY PARTY
HERETO, EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM.


 


25.                                 Subordination.  In accordance with the terms of the
Intercreditor Agreement, Lender’s liens and security interests in the
Collateral are subordinate to CIT’s liens and security interests in the
Collateral.  The Intercreditor Agreement
contains other agreements between Lender and CIT concerning each party’s rights
and priorities as such rights and priorities relate to the Collateral.


 


[End of
Page; Signatures to Follow on Next Page] 


 


9

















 


Executed by Borrower, Corporate Guarantors, Individual
Guarantors and Lender on the dates of their respective acknowledgements, but to
be effective as of the date first set forth above.


 


 


	
  BORROWER:

  	
   

  	
  INDIVIDUAL GUARANTORS:

  
	
   

  	
   

  	
   

  
	
  EDDINS-WALCHER COMPANY,

  	
   

  	
  By:

  	
  /s/
  Richard C. Skillern

  	
   

  
	
  a Texas corporation

  	
   

  	
  Richard
  C. Skillern

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Scott Heller

  	
   

  	
   

  	
   

  
	
  Name:

  	
  Scott
  Heller

  	
   

  	
   

  	
  By:

  	
  /s/
  Thomas E. Kelly

  	
   

  
	
  Title:

  	
  President
  COO

  	
   

  	
   

  	
  Thomas E. Kelly

  
	
   

  	
   

  	
   

  
	
  CORPORATE GUARANTORS:

  	
   

  	
  By:

  	
  /s/
  Glenda Kelly

  	
   

  
	
   

  	
   

  	
  Glenda Kelly

  
	
  CAP ROCK ENERGY CORPORATION,

  	
   

  	
   

  
	
  a
  Texas corporation

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  David W. Pruitt

  	
   

  	
   

  	
   

  
	
  Name:

  	
  David
  W. Pruitt

  	
   

  	
   

  	
   

  
	
  Title:

  	
  President/CEO

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  UNITED FUEL & ENERGY CORPORATION,

  	
   

  	
   

  
	
  a
  Texas corporation

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Scott Heller

  	
   

  	
   

  	
   

  
	
  Name:

  	
  Scott
  Heller

  	
   

  	
   

  	
   

  
	
  Title:

  	
  President
  COO

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  LENDER:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  WASHINGTON MUTUAL BANK, FA,

  	
   

  	
   

  
	
  a federal association

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/
  Gardner W. Cannon

  	
   

  	
   

  	
   

  
	
  Name:

  	
  Gardner
  W. Cannon

  	
   

  	
   

  	
   

  
	
  Title:

  	
  First
  Vice President

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  When Recorded Return To:

  	
   

  	
   

  
	
  THOMPSON & KNIGHT LLP

  	
   

  	
   

  
	
  333 Clay, Suite 3300

  	
   

  	
   

  
	
  Houston, Texas 77002

  	
   

  	
   

  
	
  Attn: Tami Huntley

  	
   

  	
   

  
									



 


10

















 


	
  THE STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY OF Midland

  	
  §

  	
   

  



 


This instrument was
acknowledged before me on October, 9, 2003 by Scott Heller, the President of
EDDINS-WALCHER COMPANY, a Texas corporation, on behalf of said corporation.


 


 


	
   

  	
  /s/ China J. Hughes

  	
   

  
	
   

  	
  Notary Public, State of Texas

  



 


	
  THE STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY OF Midland

  	
  §

  	
   

  



 


This instrument was
acknowledged before me on October 9, 2003 by David W. Pruitt, the
President of CAP ROCK ENERGY CORPORATION, a Texas corporation, on behalf of
said corporation.


 


 


	
  [SEAL]

  	
  /s/ Renee Diane Rister

  	
   

  
	
   

  	
  Notary Public, State of Texas

  



 


 


	
  THE STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY OF Midland

  	
  §

  	
   

  



 


This instrument was
acknowledged before me on October 9, 2003 by Scott Heller, the President of
UNITED FUEL & ENERGY CORPORATION, a Texas corporation, on behalf of said
corporation.


 


	
   

  	
  /s/ China J. Hughes

  	
   

  
	
   

  	
  Notary Public, State of Texas

  



 


	
  THE STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY OF Ector

  	
  §

  	
   

  



 


This instrument was
acknowledged before me on October 9, 2003 by RICHARD C. SKILLERN.


