exv10w6



 




Exhibit
10.6


Settlement Agreement




And




Amendment of Existing Contracts




Between




Northwestern Resources Co.




And




Reliant Energy, Incorporated




 









 





TABLE OF CONTENTS




SETTLEMENT AGREEMENT




	 	 	 	 	 	 	 
	A.

	 	Recitations
	 	 	1	 
	 
	 	 	 	 	 	 
	B.

	 	Definitions
	 	 	4	 
	 
	 	 	 	 	 	 
	C.

	 	Transition Period
	 	 	7	 
	 
	 	 	 	 	 	 
	D.

	 	Post-Transition Period
	 	 	8	 
	 
	 	 	 	 	 	 
	E.

	 	Petroleum Coke
	 	 	23	 
	 
	 	 	 	 	 	 
	F.

	 	Fuel Handling Facility
	 	 	24	 
	 
	 	 	 	 	 	 
	G.

	 	Reclamation
	 	 	25	 
	 
	 	 	 	 	 	 
	H.

	 	Arbitration
	 	 	26	 
	 
	 	 	 	 	 	 
	I.

	 	Right of First Refusal
	 	 	28	 
	 
	 	 	 	 	 	 
	J.

	 	Amended Provisions of Existing Contracts
	 	 	32	 
	 
	 	 	 	 	 	 
	K.

	 	Miscellaneous
	 	 	37	 
	 
	 	 	 	 	 	 
	Signatures 	 	 	43	 
	 
	 	 	 	 	 	 
	Exhibit A – Capital Expenditures	 	 	 	 
	 
	 	 	 	 	 	 
	Exhibit B – Page 1 – Calculation of “New Price” for Lignite	 	 	 	 
	 
	 	 	 	 	 	 
	Exhibit B – Page 2 – Assumption in “New Price” Calculation	 	 	 	 
	 
	 	 	 	 	 	 
	Exhibit B – Page 3 – CQIM Output Summary	 	 	 	 
	 
	 	 	 	 	 	 
	Exhibit B – Page 4 – Assumptions/Calculations for Data on Page 2
(Assumptions in “New Price” Calculation) of this Exhibit B	 	 	 	 
	 
	 	 	 	 	 	 
	Exhibit B – Page 5 – Assumptions/Calculations for Data on Page 1 of 5
(Calculation of “New Price” for Lignite) of this Exhibit B	 	 	 	 






 









 





SETTLEMENT AGREEMENT AND




AMENDMENT OF EXISTING CONTRACTS




August 2, 1999




     This Agreement is made and entered into between Northwestern Resources Co. (“NWR”) and Reliant
Energy, Incorporated (“REI”).



A. RECITATIONS




     1. NWR and Utility Fuels, Inc. (“Utility Fuels”) entered into a Lignite Supply Agreement dated
August 29, 1979. NWR and Utility Fuels subsequently amended the Lignite Supply Agreement on August
1, 1989. The Lignite Supply Agreement, as amended, is referred to as the “LSA.”



     2. Pursuant to the LSA, NWR and Utility Fuels entered into a Construction and Operation
Agreement (“C&O Agreement”) on December 17, 1985, but effective as of July 1, 1983.



     3. NWR and Utility Fuels or its successor, Houston Lighting & Power Company (“HL&P’’), have
agreed upon written policies and procedures applicable to operations, contracting, budgeting and
accounting under the LSA. All such policies and procedures as currently in effect are referred to
as the “Policies and Procedures.”



     4. NWR and Utility Fuels entered into a Land Purchase Agreement dated December 18, 1987,
providing for the acquisition of tracts of land by NWR for Utility Fuels which are used in the
operation of the Jewett Mine. The Land Purchase Agreement replaced an earlier agreement concerning
the same subject matter called the Land Trust Agreement. Additionally, NWR and Utility Fuels, or
its successor, HL&P, entered into various other agreements, leases



 









 




and licenses pertaining to the use by NWR of surface estates owned by Utility Fuels, or its
successor HL&P, in or about the Jewett Mine. Pursuant to the LSA, Utility Fuels granted to NWR a
sublease of all of the coat and lignite leases then owned by Utility Fuels in and about the Jewett
Mine area by instrument dated April 15, 1985, of record in Volume 593, Page 868 of the Real
Property Records of Leon County, Texas, as amended or supplemented by instruments dated September
7, 1988, recorded in Volume 783, Page 279, of the Real Property Records of Freestone County, Texas,
and dated May 6, 1996, recorded in Volume 983, Page 703 of the Real Property Records of Freestone
County, Texas. Utility Fuels, or its successor HL&P, has also from time to time executed coal and
lignite leases with NWR for lignite owned by Utility Fuels, or its successor, in or about the
Jewett Mine and have made other agreements with NWR pertaining to land. All such written
agreements, including without limitation the Land Purchase Agreement, leases, subleases and
licenses, are herein referred to as the “Land and Lignite Agreements.”




     5. The LSA, the C&O Agreement, the Land and Lignite Agreements and any other executory written
contract pertaining to the Jewett Mine between NWR and Utility Fuels, or its successor HL&P, as of
the date of this Agreement are collectively referred to as the “Existing Contracts.”



     6. In October, 1993, Utility Fuels was merged into HL&P with HL&P, as the surviving
corporation, acquiring all rights and property of Utility Fuels and assuming all duties and
liabilities of Utility Fuels under the then Existing Contracts.



     7. In August, 1998, HL&P was merged into Houston Industries Incorporated (“HII”), with HII as
the surviving corporation, and all of the rights and properties of HL&P in the Limestone Electric
Generating Station (“LEGS”), the Existing Contracts, and a reversionary



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interest in lignite in and about the Jewett Mine, and in the Mine Equipment and Facilities
leased to NWR under the C&O Agreement, were acquired by HII and all of the duties and liabilities
of HL&P under the Existing Contracts were assumed by HII. In May, 1999, HII changed its name to
Reliant Energy, Incorporated.




     8. Various disputes as to the pricing of lignite, the interpretation of the LSA, and other
matters have arisen between NWR and HL&P resulting in a lawsuit filed in Cause No. 95049802 in the
District Court of the 157th. Judicial District, Harris County, Texas, styled Houston Lighting &
Power Company v. Northwestern Resources Co. and Entech, Inc., in which a final judgment has been
entered by the District Court. This judgement was appealed in Cause No. 14-98-00839-CV in the
Court of Appeals for the Fourteenth District, Houston, Texas, (“Harris County Lawsuit”). The
appeal has been dismissed by mutual agreement of the Parties.



     9. By a written agreement dated November 19, 1998, and styled “Lignite Pricing Agreement,” NWR
and REI have agreed to settle the Harris County Lawsuit and resolve their disputes by amending the
LSA and all other Existing Contracts to the extent any provisions thereof conflict with the Lignite
Pricing Agreement. The Lignite Pricing Agreement covers the principal business terms of the
Parties’ bargain, but is not a complete statement of all agreements made and to be made in order to
reach a full and complete agreement. The Parties agreed in the Lignite Pricing Agreement that a
formal amendment to the LSA would be negotiated which would integrate the terms of the Lignite
Pricing Agreement, fill any gaps in the terms of the Lignite Pricing Agreement and revise, modify
and adjust the Existing Contracts as required to implement fully the terms of the Lignite Pricing
Agreement. The Lignite Pricing Agreement is not included in references to “Existing Contracts” as
that term is used in this Agreement.



