**Exhibit 10.7**

 
|   |                 | **1000 Superior Blvd., Suite 201**     |                       | **914 North Golden Prairie** |
|--------|----------------------|----------------------------------------|----------------------------|------------------------------|
|   |                 |                                   |                       | **Burton,  Kansas**          |
|   | ***U.S. ENERGY***    |                                   | **Wayzata, MN 55394-1873** |                         | **Office  316 835-2399** |
|   | ***SERVICES, INC.*** |                                   | **Office 952 473-4300**    |                         | **Fax      316  835-6507** |
|   |                 | **Fax   952  473-1224** |                       |                         |

 

March 9,2004

 

BillPracht, President

KansasAgri-Energy

2101⁄2 East 4th

Garnett,KS 66032

DearMr. Pracht:

 

Thepurpose of this letter is to set forth the understanding and agreement betweenU.S. Energy Services, Inc. (“U.S. Energy”) and EastKansas Agri-Energy LLC (EKAE).

 

**PROJECT DESCRIPTION:****EKAE**is developing a 25 million gallon per**year ethanol plant (“Plant”) to belocated in Garnett Kansas. The Plant will have approximately a three MW peakusage in electricity and will consume approximately 2,500 MMBtu of natural gasper day.

 

**U.S. ENERGY****RESPONSIBILITIES:******U.S. Energy will provide consulting andenergy management services for supplies of natural gas and electricity for thePlant.  These services will be providedduring the construction of the Plant (“Construction Period”), and after theConstruction Period when the Plant has been placed in service (“CompletionDate”).  The Completion Date shall bedetermined when the Plant begins producing ethanol.  These services will include but not be limited to the following:

 

**A. Energy Infrastructure Advisory Services During theConstruction Period**

 

1.                                       Provide an economic comparison of receivingnatural gas distribution service.  U.S.Energy will provide preliminary engineering cost estimates, route drawings, andproject timeline related to constructing pipeline facilities.

 

Inthe event that a direct connect pipeline option is selected, U.S. Energy willsubmit a tap request to the pipeline. In addition, U.S. Energy will alsoattempt to negotiate an option for EKAE to minimize interconnect costs throughthe purchase of firm transportation to the Plant.  Engineering and construction management services related toconstructing a pipeline may be provided by U.S. Energy’s sister company, U.S.Energy Engineering, Inc. on a fee basis.

 

2.                                       Determine whether firm, interruptible, or ablend of transportation entitlement will provide the lowest burnertipcost.  Factors that will be consideredinclude pipeline credits for the new interconnect, cost of an alternate fuelsystem, and availability of specific receipt point capacity.

 

3.                                       Provide advisory services to EKAE regardingelectric pricing and service agreements.

 

a.                                       Analyze theelectric service proposals along with primary, secondary and generation optionsand recommend an electric sourcing strategy and plan.  The plan may include a combination of electric supplier agreementand/or installation of on-site generation.

 

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U.S. Energy Initials   */s/*

 

EKAE Initials */s/*

 

b.                                      Negotiate final electric service agreementsthat meet the pricing and reliability requirements of EKAE, including options for third party access to electric metering.

 

c.                                       Prepare and implement a regulatory strategy,if required and if an alternative power supplier is selected. Any attorney feesrequired for the specific purpose of obtaining regulatory approval for analternative power supplier, if any, will be over and above U.S. Energy’smonthly fee herein, and must be pre-approved by EKAE.

 

4.                                       Evaluate the proposed electric distributioninfrastructure (substation) for reliability, future growth potential anddetermination of the division of ownership of facilities between the utilityand the Plant.

 

5.                                       Investigate economic development rates,utility grants, equipment rebates and other utility programs that may beavailable.