 


 


	
   

  	
  /s/ Beth Corrales

  	
   

  
	
   

  	
  Notary Public, State of Texas

  



 


11

















 


	
  THE STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY OF Midland

  	
  §

  	
   

  



 


This instrument was
acknowledged before me on October 9, 2003 by THOMAS E. KELLY.


 


 


	
   

  	
  /s/ China J. Hughes

  	
   

  
	
   

  	
  Notary Public, State of Texas

  



 


 


	
  THE STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY OF Midland

  	
  §

  	
   

  



 


This instrument was
acknowledged before me on October 9, 2003 by GLENDA KELLY.


 


 


	
   

  	
  /s/ China J. Hughes

  	
   

  
	
   

  	
  Notary Public, State of Texas

  



 


 


	
  THE STATE OF TEXAS

  	
  §

  	
   

  
	
   

  	
  §

  	
   

  
	
  COUNTY OF HARRIS

  	
  §

  	
   

  



 


 


This instrument was
acknowledged before me on October 10, 2003, by Gardner W. Cannon, First Vice
President of WASHINGTON MUTUAL BANK, FA, a federal association.


 


	
   

  	
  /s/ Tamarra S. Huntley

  	
   

  
	
   

  	
  Notary Public, State of Texas

  



 


12

















 


Exhibit A


 


Schedule of
Deed of Trust Recordings


 


1.               Eddins-Walcher
Company Deed of Trust filed on July 14, 2000 under Clerk’s File No.
00-2237; recorded on July 17, 2000, in Volume 754, Page 804, Official
Public Records, Andrews County, Texas.


 


2.               Frank’s Fuels, Inc.
Deed of Trust filed on July 14, 2000 under Clerk’s File No. 00-2243;
recorded on July 17, 2000, in Volume 754, Page 837, Official Public Records,
Andrews County, Texas.


 


3.               Eddins-Walcher
Company Deed of Trust filed on July 14, 2000 in Volume 417, Page 685,
Official Public Records, Crane County, Texas.


 


4.               Frank’s Fuels, Inc.
Deed of Trust filed on July 14, 2000 in Volume 417, Page 717, Official
Public Records, Crane County, Texas.


 


5.               Frank’s Fuels, Inc.
Deed of Trust filed on July 17, 2000 under Clerk’s File No. 132292,
recorded on July 21, 2000 in Volume 584, Page 709, Official Public
Records, Crockett County, Texas.


 


6.               Eddins-Walcher
Company Deed of Trust filed on July 14, 2000 in Volume 1539, Page 369,
Official Public Records, Ector County, Texas.


 


7.               Frank’s Fuels, Inc.
Deed of Trust filed on July 14, 2000 in Volume 1539, Page 331, Official
Public Records, Ector County, Texas.


 


8.               Eddins-Walcher
Company Deed of Trust filed on July 14, 2000 in Volume 706, Page 140,
Official Public Records, Gaines County, Texas.


 


9.               Eddins-Walcher
Company Deed of Trust filed on July 17, 2000 under Clerk’s File No.
00-2968, recorded on July 18, 2000, in Volume 659, Page 123, Official
Public Records, Hockley County, Texas.


 


10.         Eddins-Walcher Company
Deed of Trust filed on July 26, 2000 under Clerk’s File No. 3924, recorded
on July 27, 2000, in Volume 808, Page 422-445, Official Public Records,
Howard County, Texas.


 


11.         Eddins-Walcher Company
Deed of Trust filed on August 29, 2000 in Volume 334, Page 45, Official
Public Records, Lynn County, Texas.


 


12.         Eddins-Walcher Company
Deed of Trust filed on July 17, 2000 in Volume 6749, Page 1, Official
Public Records, Lubbock County, Texas.


 


13.         Eddins-Walcher Company
Deed of Trust filed on July 14, 2000 in Volume 1792, Page 239, Official
Public Records, Midland County, Texas.


 


14.         Frank’s Fuels, Inc. Deed
of Trust filed on July 14, 2000 in Volume 1792, Page 275, Official Public
Records, Midland County, Texas.


 


15.         Eddins-Walcher Company
Deed of Trust filed on July 27, 2000 in Volume 306, Page 51, Deed of Trust
Records, Pecos County, Texas.