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     10. Capitalized terms used in this Agreement have the meaning for each of those terms which
(i) is either stated or adopted by reference in Article B, or (ii) is given the capitalized term in
these recitations.



     11. A separately bound volume of exhibits and calculations (“Appendix”) has been prepared, and
dated of even date with this Agreement by REI and NWR for identification. The Appendix is
incorporated into this Agreement and made part hereof by references to the Appendix in various
provisions of this Agreement.



     12. Any reference to an article by letter is to a section of this Agreement unless otherwise
specifically stated. Any reference to an article by letter and number is to a particular paragraph
of a section unless otherwise specifically stated.



B. DEFINITIONS




     1. Agreement means this document, including the Appendix.



     2. As Received means as delivered at the Delivery Point.



     3. Business Day means any day other than a Saturday or Sunday or a national bank
holiday.



     4. Civil Structures means those structures or improvements at the Jewett Mine that are
constructed to benefit the Jewett Mine such as ponds, diversions, haul roads, road relocations,
overpasses and pipeline relocations.



     5. Commitment means the lignite delivery schedule to which REI and NWR jointly agree
and commit, covering a two-year forward looking period as provided in Article D.16.



     6. CQIM means Coal Quality Impact Model version 1.2.



     7. Deferred Investment Savings is a component of the Redetermined Price described in
Article D.9.



     8. Deferred Mine Closing Savings is a component of the Redetermined Price described in
Article D.11.



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     9. Delivery Point means the mine receiving surge bin that feeds lignite dumped by NWR
coal haulers onto the REI conveyor belt transporting the lignite from the Jewett Mine to LEGS. In
the case of petroleum coke, Delivery Point means the LEGS stockpile.



     10. Fixed Lignite Price means the fixed price for lignite sold by NWR to REI during
the Post-Transition Period, as more particularly provided in Article D and subject to the
limitation of Article D.15.



     11. F.o.b. means “free on board.” “F.o.b. Delivery Point” means that NWR will
transport lignite in the mine to the Delivery Point at NWR’s own expense and risk and tender
delivery there. “F.o.b. LEGS stockpile” means that NWR will transport petroleum coke to a
stockpile at LEGS at NWR’s own expense and risk and tender delivery there. “F.o.b. mine” means the
producer transports PRB Coal at the producer’s own expense and risk to a delivery point at the mine
and tenders delivery there.



     12. Investment Guidelines shall mean a calculation whereby an investment has a payback
period of three years or less as determined using a discounted cash flow analysis with an after-tax
discount rate of 9.5%.



     13. Life of Mine Plan K means the mine plan prepared by NWR dated August, 1998.



     14. Liquidated Damages are set forth and described in Articles D.22 through D.25.



     15. Jewett Mine means the reserves of lignite in the areas of Leon and Freestone
counties in the State of Texas which have been dedicated as the lignite supply for LEGS pursuant to
the terms of the LSA and which are included in Life of Mine Plan K or any successor thereto, and
the surface area in which mining operations for those reserves will occur according to such mine
plan (such surface area includes the area for which either a surface mining permit has been issued
by the State of Texas or for which NWR contemplates a surface mining permit will be sought in the
future).



     16. Miscellaneous Avoided Costs is a component of the Redetermined Price described in
Article D.10.



     17. New Price means the price of $0.8639 per mmBtu.



     18. Old Price means the price calculated under Section 10.1 and related provisions of
the LSA.



     19. Party refers to either NWR or REI.



     20. Parties refers to NWR and REI.



     21. Plant Savings is a component of the Redetermined Price described in Article D.12.



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     22. Policies and Procedures means all of the written policies and procedures which
have been agreed upon by NWR and Utility Fuels, or its successor, HL&P, and that are currently in
effect and are applicable to operations, contracting, budgeting and accounting under the LSA.



     23. Post-Transition Period means the period of time beginning July 1, 2002 through
August 29, 2015, unless extended by mutual agreement of the Parties.



     24. PRB means the Powder River Basin.



     25. PRB Coal means subbituminous coal produced from a mine in the PRB.



     26. PRB Coal Price is a component of the Redetermined Price described in Article D.7.



     27. Pricing Period means the calendar year or partial calendar year to which the
Redetermined Price applies.



     28. Rail Transportation Price is a component of the Redetermined Price described in
Article D.8.



     29. Redetermined Price means the price calculated in accordance with the provisions of
Articles D.5 through D.12 of this Agreement.



     30. Redetermined Price Date means July 1, 2002 and January 1, of each year thereafter
so long as the LSA is in effect



     31. Remaining Anticipated Fuel Requirements means the difference between the quantity
of lignite committed by NWR for each year of the Commitment and the anticipated annual fuel
requirements for LEGS for those years.



     32. RFP means a request for proposal.



     33. Right of First Refusal refers to any one of the separate options granted to NWR
under Articles D.18, D.20 and D.21.



     34. System Lambda means the point where all of REI’s on-line generating units with
which LEGS is jointly dispatched are operating at the most efficient incremental cost.



     35. Transition Period means the period of time commencing on July 1, 1998 and
continuing through June 30, 2002.



     36. Trigger Event is any one of the following occurrences:




(a) If there are Remaining Anticipated Fuel Requirements and REI has
obtained a bona fide quote for the price and the terms under which one or
move independent, third party suppliers will provide the Remaining
Anticipated Fuel Requirements.



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(b) In the event (i) REI determines in accordance with Article D.20 that PRB
Coal can be used during the Post-Transition Period at a cost which is less
than the cost of using lignite at the Fixed Lignite Price, and (ii) REI
determines that PRB Coal should be substituted for all or part of the
lignite available from NWR for sale and delivery to LEGS.




(c) A competitive price is determined as provided in Article D.21.



     37. Union Pacific Contract means that certain Coal Transportation Agreement between
HL&P; Union Pacific Railroad Company and Missouri Pacific Railroad Company dated August 30, 1996,
and designated “Contract UP-C-7703”.



     38. WAP means W.A. Parish Electric Generating Station.



C. TRANSITION PERIOD




     1. During the Transition Period, REI shall use lignite as the primary fuel for LEGS,
supplemented at REI’s discretion by petroleum coke as provided in Article E. Except as
specifically modified herein, NWR and REI shall continue the purchase and sale of lignite in
accordance with the Existing Contracts throughout the Transition Period.



Pricing




     2. The price paid by REI to NWR for lignite during the Transition Period shall be the Old
Price, calculated under Section 10.1 and related Sections of the LSA.