 

**B. On-Going Energy Management Services Following theCompletion Period**

 

U.S.Energy will provide the following services at EKAE’s request:

 

Providenatural gas supply information to minimize the cost of natural gaspurchased.  This will include acquiringmultiple supply quotes and reporting to EKAE the various supplyindex and fixed prices. U.S. *Energy*will not take title to EKAE gas supplies, but will communicate supplyprices and potential buying strategies.

 

2.                                       Negotiate with pipelines, utilities, other shippers,and suppliers to provide transportation, balancing, and supply agreements thatmeet EKAE’s performance criteria at the lowest possiblecost.

 

3.                                       Develop and implement a price risk managementplan that is consistent with EKAE’s pricing objectives and risk profile.

 

4.                                       Provide daily nominations to the suppliers,pipeline, and other applicable shippers for natural gas deliveries to thePlant.  This will include dailyelectronic confirmations to EKAEof all nominations and actualdaily usage.  U.S. Energy will utilizecustomer or utility supplied telemetering to obtain actual usage data.

 

5.                                       Provide a consolidated monthly invoice toEKAE that reflects all applicable natural gas and electric energy costs. U.S.Energy will be responsible for reviewing, reconciling and paying all shipper,supplier and utility invoices.

 

6.                                       Provide a monthly usage report of electricenergy consumption and costs. Also, where applicable and available from theutility, obtain monthly interval electric load data and provide monthly loadprofile graphs.

 

7.                                       On going review and renegotiation of electricservice costs, as required.  This mayinclude:

 

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a.                                            Completing and evaluating annual proposals toidentify the most reliable and economic third party electric energy supply.

 

b.                                           Identifying new service tariffs oropportunities to renegotiate the service agreement to provide lower costs.

 

c.                                       Identifying on-site generation opportunitiesas market conditions change.

 

d.                                           Provide a monthly projection of energy(natural gas and electricity) and annual summaries.

 

8.                                       Provide natural gas and electric energyoperating budgets for the Plant.

 

9.                                       Perform initial sales tax exemption auditsfor energy consumption costs as required and allowed by Kansas tax laws.

 

**TERM:** The initial term of this Agreement shall commence on March 10,2004 and continue until three months after the Plant’s Completion Date.  The Agreement shall be month-to-month afterthe initial term.  This Agreement may beterminated by either party effective after the initial term upon sixty (60)days prior written notice.

 

**FEES:******U.S.Energy’s fee for services described above during the term of this Agreementshall be $2,700 per month, plus any travel expenses incurred by U.S. Energyemployees.  Such travel expenses shallbe limited to travel of U.S. Energy employees requested by EKAE, and must bepre-approved by EKAE.  EKAE may deferpayment on the invoiced amounts up to $2,200 until the month in which naturalgas consumption and ethanol production begins. Deferred invoice amounts shall not bear interest Pre-approved travelexpenses shall not be deferred.  In theevent that plant financing is not secured, this Agreement shall become null andvoid and both parties will be relieved of professional and/or financialobligations due the other party.  IfEKAE experiences significant delays in its project timeline and it is necessaryfor U.S. Energy to delay work on EKAE’s energy management activities, U.S.Energy will suspend its activities and suspend invoicing EKAE until U.S.Energy’s activities resume.

 

**BILLING AND PAYMENT:******On the first of the month, U.S. Energy shallinvoice EKAE for the work to be completed that month and EKAE shall pay U.S.Energy within ten (10) days of receipt of invoice.  U.S. Energy will also provide to EKAE a consolidated invoice ofthe Plant’s energy costs.

 

**TAXES:** EKAE will be responsible for payment of all taxes including, but notlimited to, all sales, use, excise, BTU, heating value and other taxesassociated with the purchase and/or transport of natural gas or electricity andthe provision of services hereunder.