 


13

















 


16.         Frank’s Fuels, Inc. Deed
of Trust filed on September 20, 2000 under Clerk’s No. 67349, recorded on
September 21, 2000 in Volume 307, Page 1, Deed of Trust Records, Pecos
County, Texas.


 


17.         Eddins-Walcher Company
Deed of Trust filed on July 18, 2000 in Volume 463, Page 308, Official
Public Records, Scurry County, Texas.


 


18.         Eddins-Walcher Company
Deed of Trust filed on July 14, 2000 in Volume 652, Page 395, Official
Public Records, Terry County, Texas.


 


19.         Eddins-Walcher Company
Deed of Trust filed on July 14, 2000 in Document No. 0125433, Volume 692,
Page 801, Official Public Records, Upton County, Texas.


 


20.         Eddins-Walcher Company
Deed of Trust filed on July 18, 2000 in Document No. 0182041, Volume 748,
Page 403, Official Public Records, Val Verde County, Texas.


 


21.         Eddins-Walcher Company
Deed of Trust filed on July 24, 2000 under Clerk’s File No. 1928, recorded
on July 25, 2000, in Volume 696, Page 233, Official Public Records, Ward
County, Texas.


 


22.         Frank’s Fuels, Inc. Deed
of Trust filed on August 14, 2000 under Clerk’s File No. 2115, recorded on
August 15, 2000, in Volume 697, Page 254, Official Public Records, Ward
County, Texas.


 


23.         Frank’s Fuels, Inc. Deed
of Trust filed on August 14, 2000 under Clerk’s File No. 2117, recorded on
August 15, 2000, in Volume 697, Page 279, Official Public Records, Ward
County, Texas.


 


24.         Eddins-Walcher Company
Deed of Trust filed on July 14, 2000, in Volume 472, Page 749, Official
Public Records, Winkler County, Texas.


 


25.         Eddins-Walcher Company
Deed of Trust filed on July 14, 2000, in Volume 210, Page 832, Official
Public Records, Yoakum County, Texas.


 


26.         Eddins-Walcher Company
Deed of Trust filed on July 20, 2000, under File No. 61349, Book 1028,
Page 23, Lea County Records, New Mexico.


 


14

















 


UNCONDITIONAL
GUARANTY


 


THIS UNCONDITIONAL GUARANTY (“Guaranty”) is
made effective October 1, 2003, by CAP ROCK ENERGY CORPORATION, a Texas
corporation (“Corporate Guarantor”) for the benefit of WASHINGTON MUTUAL BANK,
FA, a federal association (“Bank”).


 


1.                                       Definitions.
As used in this Guaranty, the following terms shall have the meanings indicated
below:


 


a.                                       The
term “Bank” shall mean WASHINGTON MUTUAL BANK, FA, a federal association.


 


b.                                      The
term “Borrower” shall mean EDDINS-WALCHER COMPANY, a Texas Corporation.


 


c.                                       The
term “Corporate Guarantor” shall mean and refer to CAP ROCK ENERGY CORPORATION,
a Texas corporation.


 


d.                                      The
term “Guaranteed Indebtedness” shall mean (i) all indebtedness, obligations and
liabilities of Borrower to Bank of any kind or character now existing or
hereafter arising, whether direct, indirect, related, unrelated, fixed,
contingent, liquidated, unliquidated, joint, several or joint and several, and
regardless of whether such indebtedness, obligations and liabilities may, prior
to their acquisition by Bank, be or have been payable to or in favor of a third
party and subsequently acquired by Bank (it being contemplated that Bank may
make such acquisitions from third parties), arising from those certain
promissory notes dated July 12, 2000 in the aggregate principal amount of
$15,000,000.00 from Borrower and Frank’s Fuels, Inc. originally payable to the
order of New West Resources, Inc., (the “Original Promissory Notes”) as
assigned, modified and endorsed over to Bank, and including without limitation
all indebtedness, obligations and liabilities of Borrower to Bank now existing
or hereafter arising by note, draft, acceptance, guaranty, endorsement, letter
of credit, assignment, purchase, overdraft, discount, indemnity agreement or
otherwise with regard to the Original Promissory Notes, (ii) all accrued but
unpaid interest on any of the indebtedness described in (i) above; (iii) all
obligations of Borrower to Bank under any documents evidencing, securing,
governing and/or pertaining to all or any part of the indebtedness described in
(i) and (ii) above, (iv) all costs and expenses incurred by Bank in connection
with the collection and administration of all or any part of the indebtedness
and obligations described in (i), (ii) and (iii) above or the protection or
preservation of, or realization upon, the collateral securing all or any part
of such indebtedness and obligations, including without limitation all
reasonable attorneys’ fees, and (v) all renewals, extensions, modifications and
rearrangements of the indebtedness and obligations described in (i), (ii),
(iii) and (iv) above.