Life of Mine Plan




     3. Life of Mine Plan K, subject to mutually agreed amendments and modifications, shall be the
current life of mine plan. All annual mine plans hereafter prepared and submitted by NWR during
the Transition Period shall follow the sequencing in Life of Mine Plan K to the extent practicable
and provide for the delivery of lignite required to meet the scheduled deliveries established by
the Parties in compliance with the Existing Contracts.



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Capital Expenditures




     4. The annual capital expenditures REI is required to make for the Jewett Mine during the
Transition Period commencing in 1999 will be limited to the aggregate amount specified for each
year according to the following table:



	 	 	 	 	 
	Year	 	 	Capital	 
	1999
	 	$	870,000	 
	2000
	 	$	7,344,000	 
	2001
	 	$	2,232,000	 
	2002
	 	$	1,079,000	 






     5. Excluded from annual capital expenditures that REI is required to make pursuant to existing
approved capital budgets are any capital additions to mining equipment for the Jewett Mine.
Further, all proposed replacements of mining equipment or additional facilities for the Jewett Mime
must meet the Investment Guidelines.



     6. The aggregate amounts for capital expenditures shown for each year in Article C.4 are based
upon capital expenditures that both REI and NWR anticipate, as shown in Exhibit A of the Appendix,
under existing annual mine plans and projections for the balance of the Transition Period. REI
will reasonably accommodate NWR in shifting capital expenditures within the annual limitations from
one period to another as circumstances may reasonably require, provided that such requests are
received during REI’s normal budget cycle and provided further that no capital expenditures by REI
will be shifted to any subsequent period beyond June 30, 2002.



D. POST-TRANSITION PERIOD




Pricing — Fixed Lignite Price




     1. During the Post-Transition Period, the price for lignite sold by NWR to REI pursuant to the
LSA shall be a fixed price (“Fixed Lignite Price”), determined annually in



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accordance with the provisions of this Agreement, except that sales of lignite by NWR to REI
pursuant to the exercise of one of the Rights of First Refusal shall be priced according to the
applicable Right of First Refusal.




     2. The Fixed Lignite Price shall equal the greater of (i) the Redetermined Price expressed as
a price per mmBtu or (ii) $0.8207 per mmBtu which is 95% of the New Price.



     3. The Fixed Lignite Price shall be for lignite delivered f.o.b. at the Delivery Point during
the Post Transition Period.



Pricing — New Price




     4. The “New Price” of $0.8639 per mmBtu is a price the Parties established as of July 1, 1998,
and is used to calculate the floor for the Fixed Lignite Price in each calendar year during the
Post-Transition Period. The worksheets and other calculations used in the calculation of the New
Price are included in the Appendix under Exhibit B.



Pricing — Redetermined Price




     5. The “Redetermined Price,” expressed as a price per mmBtu, using the CQIM model to calculate
the mmBtus for 100% lignite usage at LEGS shall be calculated as the sum of:




	 	a.	 	the PRB Coal Price, plus
	 
	 	b.	 	the Rail Transportation Price, plus
	 
	 	c.	 	the Deferred Investment Savings, plus
	 
	 	d.	 	the Miscellaneous Avoided Costs, plus
	 
	 	e.	 	the Deferred Mine Closing Savings, less
	 
	 	f.	 	the Plant Savings.





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Calculation of Redetermined Price




     6. Except for the calculation of Deferred Mine Closing Savings, REI shall initiate the annual
determination of the Redetermined Price by proposing to NWR a calculation of each of the five other
components of the Redetermined Price, annotated to identify all material source documents for data
and all material assumptions used in each such calculation. Upon request by REI (and in any event,
upon receipt of REI’s proposals for the other components of the Redetermined Price), NWR shall make
the calculation of the Deferred Mine Closing Savings, annotated to identify all material source
documents for data and all material assumptions used in the calculation. Subject to the specific
disclosure conditions with respect to certain information stated in the following paragraphs, each
Party will make available to the other Party for review all workpapers and source documents
(including electronically stored workpapers and documents) supporting the calculation of any one or
more of the components of the Redetermined Price.



Components of the Redetermined Price.




     7. The “PRB Coal Price” shall be the price of PRB Coal bid, f.o.b. mine, which is payable for
PRB Coal deliveries to supply WAP during the calendar year to which the Redetermined Price applies
(the “Pricing Period”) and shall be determined in compliance with the following terms:




a. REI agrees that at least every three years REI will issue a
request for proposals soliciting bids from PRB Coal suppliers for PRB
Coal, f.o.b. the mine, to be supplied to WAP. Any such request for
proposal is referred to as the “RFP.” The average weighted price for
all PRB Coal purchases, (i) scheduled for WAP during the Pricing
Period which (ii) are to be made pursuant to PRB Coal bids solicited
by REI will be the PRB Coal Price, subject to the limitations herein
expressed.



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b. The RFPs and the related coal purchases used in the calculation of
the PRB Coal Price shall be structured so that no other business
arrangement or incentive is tied into the coal purchase. REI’s RFP
shall be made only to PRB Coal suppliers who are not REI affiliates.




c. All RFPs issued by REI, all bids received by REI pursuant to any
RFP, REI’s evaluation of all such bids, all worksheets (including any
electronically recorded) and source documents reflecting or used in
the determination of the PRB Coal Price, and any contract made
pursuant to the acceptance of a bid by REI which is relevant to the
calculation will be made available for review by an independent third
party chosen by NWR and acceptable to REI, subject to an appropriate
confidentiality agreement.




d. The PRB Coal Price determined pursuant to these provisions may be
challenged by either Party if there is evidence upon which a prudent
supplier or customer could reasonably conclude that the actual spot
market price for PRB Coal of the same approximate quality supplied to
LEGS for the Pricing Period would materially differ from the PRB Coal
Price determined through the bid price for PRB Coal to be supplied to
WAP. A challenge by a Party shall be initiated by the challenging
Party notifying the other Party of the PRB Coal Price the challenging
Party asserts represents the actual spot market for such PRB Coal and
supplying workpapers supporting the challenge annotated to show the
source of the data used. Each Party shall make the source documents
used to support its position available for review by the other Party
and by an independent third party chosen by that Party, subject to an
appropriate confidentiality agreement. If the Parties cannot agree
on the PRB Coal Price following a challenge, the issue may be
submitted to arbitration under Article H.




e. In the event that PRB Coal starts to be traded by the New York
Mercantile Exchange, or some other generally recognized commodity
trading entity, and the market, in the judgment of either Party, is
sufficiently mature that trades could be used to determine the market
price for 8,600 Btus per pound of PRB Coal, that Party may request
that NWR and REI jointly determine in good faith an appropriate
method of using such market prices in the determination of the PRB
Coal Price.