 

**CONFIDENTIALITY:******U.S. Energy shall not divulge to any otherperson or party any information developed by U.S. Energy hereunder or revealedto U.S. Energy pursuant to this Agreement, unless such information is (a)already in U.S. Energy’s possession and such information is not known by U.S.Energy to be subject to another Confidentiality Agreement, or (b) is or becomesgenerally available to the public other than as a result of an unauthorizeddisclosure by U.S. Energy, its officers, employees, directors, agents or itsadvisors, or (c) becomes available to U.S. Energy on a non-confidential basisfrom a source which is not

 

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knownto be prohibited from disclosing such information to U.S. Energy by legal,contractual or fiduciary obligation to the supplier, or (d) is required by U.S.Energy to be disclosed by court order, or (e) is permitted by EKAE**. **Allsuch information shall be and remain the property of EKAE unless suchinformation is subject to another Confidentiality Agreement, and upon thetermination of this Agreement, U.S. Energy shall return all such informationupon EKAE’s request.  Notwithstandinganything to the contrary herein, U.S. Energy shall not disclose any informationwhich is in any way related to this Agreement or U.S. Energy’s serviceshereunder without first discussing such proposed disclosure with EKAE.

 

**NOTICES:******Anyformal notice, request or demand which a party hereto may desire to give to theother respecting this Agreement shall be in writing and shall be considered asduly delivered as of the postmark date when mailed by ordinary, registered orcertified mail by said party to the addresses listed below, Either party may,from time-to-time, identify alternate addresses at which they may receivenotice during the term of this Agreement by providing written notice to theother party of such alternate addresses.

 
| East  Kansas Agri-Energy: |   | East  Kansas Agri-Energy LLC     |
|---------------------------|--------|----------------------------------|
|                      |   | Attn:  Jill Zimmerman            |
|                      |   | PO  Box 225                      |
|                      |   | Garnett,  KS 66032               |
|                      |   |                             |
| U.S.  Energy:             |   | U.S.  Energy Services, Inc.      |
| (Payment)                 |   | c/o  US Bank SDS 12-1449         |
|                      |   | Account  #: 173100561153         |
|                      |   | P.O.  Box 86                     |
|                      |   | Minneapolis,  MN 55486           |
|                      |   |                             |
| (Notices):                |   | U.S.  Energy Services, Inc. 1000 |
|                      |   | Superior  Blvd, Suite 201        |
|                      |   | Wayzata,  MN 55391               |
|                      |   | Attn:  Bruce L. Hoffarber        |

 

**ASSIGNMENT OR AMENDMENT:******The Agreement may not be assigned or amendedwithout the written consent of U.S. Energy and EKAE.

 

**APPLICABLE LAW:******The Agreement shall be construed inaccordance with the laws of the State of Kansas.

 

**ENTIRE AGREEMENT:******This Agreement constitutes the entireAgreement among the parties pertaining to the subject matter hereof andsupersedes all prior Agreements and understanding pertaining hereto.

 

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Ifthe above correctly sets forth EKAE’s understanding of the Agreement, please soindicate in the spaces below and return one copy to U.S. Energy, Attention:Bruce L. Hoffarber.

 

Sincerely,

 

 

**U.S. ENERGY SERVICES, INC.**

 
| By:                                  | *      /s/  Todd D. Overgard* | *(Sign)* |   |
|--------------------------------------|-------------------------------------------------------------|----------|--------|
|                                 |                                                        |
| Name:                                | Todd D. Overgard                                            | (print)  |   |
|                                 |                                                        |
| Title:  Chief Operating Officer |                                                        |
|                                 |                                                        |
| Date:  March 15, 2004      |                                                        |
|                                      |                                                             |          |        |  |

 

 

ACCEPTED AND DATED TO THIS

15th DAY OF MARCH, 2004.

 

**EAST KANSAS AGRI-ENERGY, LLC**

 
| By:                   | */s/ William R.  Pracht* | *(Sign)* |   |
|-----------------------|--------------------------|----------|--------|
|                  |                     |
| Name:            | William R. Pracht        | (print)  |   |
|                  |                     |
| Title:  Chairman |                     |
| Date:  3-9-04    |                     |
|                       |                          |          |        |  |  |

 

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