 


2.                                       Obligations.
As an inducement to Bank to extend or continue to extend credit and other
financial accommodations to Borrower, Corporate Guarantor, for value received,
does hereby unconditionally and absolutely guarantee the prompt and full
payment and performance of the Guaranteed Indebtedness when due or declared to
be due and at all times thereafter. The liability


 

















 


of Corporate Guarantor hereunder shall be limited to the maximum amount
of liability that can be incurred without rendering the obligations of
Corporate Guarantor hereunder voidable under applicable laws relating to
fraudulent conveyance or fraudulent transfer, and not for a greater amount.


 


3.                                       Character
of Obligations. This is an absolute, continuing and unconditional Guaranty
of payment and not of collection,
provided however that if at any time or from time to time there is no
outstanding Guaranteed Indebtedness, the obligations of the Corporate Guarantor
with respect to any and all Guaranteed Indebtedness of Borrower to Bank shall
terminate. All Guaranteed Indebtedness heretofore, concurrently herewith or
hereafter made by Bank to Borrower shall be conclusively presumed to have been made
or acquired in acceptance hereof. Corporate Guarantor shall be primarily
liable, jointly and severally, with Borrower and any other guarantor of all or
any part of the Guaranteed Indebtedness.


 


4.                                       Representations
and Warranties. Corporate Guarantor hereby represents and warrants the
following to Bank:


 


a.                                       This
Guaranty may reasonably be expected to benefit, directly or indirectly,
Corporate Guarantor;


 


b.                                      Corporate
Guarantor is familiar with, and has independently reviewed the books and
records regarding the financial condition of Borrower and is familiar with the
value of any and all collateral intended to be security for the payment of all
or any part of the Guaranteed Indebtedness; provided, however, Corporate
Guarantor is not relying on such financial condition or collateral as an
inducement to enter into this Guaranty;


 


c.                                       Corporate
Guarantor has adequate means to obtain from Borrower on a continuing basis
information concerning the financial condition of Borrower and Corporate
Guarantor is not relying on Bank to provide such information to Corporate
Guarantor either now or in the future;


 


d.                                      Corporate
Guarantor has the power and authority to execute, deliver and perform this
Guaranty and any other agreements executed by Corporate Guarantor contemporaneously
herewith, and the execution, delivery and performance of this Guaranty and any
other agreements executed by Corporate Guarantor contemporaneously herewith
does not and will not violate, (i) any agreement or instrument to which
Corporate Guarantor is a party or (ii) any law, rule, ration or order of any
governmental authority to which Corporate Guarantor is subject;


 


e.                                       Neither
Bank nor any other party has made any representation, warranty or statement to
Corporate Guarantor in order to induce Corporate Guarantor to execute this
Guaranty;


 


f.                                         The
financial statements and other financial information regarding Corporate
Guarantor heretofore and hereafter delivered to Bank are and shall be true and
correct in all material respects and fairly present the financial position of
Corporate Guarantor as of the dates thereof, and no material adverse change has
occurred in the financial condition of Corporate


 


2

















 


Guarantor reflected in the financial statements and other financial
information regarding Corporate Guarantor heretofore delivered to Bank since
the date of the last statement thereof; and


 


g.                                      As
of the date hereof, and after giving effect to this Guaranty and the
obligations evidenced hereby, (i) Corporate Guarantor is and will be solvent,
(ii) the fair saleable value of Corporate Guarantor’s assets exceeds and will
continue to exceed Corporate Guarantor’s liabilities (both fixed and
contingent), (iii) Corporate Guarantor is and will continue to be able to pay
Corporate Guarantor’s debts as they mature, and (iv) Corporate Guarantor has
and will continue to have sufficient capital to carry on its business and all
businesses in which it is about to engage.