     8. The “Rail Transportation Price” shall be the estimated cost per mmBtu for rail
transportation in aluminum rail cars from the PRB to LEGS during the Pricing Period, plus the



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estimated maintenance and repair costs for the aluminum unit train rail cars required for such
rail transportation. Such estimated cost shall be determined as follows:





a. The price per ton for rail transportation in aluminum rail cars
owned or leased by RFI from PRB to WAP during the Pricing Period
under REI’s most recent rail transportation contract, shall be
divided by 1,573 miles and multiplied by 1,372 miles. This product
shall then be divided by the number of mmBtus per ton in the PRB Coal
scheduled to be delivered during the Pricing Period under the bid(s)
used to determine the PRB Coal Price in order to calculate the rail
transportation cost to LEGS on a per mmBtu basis.




b. Notwithstanding the provisions of the foregoing Article D.8.a, the
minimum price per ton rate used to make the estimate of the price per
ton for rail transportation in aluminum rail cars shall be the price
paid by REI to Union Pacific during the Pricing Period (or at
contract termination, if no longer in effect), for rail
transportation in aluminum rail cars from the PRB to WAP (subject to
the same factor as provided for in Article D.8.a) at the price
provided for under the terms of its Union Pacific Contract at the
date of this Agreement escalated pursuant to the terms of such
contract.




c. REI’s transportation contract used in the calculation of the rail
price and any other then current rail transportation contracts for
PRB Coal to WAP and the applicable maintenance contract and
maintenance records will be made available for review by an
independent Party chosen by NWR and acceptable to REI, subject to an
appropriate confidentiality agreement.




d. Notwithstanding the foregoing subparagraphs of this Article D.8,
if the pricing in a rail transportation contract is a result of
another business arrangement or incentive (including without
limitation the settlement of litigation) or is otherwise not the
result of an arms-length negotiation, then the Parties shall either
use an appropriate transportation contract or agree to appropriate
adjustments. Disputes under this Article D.8 shall be resolved
pursuant to the provisions of Article H.



     9. “Deferred Investment Savings” shall equal the benefit to REI of deferring capital cost that
REI would otherwise incur investing in rail cars and coal handling facilities required to
substitute 100% PRB coal usage at LEGS, calculated using REI’s weighted pretax cost of capital



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as of the Redetermined Price Date. The deferred capital in railcars shall be calculated using
a unit value based upon the average depreciated value per railcar of REI’s then existing aluminum
railcar fleet (calculated in accordance with the Association of American Railroads Rule 107) as of
the Redetermined Price Date.




     10. “Miscellaneous Avoided Costs” shall be the avoided cost of railcar maintenance, railcar ad
valorem taxes, railcar unloading facility ad valorem taxes and railcar unloading facility
incremental operation and maintenance costs. Maintenance and repair costs of railcars will be
based on REI’s maintenance contract[s] for the Pricing Period, and REI’s most recent calendar
year’s maintenance and repair experience for aluminum railcars only.



     11. “Deferred Mine Closing Savings” shall be the benefit to REI of deferring closure costs for
the Jewett Mine that REI will need to fund when 100% PRB is utilized at LEGS, or LEGS is
decommissioned, calculated using REI’s pretax cost of debt as of the Redetermined Price Date. REI
shall provide NWR with its pretax cost of debt and NWR shall make the calculation of this component
of the Redetermined Price as provided in Article D.6.



     12. “Plant Savings” shall be the net annual savings that would result from burning PRB Coal as
the primary fuel for LEGS during the Pricing Period as opposed to burning lignite during the
Pricing Period. The Plant Savings shall be calculated as of each Redetermined Price Date. The
following terms shall apply to the estimate of Plant Savings.




a. CQIM shall be used to compute a model projecting the differential
costs between burning PRB Coal and lignite supplied by NWR.




b. The values used for the specification fuels in the CQIM
computation will be as mutually agreed by NWR and REI as of each of
the Redetermined Price Dates. The physical characteristics used for
the fuel specification in the CQIM will be, as closely as possible,
the physical characteristics of the PRB Coal subject to the



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bid price(s) used to determine the PRB Coal Price component of the
Predetermined Price and as closely as possible the physical
characteristics of the lignite actually delivered during the prior
year for which the Redetermined Price is being calculated.




c. The Plant Savings which will be quantified by calculations made
using CQIM include, but are not limited to, reductions in operation
and maintenance costs resulting from reduced wear to plant
components, crushed limestone rock, dibasic acid, fly ash, bottom
ash, FGD sludge, auxiliary load and heat rate and the value of any
increase in plant availability. The additional conditions stated in
the following subparagraphs of this Article D.12 shall apply to the
estimation of Plant Savings.




d. When calculating the value of additional available generation,
REI’s average System Lambda for the 12 months preceding the
Redetermined Price Date shall be used.




e. The per mmBtu Plant Savings shall be calculated by dividing the
total estimated Plant Savings when banning 100% PRB Coal by the
number of mmBtus in the CQIM calculation as if LEGS utilized 100%
lignite during the Pricing Period.




f. CQIM shall be used to compute Plant Savings, an example of which
is included in Exhibit B of the Appendix. The Parties may jointly
agree to use a newer version of CQIM or incorporate updates to CQIM
if they become available in the future.



New Price




     13. For the purpose of illustrating the method by which the Redetermined Price will be
determined in the future and establishing the minimum for the Fixed Lignite Price during the
Post-Transition Period as provided in Article D.l through D.3, a “New Price” has been determined as
of July 1, 1998. The work papers for the determination of the New Price are included as Exhibit B,
pages 1 through 5 of the Appendix, and are incorporated herein as an illustration of the pricing
model for the determination of each Redetermined Price. Incorporation of New Price workpapers is
intended to illustrate and clarify the components of the Redetermined Price and the method of its
determination described in the text of this Agreement. The Parties intend that the text shall be
interpreted in conformity with the numerical exposition



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in the Exhibits unless there is irreconcilable conflict between the text and the exposition
examples in which event the text shall control. No numerical value used in calculating the New
Price shall determine conclusively the value to be used in calculating a Redetermined Price. Such
values shall be determined under the then prevailing facts and circumstances.




     14. The following provisions explain the basis for certain values used in the calculation of
the New Price.




a. The PRB Coal Price is the 1998 WAP spot price.




b. The price per ton for rail transportation used in the calculation of the Rail
Transportation Price in determining the New Price is based upon the 1998 prices in
the Union Pacific Contract for PRB Coal delivered to WAP and an assumed maintenance
and repair cost of $0.0132 per mmBtu for aluminum railcars now owned/leased by REI.




c. For the calculation of the Plant Savings component of the New Price, the Parties
agreed to the following limits at LEGS when burning specification coal rather than
lignite:




(i) 7 megawatt reduction in auxiliary load;


(ii) 3.5 percent reduction in net heat rate;


(iii) 2.75 percent increase in equivalent availability; and


(iv) no NOX credits.




     d. The specification lignite quality on an “As Received” basis agreed upon by the
Parties for the calculation of Plant Savings for the New Price was 6,499 Btu/lb.,
29.01% moisture, 20.14% ash, and 1.04% sulfur as per analysis 980758-01 dated August
28, 1998.




     e. The specification for PRB Coal quality on an “As Received” basis agreed upon by
the Parties for use in the determination of the Plant Savings for the New Price was:
8,553 Btu/lb., 29.04% moisture, 4.82% ash, and 0.33% sulfur as per analysis
980722-02 dated August 18, 1998.




     f. When calculating the New Price, REI’s average System Lambda for the period July
1997, through June 1998, was used to calculate the value of additional available
generation at LEGS.