 


5.                                       Covenants.
Corporate Guarantor hereby covenants and agrees with Bank as follows:


 


a.                                       Corporate
Guarantor shall not, so long as Corporate Guarantor’s obligations under this
Guaranty continue, transfer or pledge any material portion of Corporate
Guarantor’s assets for less than full and adequate consideration;


 


b.                                      Corporate
Guarantor shall promptly furnish to Bank at any time and from time to time such
financial statements and other financial information of Corporate Guarantor as
the Bank may require, in form and substance satisfactory to Bank;


 


c.                                       Corporate
Guarantor shall comply with all terms and provisions of the instruments and
agreements evidencing, governing and securing all or any part of the Guaranteed
Indebtedness that apply to Corporate Guarantor; and


 


d.                                      Corporate
Guarantor shall promptly inform Bank of (i) any litigation or governmental
investigation against Corporate Guarantor or affecting any security for all or
any part of the Guaranteed Indebtedness or this Guaranty which, if determined
adversely, might have a material adverse effect upon the financial condition of
Corporate Guarantor or upon such security or might cause a default under any of
the instruments or agreements evidencing, governing or securing all or any part
of the Guaranteed Indebtedness, (ii) any claim or controversy which might
become the subject of such litigation or governmental investigation, and (iii)
any material adverse change in the financial condition of Corporate Guarantor.


 


6.                                       Consent
and Waiver.


 


a.                                       Corporate
Guarantor waives (i) promptness, diligence and notice of acceptance of this
Guaranty and notice of the incurring of any obligation, indebtedness or
liability to which this Guaranty applies or may apply and waives presentment
for payment, notice of nonpayment, protest, demand, notice of protest, notice
of intent to accelerate, notice of acceleration, notice of dishonor, diligence
in enforcement and indulgences of every kind, and (ii) the taking of any other
action of Bank, any other notice to, or making any demand on, Borrower or any
other guarantor of all or any part of the Guaranteed Indebtedness or any other
party.


 


3

















 


b.                                      Corporate
Guarantor waives any rights Corporate Guarantor has under, or any requirements
imposed by Chapter 34 of the Texas Business and Commerce Code, as in effect on
the date of this Guaranty or as it may be amended from time to time, but solely
as such rights apply to Bank. Corporate Guarantor waives no rights as may exist
between Corporate Guarantor and Borrower and other guarantors.


 


c.                                       Bank
may at any time, without the consent of or notice to Corporate Guarantor,
without incurring responsibility to Corporate Guarantor and without impairing,
releasing, reducing or affecting the obligations of Corporate Guarantor
hereunder: (i) change the manner, place or terms of payment of all or any part
of the Guaranteed Indebtedness, or renew, extend, modify, rearrange or alter
all or any part of the Guaranteed Indebtedness; (ii) sell, exchange, release,
surrender, subordinate, realize upon or otherwise deal with in any manner and
in any order any collateral for all or any part of the Guaranteed Indebtedness
or this Guaranty or setoff against all or any part of the Guaranteed
Indebtedness; (iii) neglect, delay, omit, fail or refuse to take or prosecute any
action for the collection of all or any part of the Guaranteed Indebtedness or
this Guaranty or to take or prosecute any action in connection with any
instrument or agreement evidencing, governing or securing all or any part of
the Guaranteed Indebtedness or this Guaranty; (iv) exercise or refrain from
exercising any rights against Borrower or others, or otherwise act or refrain
from acting; (v) settle or compromise all or any part of the Guaranteed
Indebtedness and subordinate the payment of all or any part of the Guaranteed
Indebtedness to the payment of any obligations, indebtedness or liabilities
which may be due or become due to Bank or others; (vi) apply any deposit
balance, fund, payment, collections through process of law or otherwise or
other collateral of Borrower to the satisfaction and liquidation of the
indebtedness or obligations of Borrower to Bank not guaranteed under this
Guaranty pursuant to paragraph 4 herein; and (vii) apply any sums paid to Bank
by Corporate Guarantor, Borrower, or others to the Guaranteed Indebtedness in
such order and manner as Bank, in its sole discretion, may determine.


 


d.                                      Notwithstanding
any provision in this Guaranty to the contrary, Corporate Guarantor hereby
waives and releases (i) any and all rights of subrogation, reimbursement,
indemnification or contribution which Corporate Guarantor may have, before
payment in full of the Guaranteed Indebtedness, against others liable on all or
any part of the Guaranteed Indebtedness, (ii) any and all rights to be
subrogated to the rights of Bank in any collateral or security for all or any
part of the Guaranteed Indebtedness before payment in full of the Guaranteed
Indebtedness, and (iii) any and all other rights and claims of such Corporate
Guarantor against Borrower or any third party as a result of such Corporate
Guarantor’s payment, before payment in full of the Guaranteed Indebtedness.


 


e.                                       Should
Bank seek to enforce the obligations of Corporate Guarantor hereunder by action
in any court or otherwise, Corporate Guarantor waives any requirement,
substantive or procedural, that (i) Bank first enforce any rights or remedies
against Borrower, or any other person or entity liable to Bank for all or any
part of the Guaranteed Indebtedness, including without limitation that a judgment
first be rendered against Borrower or any other person or entity, or that
Borrower or any other person or entity should be joined in such cause, or (ii)
Bank shall first enforce rights against any collateral which shall ever have
been given to secure all or any part of the Guaranteed Indebtedness or this
Guaranty. Such waiver shall be without prejudice


 


4

















 


to Bank’s right, at its option, to proceed against Borrower or any
other person or entity, whether by separate action or by joinder.


 


f.                                         In
addition to any other waivers, agreements and covenants of Corporate Guarantor
set forth herein, Corporate Guarantor hereby further waives and releases all
claims, causes of action, defenses and offsets for any act or omission of Bank,
its directors, officers, employees, representatives or agents in connection
with Bank’s administration of the Guaranteed Indebtedness, except for Bank’s
willful misconduct and gross negligence.


 


7.                                       Obligations
Not Impaired.


 


a.                                       Corporate
Guarantor agrees that Corporate Guarantor’s obligations hereunder shall not be
released, diminished, impaired, reduced or affected by the occurrence of any
one or more of the following events: (i) the lack of corporate power of
Borrower or any other guarantor of all or any part of the Guaranteed
Indebtedness, (ii) any receivership, insolvency, bankruptcy or other
proceedings affecting Borrower or any other guarantor of all or any part of the
Guaranteed Indebtedness, or any of their respective property; (iii) the partial
or total release or discharge of Borrower or any other guarantor of all or any
part of the Guaranteed Indebtedness, or any other person or entity from the
performance of any obligation contained in any instrument or agreement
evidencing, governing or securing all or any part of the Guaranteed
Indebtedness, whether occurring by reason of law or otherwise; (iv) the taking
or accepting of any collateral for all or any part of the Guaranteed
Indebtedness or this Guaranty; (v) the taking or accepting of any other
guaranty for all or any part of the Guaranteed Indebtedness; (vi) any failure
by Bank to acquire, perfect or continue any lien or security interest on
collateral securing all or any part of the Guaranteed Indebtedness or this
Guaranty; (vii) the impairment of any collateral securing all or any part of
the Guaranteed Indebtedness or this Guaranty; (viii) any failure by Bank to
sell any collateral securing all or any part of the Guaranteed Indebtedness or
this Guaranty in a commercially reasonable manner or as otherwise required by
law; (ix) any invalidity or unenforceability of or defect or deficiency in any
instrument or agreement evidencing, governing or securing all or any part of
the Guaranteed Indebtedness or this Guaranty; or (x) any other circumstances
which might otherwise constitute a defense available to, or discharge of,
Borrower, Corporate Guarantor or any other guarantor of all or any part of the
Guaranteed Indebtedness, other than payment of the Guaranteed Indebtedness.


 


b.                                      This
Guaranty shall continue to be effective or be reinstated, as the case may be,
if at any time any payment of all or any part of the Guaranteed Indebtedness is
rescinded or must otherwise be returned by Bank upon the insolvency, bankruptcy
or reorganization of Borrower, Corporate Guarantor or any other guarantor of
all or any part of the Guaranteed Indebtedness, or otherwise, all as though
such payment had not been made.