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Maximum Annual Price




     15. Notwithstanding the price or prices per mmBtu applicable to lignite deliveries by NWR
pursuant to the Commitment or to the exercise of any Right of First Refusal, the maximum amount of
money paid by REI to NWR for lignite in any calendar year (or portion thereof) during the
Post-Transition Period shall not exceed the total amount of money REI would have paid NWR for the
lignite delivered under the Old Price if applied to such calendar year. NWR shall calculate the
Old Price for each year, or the partial year of 2002 or the partial year of 2015 (unless the
parties mutually agree on a termination date other than 2015), during the Post-Transition Period
and notify REI of such maximum annual price not later than March 1st of the year immediately
following the year or partial year for which the Old Price is calculated, provided NWR may estimate
the Old Price for a year and request that REI waive calculation of the Old Price if the facts and
circumstances make it apparent the Old Price will not affect the annual amount paid by REI to NWR
for lignite. If REI agrees that no adjustment will be due, REI may waive the calculation. If an
adjustment is due because REI paid more than the Old Price in a Post-Transition Period year, NWR
may credit the adjustment to the next lignite invoices coming due from REI provided the full amount
of the adjustment must be paid or credited no later than May 1st of the year immediately following
the year for which the adjustment is made.



Lignite Delivery Schedule




     16. Subject to the Force Majeure provisions of Article C, Section 15 of the LSA and consistent
with Article D.17 of this Agreement, REI and NWR will jointly agree upon and commit to a lignite
delivery schedule (“Commitment”), which covers a two year forward looking period. NWR shall be
firmly obligated to sell and deliver the lignite and REI shall be firmly



-16-









 




obligated to purchase the lignite tendered for delivery under the Commitment. The Commitment
shall include the quantities of lignite to be delivered on a monthly basis during the term of the
Commitment. The Parties shall work together to develop monthly and daily delivery schedules
consistent with such Commitment which will support the requirements of LEGS. Subject to the
provisions of Article D.19, REI may direct NWR to adhere to a particular delivery schedule as
needed for the operation of LEGS.




     17. The Parties shall adapt the Policies and Procedures concerning the scheduling of lignite
deliveries to allow the Parties a reasonable opportunity to agree upon the Commitment by July 1st
of the preceding year. The Parties shall seek to make the first Commitment by July 1, 2000 for
lignite deliveries scheduled beginning July 1, 2002 through December 31, 2003. Thereafter, a new
Commitment will be made for each successive year after 2003 so that by July 1st of each year
beginning in 2002, a Commitment will be in place for the next two calendar years, provided no
Commitment will extend beyond the end of the Post-Transition Period.



     18. In the event that a Commitment is anticipated to be insufficient to satisfy the total
lignite requirements for LEGS for any year, REI shall have the unilateral right, subject to NWR’s
Right of First Refusal, to procure the difference between the quantity of lignite committed by NWR
for each year of such Commitment and the anticipated annual fuel requirements for LEGS for those
years (the “Remaining Anticipated Fuel Requirements”) from other sources REI deems appropriate.
When REI obtains pricing information from independent, third party suppliers for a price at which a
supplier or suppliers will provide the Remaining Anticipated Fuel Requirements, REI shall notify
NWR of the pricing information including all material terms and conditions. NWR shall have the
Right of First Refusal to agree to deliver lignite in sufficient quantity to meet all of the
Remaining Anticipated Fuel Requirements under terms no less favorable (using



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the methodology described in Articles D.5 through D.12 and then current market values and
plant operating conditions) than those terms obtained by REI from independent, third party
suppliers to satisfy the Remaining Anticipated Fuel Requirements. The method, timing and other
general terms for the exercise of the Right of First Refusal are set forth in Article I.
Notwithstanding the provisions of this Article D.18, the Parties may mutually agree that NWR will
continue to deliver, and REI shall continue to take, lignite at the Redetermined Price in cases
where a Commitment is anticipated to be insufficient to satisfy the total lignite requirements for
LEGS for any year.




     19. NWR agrees that lignite sold and delivered to REI during the Post-Transition Period will
have a minimum calorific value of 6,236 Btu/lb on an “As Received” basis. NWR further agrees that
lignite sold and delivered to REI during the Post-Transition Period will be reasonably free of
partings and extraneous material. Failure by NWR to meet these minimum standards shall result in a
0.75% price reduction for each 5 Btu/lb deficit. Said price reduction shall not be applied unless
NWR fails to meet these minimum standards on a seven day weighted rolling average basis over any
period. In such event, the price reduction shall apply to all lignite tonnage delivered on the day
or days that NWR fails to meet the minimum standard. When REI directs NWR to deliver lignite
regardless of conditions at the mine, the days which are subject to that direction shall not be
included in the calculation of the seven day rolling average or the price reduction under this
Article D.19.



     20. During the Post-Transition Period, REI shall not substitute PRB Coal, in whole or in part,
for lignite as the fuel for LEGS unless REI determines that PRB Coal can be used at LEGS at a cost
that is less than the cost of using lignite at the Fixed Lignite Price. Such determination shall
be made utilizing the methodology described in Articles D.5 through D.12



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and then current market values and plant operating considerations. In the event that (i) REI
determines that PRB Coal can be used, in whole or in part, during the Post-Transition Period at a
cost which is less than the cost of using lignite at the Fixed Lignite Price, and (ii) REI
determines that PRB Coal should be substituted for all or part of the lignite available from NWR
for sale and delivery to LEGS, then RFI shall so notify NWR. REI shall provide in the notification
(i) the cost of using PRB Coal at LEGS which REI can reasonably realize (ii) the annual quantity of
PRB Coal that will be substituted and the quantity of lignite that will be displaced, (iii) the
term of the coal supply and coal transportation contracts upon which the cost of PRB Coal is based,
(iv) the scheduled date of the switch, and (v) using the same methodology as is used to determine
the cost of using PRB Coal, a determination of the lignite price that is reasonably required to
produce an equivalent cost to REI using only lignite at LEGS. REI shall include with the
notification a copy of the workpapers reflecting REI’s determination of the cost of using PRB Coal
and REI’s determination of the lignite price required to produce an equivalent cost to REI if
lignite is used. The workpapers included with the notice shall be annotated to show the source
document for all material data used in making the determinations. Upon receipt by NWR of such
notification, the following terms shall apply:





a. NWR shall have the Right of First Refusal to deliver lignite at a price that is
reasonably expected to produce a cost to REI equivalent to the cost that REI can
reasonably realize by using the PRB Coal that REI intends to substitute for lignite.
The method, timing and other general terms for exercise of the Right of First
Refusal set forth in Article I shall apply.