 


c.                                       None
of the following shall affect Corporate Guarantor’s liability hereunder: (i) the
unenforceability of all or any part of the Guaranteed Indebtedness against
Borrower by reason of the fact that the Guaranteed Indebtedness exceeds the
amount permitted by law; (ii) the act of creating all or any part of the
Guaranteed Indebtedness is ultra vires; or (iii) the officers or partners
creating all or any part of the Guaranteed Indebtedness acted in excess of
their authority. Corporate Guarantor hereby acknowledges that withdrawal from,
or termination of, any


 


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ownership interest in Borrower now or hereafter owned or held by
Corporate Guarantor shall not alter, affect or in any way limit the obligations
of Corporate Guarantor hereunder.


 


8.                                       Actions
against Corporate Guarantor. In the event of a default in the payment or
performance of all or any part of the Guaranteed Indebtedness when such
Guaranteed Indebtedness becomes due, whether by its terms, by acceleration or
otherwise, or in the event of death or incompetency of Thomas E. Kelly, or the
bankruptcy, dissolution or insolvency of Borrower, Corporate Guarantor, or any
other guarantor, or upon an assignment by Borrower, Corporate Guarantor, or any
guarantor for the benefit of creditors, then and in any such event Corporate
Guarantor shall immediately, without notice or demand, promptly pay the amount
due thereon to Bank, in lawful money of the United States, at Bank’s address.
One or more successive or concurrent actions may be brought against Corporate
Guarantor, either in the same action in which Borrower is sued or in separate
actions, as often as Bank deems advisable. The exercise by Bank of any right or
remedy under this Guaranty or under any other agreement or instrument, at law,
in equity or otherwise, shall not preclude concurrent or subsequent exercise of
any other right or remedy. The books and records of Bank shall be admissible in
evidence in any action or proceeding involving this Guaranty and shall be prima
facie evidence of the payments made on, and the outstanding balance of, the
Guaranteed Indebtedness.


 


9.                                       Payment
by Corporate Guarantor. Whenever Corporate Guarantor pays any sum which is
or may become due under this Guaranty, written notice must be delivered to Bank
contemporaneously with such payment. Such notice shall be effective for
purposes of this paragraph when contemporaneously with such payment Bank
receives such notice either by: (a) personal delivery to the address and
designated department of Bank, or (b) United States mail, certified or
registered, return receipt requested, postage prepaid, addressed to Bank. In
the absence of such notice to Bank by Corporate Guarantor in compliance with
the provisions hereof, any sum received by Bank on account of the Guaranteed
Indebtedness shall be conclusively deemed paid by Borrower.


 


10.                                 Notice
of Sale. In the event that Corporate Guarantor is entitled to receive any
notice under the Uniform Commercial Code, as it exists in the state governing
any such notice, of the sale or other disposition of any collateral securing
all or any part of the Guaranteed Indebtedness or this Guaranty, reasonable
notice shall be deemed given when such notice is deposited in the United States
mail, postage prepaid, at the address for Corporate Guarantor, five (5) days
prior to the date any public sale, or after which any private sale, if any such
collateral is to be held; provided, however, that notice given in any other
reasonable manner or at any other reasonable time shall be sufficient.


 


11.                                 Waiver
of Bank. No delay on the part of Bank in exercising any right hereunder or
failure to exercise the same shall operate as a waiver of such right. In no
event shall any waiver of the provisions of this Guaranty be effective unless
the same be in writing and signed by an officer of Bank, and then only in the
specific instance and for the purpose given.


 


12.                                 Successors
and Assigns. This Guaranty is for the benefit of Bank, its successors and
assigns, including, without limitation, any assignee or participant. This
Guaranty is binding upon Corporate Guarantor’s successors and assigns,
including without limitation any person or entity


 


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obligated by operation of law upon the reorganization, merger,
consolidation or other change in the organizational structure of Corporate
Guarantor.


 


13.                                 Costs
and Expenses. Corporate Guarantor shall pay on demand by Bank all costs and
expenses (including without limitation all reasonable attorneys’ fees) incurred
by Bank in connection with the preparation, administration, enforcement and/or
collection of this Guaranty. This covenant shall survive the payment of the
Guaranteed Indebtedness.


 


14.                                 Severability.
If any provision of this Guaranty is held by a court of competent jurisdiction
to be illegal, invalid or enforceable under present or future laws, such
provision shall be fully severable, shall not impair or invalidate the
remainder of this Guaranty and the effect thereof shall be confined to the
provision held to be illegal, invalid or unenforceable.


 


15.                                 No
Obligation. Nothing contained herein shall be construed as an obligation on
the part of Bank to extend or continue to extend credit to Borrower.


 


16.                                 Amendment.
No modification or amendment of any provision of this Guaranty, nor consent to
any departure by Corporate Guarantor therefrom, shall be effective unless the
same shall be in writing and signed by an officer of Bank, and then shall be
effective only in the specific instance and for the purpose for which given.


 


17.                                 Cumulative
Rights. All rights and remedies of Bank hereunder are cumulative of each
other and of every other right or remedy which Bank may otherwise have, at law
or in equity or under any instrument or agreement, and the exercise of one or
more of such rights or remedies shall not prejudice or impair the concurrent or
subsequent exercise of any other rights or remedies.


 


18.                                 Governing
Law. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS AND APPLICABLE FEDERAL LAWS.


 


19.                                 Venue.
This Guaranty has been entered into in Harris County, Texas, and it shall be
performable for all purposes in such county. Courts within the State of Texas
shall have jurisdiction over any and all disputes arising under or pertaining
to this Guaranty and venue for any such disputes shall be Harris County, Texas.


 


20.                                 Compliance
with Applicable Usury Laws. Notwithstanding any other provision of this
Guaranty or of any instrument or agreement evidencing, governing or securing
all or any part of the Guaranteed Indebtedness, Corporate Guarantor and Bank by
its acceptance hereof agree that Corporate Guarantor shall never be required or
obligated to pay interest in excess of the maximum nonusurious interest rate as
may be authorized by applicable law for the written contracts which constitute
the Guaranteed Indebtedness. It is the intention of Corporate Guarantor and
Bank to conform strictly to the applicable laws which limit interest rates, and
any of the aforesaid contracts for interest, if and to the extent payable by
Corporate Guarantor, shall be held to be subject to reduction to the maximum
nonusurious interest rate allowed under said law.


 


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21.                                 Descriptive
Headings. The captions in this Guaranty are for convenience only and shall
not define or limit the provisions hereof.


 


22.                                 Gender.
Within this Guaranty, words of any gender shall be held and construed to
include the other gender.


 


23.                                 Notice.
For purposes of notice under this Guaranty, the addresses of the parties is as
follows:


 


Cap Rock Energy
Corporation


500 West Wall, Suite 400


Midland, Texas 79701


 


Washington Mutual Bank,
FA


3200 Southwest Freeway,
Suite 1700


Houston, Texas 77027


 


24.                                 Security.  The
undersigned agrees that no security now or later held by the Bank for the
payment of any Guaranteed Indebtedness or this Guaranty, whether from the
Borrower, Corporate Guarantor or any guarantor, or otherwise, and whether in
the nature of a security interest, pledge, lien, assignment, setoff,
suretyship, guaranty, indemnity, insurance or otherwise, shall affect in any
manner the unconditional obligation of the undersigned under this Guaranty, and
the Bank, in its sole discretion, without notice to the undersigned, may
release, exchange, enforce and otherwise deal with any security without affecting
in any manner the unconditional obligation of the undersigned under this
Guaranty.  The undersigned acknowledges
and agrees that the Bank has no obligation to acquire or perfect any lien on or
security interest in any assets, whether realty or personalty, to secure
payment of the Guaranteed Indebtedness or this Guaranty, and the undersigned is
not relying upon any assets in which the Bank has or may have a lien or
security interest for payment of the Guaranteed Indebtedness or this Guaranty.


 


25.                                 Entire
Agreement. This Guaranty contains the entire agreement between Corporate
Guarantor and Bank regarding the subject matter hereof and supersedes all prior
written and oral agreements and understandings, if any, regarding same,
including that certain Unconditional Guaranty dated July 12, 2000 by Cap Rock Electric Cooperative, Inc., to
which Cap Rock Energy Corporation, a
Texas corporation, is successor-in-interest, in favor of Bank United Texas FSB.


 


EXECUTED to be effective
as of October 1, 2003.


 


	
  CAP ROCK ENERGY CORPORATION,

  	
   

  
	
  a
  Texas corporation

  	
   

  
	
   

  	
   

  
	
   

  
	
  By:

  	
  /s/
  David W. Pruitt

  	
   

  
	
  Name:

  	
   

  	
  David W. Pruitt

  	
   

  
	
  Title:

  	
   

  	
  President

  	
   

  
							



 


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