b. In order to evaluate REI’s determination of an equivalent cost for lignite, NWR
shall have the same access to information supporting REI’s determination of a lower
cost by using PRB Coal as NWR has under Articles D.5 through D.12 in the process of
establishing a Redetermined Price.




c. If REI notifies NWR of its intent to substitute PRB Coal for 100% of the fuel
requirements at LEGS and NWR does not exercise its Right of First Refusal, REI may
substitute PRB Coal as the fuel for LEGS and all rights or obligations of the
Parties to sell, buy or deliver lignite shall terminate effective the date specified



-19-









 







in REI’s notice for the switch to PRB Coal. REI, however, shall remain obligated to
NWR (i) for payment obligations accrued before the date of the switch to PRB Coal
and (ii) for any executory obligation of REI to purchase lignite under any
Commitment or under any Right of First Refusal previously exercised by NWR,
regardless of whether delivery is scheduled under such Commitment or exercised Right
of First Refusal before or after the date of the switch to PRB Coal. NWR will
reasonably accommodate delays in the switch to PRB Coal beyond the scheduled date by
continuing to deliver lignite at the Fixed Lignite Price for a period up to the
longer of (i) 90 days after the scheduled switch date or (ii) the expiration of the
term of any Commitment or Right of First Refusal in effect after the date of the
switch.




d. If REI gives notice of an intent to substitute partially PRB Coal for lignite at
LEGS and NWR does not exercise its Right of First Refusal with respect to such
partial substitution, then so long as NWR and REI agree upon a Commitment that
provides for the lignite deliveries required for LEGS, the LSA and other Existing
Contracts, as amended hereby, shall continue in effect, subject to the right of REI
thereafter to substitute PRB Coal for lignite up to the annual quantity of PRB Coal
specified in the notice.




e. If NWR does exercise the Right of First Refusal, deliveries of lignite pursuant
to the exercise of the Right of First Refusal will begin on or after the scheduled
date of the switch specified in REI’s notification of an intent to switch to PRB
Coal and continue for the term specified in the notice.




f. With respect to any Commitment in effect at the date NWR commences lignite
deliveries under a Right of First Refusal, all lignite deliveries made for that
calendar year and for any subsequent year in which any Commitment continues in
effect shall be first deemed delivered under the Commitment for that calendar year
and then delivered pursuant to the Right of First Refusal. If contracts for lignite
deliveries for more than one exercise of a Right of First Refusal are in effect for
any calendar year, then after satisfaction of any current Commitment, the deliveries
of lignite shall be deemed to occur under each contract under a Right of First
Refusal in order of seniority with the oldest contract deemed first satisfied.




g. The references to lignite as the “primary fuel” at LEGS are in recognition of the
fact some natural gas is used in the combustion of lignite and petroleum coke may be
used to supplement lignite. The reference is not to be construed as an agreement to
blending PRB Coal with lignite, except in accordance with the notification and Right
of First Refusal provided in this Article D.20.



     21. The Parties have made the bargain memorialized in this Agreement on the assumption that
RET will operate LEGS using lignite provided by NWR as the primary fuel so long as the cost of
generation to REI using lignite does not exceed the cost of using PRB Coal as




-20-










 




the primary fuel for generation at LEGS. Neither Party believes that a primary fuel other
than PRB Coal is available or is likely to become available at a price that would lower the cost of
generation at LEGS. If REI determines that an alternative source of coal or of an alternative fuel
(with the exception of petroleum coke) is or may be available, then the Parties shall enter into
good faith negotiations to determine an appropriate method for comparing the generation costs at
LEGS using such alternative source of coal or alternative fuel and NWR shall be given the
reasonable opportunity to provide lignite to REI at a competitive price to coal from such
alternative sources or to the alternative fuel (considering all of the jointly agreed appropriate
factors). If the Parties cannot agree within thirty calendar days upon the method to determine a
competitive price, then the determination of a competitive price may be submitted to arbitration
under the provisions of Article H by either Party. Upon determination of a competitive pace, NWR
shall have the Right of First Refusal to provide lignite at the competitive price. The timing,
method and other general terms for the exercise of the Right of First Refusal are set forth in
Article I.




Liquidated Damages




     22. The Liquidated Damages payable to REI in the event of a default by NWR in the performance
of its obligations under the Commitment or pursuant to a Right of First Refusal shall be the dollar
amount by which the cost of replacement energy exceeds the dollar amount which REI would have paid
under this Agreement for energy generated by burning lignite during the period of the default. REI
shall use reasonable efforts to mitigate such Liquidated Damages.



     23. The Liquidated Damages payable to NWR in the event of a default by REI in the performance
of its obligations under the Commitment or pursuant to a Right of First Refusal shall be (i)
payable only in the event that REI fails to take at least 85% of its Commitment in any



-21-









 







annual period, (ii) the reasonable and necessary unavoidable costs incurred by NWR during the
period of default as a result of the default and (iii) NWR’s lost profits during the period of
default as a result of the default. NWR shall use reasonable efforts to mitigate such Liquidated
Damages.



     24. Unless disputed by the defaulting Party, Liquidated Damages shall be payable in cash
within thirty calendar days after the claimant calculates the damages and submits the calculations,
including workpapers, to the defaulting Party. If NWR is unable or unwilling to pay Liquidated
Damages in cash, it shall transfer to REI an equivalent amount of lignite reserves in reasonable
mining blocks of REI’s election.



     25. The Parties in agreeing to Liquidated Damages reserve their respective remedies under the
Texas UCC (i) in the event of insolvency of either Party, (ii) in the event of a breach of
obligations under or arising from Articles D.18, D.20 or D.21 hereof, or (iii) in the event of a
failure to pay the price for delivered lignite. Otherwise, Liquidated Damages are intended as the
exclusive remedy for default in the performance of obligations under the Commitment.



Existing Mine Equipment and Facilities: Additions and Replacement.




     26. All mining equipment and facilities leased to NWR under the terms of Article 7 of the C&O
Agreement shall continue to be leased to NWR without consideration additional to the rental already
prepaid by NWR. The terms and conditions of the lease shall remain unchanged except that, during
the Post-Transition Period, NWR will be responsible for the operating and maintenance costs and for
the cost of insurance for the mining equipment and facilities. REI shall be named as an additional
insured under all policies of insurance affecting the mining



-22-









 







equipment and facilities. Included in the mining facilities and equipment subject to the
lease shall be any mining equipment or facility REI is scheduled to acquire under Article C.4.



     27. NWR shall purchase at its cost all mining equipment and facilities and all Civil
Structures as NWR may in its sole discretion determine should be purchased on or after July 1,
2002. Reasonable depreciation or amortization for such capital costs and associated expenses shall
be included as a cost of production only for the purpose of calculating the Old Price which sets
the maximum price REI must pay for lignite in any calendar year.



     28. During the Post-Transition Period, NWR shall maintain leased mine equipment and facilities
in reasonable condition. When NWR determines leased mine equipment or a facility is no longer
needed at the Jewett Mine, NWR shall return or make available to REI the equipment and any facility
that may be salvaged or removed. This provision supersedes the fast sentence of Paragraph 7.4 of
the C&O Agreement. The other provisions of Paragraph 7.4 of the C&O Agreement shall otherwise
remain in force and effect .



     29. Effective July 1, 2002, REI hereby waives its overriding royalty on lignite production
from “Utility Fuels reserves” under Article A, Section 4.1 of the LSA. Notwithstanding the
previous sentence, the overriding royalty on lignite production from such reserves shall be
considered for the purposes of the calculation of the Old Price.



E. PETROLEUM COKE




     1. After January I, 1999, REI shall have the right to burn such quantities of petroleum coke
as it chooses at LEGS. NWR shall supply petroleum coke required for LEGS up to 600,000 tons per
year during the period January 1, 2000 through December 31, 2004. Subject to the limitation that
NWR is not required to sell below its actual costs, the price for petroleum



-23-









 







coke supplied by NWR per mmBtu (f.o.b. LEGS stockpile) (1) through June 30, 2002, shall equal
the price of lignite per million Btu for the period in which the petroleum coke is delivered
calculated under the provisions of Article B, Section 10.1 of the LSA with payment on semi-monthly
lignite invoice for period of delivery followed by true-up and adjustment at month-end, and (2)
commencing July 1, 2002, shall equal the “Redetermined Price” per million Btu of lignite for the
year in which the petroleum coke is delivered, calculated under the provisions of Article D.5
through D.12 hereof. If the actual cost to NWR to deliver petroleum coke (f.o.b. LEGS stockpile)
is greater than the price NWR is to be paid for the petroleum coke, NWR shall so advise REI and REI
may elect to purchase the petroleum coke at a price equal to NWR’s actual cost or obtain the
petroleum coke from another source. REI shall specify the quantify of petroleum coke required, if
any, as well as quality specifications, as limited by the provisions of Article E.2, and delivery
schedule, terms and conditions. REI will provide a suitable stockpile area and access for
delivery. After December 31, 2004, REI may acquire all petroleum coke for LEGS from a supplier of
its choice.



     2. Petroleum coke supplied by NWR, on an “As Received” basis, will have the quality
specifications as provided on Exhibit C of the Appendix. Such quality specifications shall be
modified as needed from time to time to allow REI to operate under then current laws and permits
and to address LEGS operational requirements which the Parties agree exist.



F. FUEL HANDLING FACILITY




     1. REI may elect to construct a fuel handling facility at the Jewett Mine. If REI so elects,
it shall bear the cost of construction of said facility and it may require that NWR maintain and
operate such facility. Should REI elect to utilize the fuel handling facility, the Parties shall
meet as needed and agree upon the periodic payments to be made to NWR to cover the operation



-24-









 







and maintenance expenses of the fuel handling facility, loading and transportation expenses
from the facility to LEGS and reasonable compensation to NWR for operation of the facility. Any
such expenses shall be limited to the direct costs on a pro rata basis for all REI tons handled.
Any such compensation to NWR shall be ten percent of the direct costs charged to REI. Any
disagreement as to the amount of the operation and maintenance expenses or the amount of the
compensation shall be submitted to arbitration under Article H.



G. RECLAMATION




     1. REI currently posts a corporate guarantee of NWR’s reclamation bond filed with the Railroad
Commission of Texas (“RCT”) to secure NWR’s obligation to complete Final Reclamation of the Jewett
Mine. As long as the cost to REI does not change and the conditions imposed by the RCT as a
condition of self-bonding do not change materially, REI will continue to provide such corporate
guaranty in compliance with the rules of the RCT for all renewals and amendments of the surface
mining permit until NWR has been fully released from all reclamation obligations related to the
Jewett Mine. Currently, REI incurs no direct cost in providing the corporate guarantee. (REI has
some internal cost in processing and recording the guaranty.) In the future, if REI incurs
additional costs directly as a result of providing the corporate guarantee, NWR will pay those
costs.



     2. Final reclamation of the Jewett Mine at the end of its useful life is considered a sunk
cost and these expenditures will be accounted for separately during the Post-Transition Period.
The Parties shall agree on final reclamation costs and REI will be responsible for the cost of all
final reclamation. NWR shall pay all current reclamation costs (contemporaneous reclamation
activities required under Section 816.383 of the Texas Surface Goal Mining regulations (or any
successor provision)) during the Post-Transition Period, including all



-25-









 







reclamation costs associated with closing any mine area depleted prior to the end of the
Jewett Mine’s useful life. NWR shall use good mining practices during the Post-Transition Period
to insure that only a reasonable and appropriate amount of reclamation remains at the end of the
useful life of the Jewett Mine and shall bear the cost of its failure to comply with this
provision.



H. ARBITRATION




     1. Subject to the provisions of Article J hereof, this Agreement shall not modify the
provisions of the LSA relating to arbitration. Unless otherwise specifically provided herein, the
Parties shall have thirty calendar days to resolve any dispute which is subject to arbitration
under the Agreement. If any such dispute is not resolved within thirty calendar days, then either
Party may initiate arbitration. The thirty day dispute resolution period shall commence on the
date a Party receives written notice from the other Party setting forth an explanation of the
specific issues to be resolved. The written notice under this section shall be sent in accordance
with the provisions of Article K.6. Failure by the aggrieved Party to initiate arbitration within
thirty calendar days from the date the thirty day negotiation period expires shall, with respect to
any challenged component of a price calculated by the other party, be deemed a waiver by the
aggrieved Party of the right to arbitrate the submitted issues regarding price and the non-waiving
Party’s position shall be deemed correct. The “aggrieved party” shall be the Party challenging the
calculation of a component of a price calculation (including without limitation, a calculation
under Article D.18, D.20 or D.21).



     2. Matters in controversy involving (i) the calculation of any component of the Redetermined
Price, (ii) the calculation of the Old Price, (iii) the calculation of a lignite price under a
Right of First Refusal, (iv) the calculation of Liquidated Damages under Articles D.22 through D.25
inclusive, (v) the determination of payments under Article F, or (vi) any provision



-26-









 







under Article G.2, not resolved timely by negotiation, shall be resolved by binding
arbitration as follows:




a. Each Party shall submit in writing to the arbitrator its proposed ruling for resolving
the controversy within fifteen calendar days of a request by either party for arbitration.




b. Within thirty calendar days of the request for arbitration, the Parties shall make
oral presentations (which shall be limited to one hour per side unless the parties mutually
agree to a different time limit) to the arbitrator of their respective positions about the
controversy.




c. Within ten business days of the presentation, the arbitrator shall choose one Party’s
proposed ruling in its entirety. In the event the arbitrator determines that a Party has
failed or refused to supply relevant information or respond to inquiries material to the
matter in controversy, the arbitrator may extend the time within which a ruling must be
issued for such an additional period, not to exceed twenty-one calendar days, as the
arbitrator may determine in the arbitrator’s sole discretion to be appropriate. The
arbitrator shall not be allowed to compromise between the two proposals or to combine parts
to the two proposals to reach an intermediate ruling. If controversies as to more than one
of the six components of the Redetermined Price as listed in Article D.5 are submitted in
the same arbitration, the arbitrator shall select one Party’s proposal to resolve all
controversies as to one of the six components, but may select the other Party’s proposal as
to the controversies regarding another of the six components and the same rule shall apply
in determining such price components for the purpose of establishing the price under Article
D.18, D.20 or D.21. The arbitrator shall also select one Party’s proposal in any
controversy regarding the Old Price or compensation under Article F.




d. The arbitrator’s ruling shall be the final resolution of the controversy without right of
appeal. The price for all fuel delivered during the period of the Parties’ dispute that
corresponds to the period for which any component of price is being determined shall be
trued up to the arbitrator’s ruling and an appropriate payment or credit made to effect the
adjustment required by the true-up.




e. Within thirty calendar days of the execution of this Agreement, the Parties will mutually
agree on an arbitrator and on fast, second and third alternate arbitrators. The arbitrator
will decide ail controversies unless unavailable in which case an alternate will be used in
the order selected. Only individuals with knowledge in the fields of the western coal
industry, coal transportation and large solid fuel electric generation plants shall be
selected as arbitrators. An arbitrator may not be an employee of, own directly or
indirectly any debt or equity securities of, or have any other financial interest in either
Party or have testified in or consulted in the Harris County Lawsuit. The arbitrators shall
serve as standing arbitrators for terms of two years from the date of their appointment and
may be reappointed for additional terms upon mutual consent of the Parties. No later than
December 1 of each year, each Party shall notify the other in writing whether it



-27-










 







wishes to retain the current arbitrator and alternatives or to select different ones for the
next term.




f. If either Party wishes to select a new arbitrator or alternate, the Parties shall confer
and attempt to reach mutual agreement by December 15 on the appointments for the next term.
If no agreement is reached, the Parties will jointly apply to the North American Electric
Reliability Counsel (“NERC’) for the names of fifteen individuals qualified according to the
provisions of Article H.2.e and willing to serve as the standing arbitrator or as an
alternate. Within five business days of receipt of the list from NERC, each Party shall (i)
strike no more than six of the individuals; (ii) number the remaining individuals in the
order of preference, and (iii) return the list to NERC. NERC shall select the arbitrator
and alternates (if needed) from the individuals not stricken from the list by either Party
and if possible in accordance with the designated order of preference within five business
days after return of the list to NERC. In the event NERC is unwilling or unable to perform
the responsibilities set forth in this Article H.2.f, the Parties agree to use the American
Arbitration Association to perform those responsibilities. If the Parties are unable to
agree on the initial arbitrator or alternates, the process described in this Article H.2.f
shall be used to make such selections.




g. Each Party shall bear its own expenses for arbitration. Expenses of the standing
arbitrators, if any, when the standing arbitrators are not considering a controversy shall
be borne equally by the Parties. The Party whose proposed ruling or position is not
selected in a dispute under the provisions of this Article shall pay the fees and expenses
of the arbitrator related to the controversy.




h. No source documents or data shall be included or used as a material part of a Party’s
submission to an arbitrator unless such document or data has been made available to the
other Party as required and in accordance with this Agreement. Each Party shall certify
compliance with this provision in its submission. The arbitrator may inquire into
compliance if the arbitrator deems there is good cause to do so.



I. RIGHT OF FIRST REFUSAL




     1. “Right of First Refusal” refers to the separate options granted to NWR under Articles D.18,
D.20 and D.21 and each of the options granted to NWR in those Articles is so designated. Each
Right of First Refusal matures only upon the occurrence of a future event. The method for
determining the price, quantity and terms under which NWR may elect to provide the fuel under each
Right of First Refusal is described in the Article granting the particular Right of First Refusal.
The Parties intend that each Right of First Refusal shall be construed as a presently vested right
and enforceable in accordance with its terms. Each Right of First Refusal



-28-









 







is subject to the following provisions governing the method, timing and other general matters
for the exercise of each such Right of First Refusal.



     2. The Parties’ bargain with respect to each Right of First Refusal in Article D is based in
fact upon a mutual agreement that during the Post-Transition Period, REI will be supplied lignite
as the primary fuel for LEGS at a price which results in a cost of generation to REI that is
equivalent to the cost of generation that REI would incur if PRB Coal were substituted for lignite
as the primary fuel for LEGS taking into consideration all of the factors described in Articles D.5
through D.12. The Rights of First Refusal in Article D are intended to assure NWR that it will
have the option to provide lignite at a price that produces the equivalent cost of generation to
REI if PRB Coal (or, under the circumstance described in Article D.21, another fuel) were used as
the primary fuel at LEGS. The Parties further intend that NWR have a reasonable opportunity to
evaluate a Right of First Refusal upon maturity and make an informed decision to exercise or not
exercise such Right of First Refusal. The provisions of this Article I shall be construed in a
manner consistent with such intent.



     3. Each Right of First Refusal must be exercised by NWR within 15 days after the date that
notification of a Trigger Event is effective (not counting the effective date of the notice, but
counting the fifteenth day thereafter as the last day). If the fifteenth day falls on a day other
than a Business Day, then the time to exercise the Right of First Refusal shall be extended to the
next Business Day. Notification of a Trigger Event must be in writing and be delivered in the
manner specified in Article K.6 for the giving of notices and shall be effective as provided in
Article K.6. In order for the notification to be effective, the notification must contain or be
accompanied by all information specified in this Agreement to be included in or with the
notification. The fact such information may otherwise be available to NWR shall not excuse



-29-










 







failure to include required information with the notification of a Trigger Event. In order to
avoid dispute as to when a notification of a Trigger Event is effective, a failure to provide
required information with a notification of a Trigger Event may be cured only by properly repeating
the notification with all required information in or with the notification; provided, however, that
NWR shall notify REI of any material deficiencies in the provision of the information specified in
this Agreement within five working days of the receipt by NWR of the notification of a Trigger
Event.



     4. After or with notification of a Trigger Event, REI must provide to NWR all information that
REI is obligated to provide under the terms of this Agreement that is relevant to the Right of
First Refusal. Information not required to be included with the notification, must be made
available to NWR on such Business Day as NWR requests (but no sooner than the second Business Day
after the request for information is made) by delivery of the information to NWR in Butte, Montana
or at the Jewett Mine or as required by the terms of this Agreement to review certain confidential
information, to the offices of a third party. Alternatively, NWR may request such information be
provided at REI’s offices in Houston and REI will provide the information to NWR in a private room
with copying facilities reasonably available to NWR at a commercial copying rate. The place of
review shall be as specified in NWR’s request for information. Any approval of a third party to
review information and the execution of any required confidentiality agreement shall be expedited
by the Parties so that any conditions to review of confidential information may be satisfied within
two Business Days of a request by NWR for such information, which request must designate a third
party as required to review confidential information and provide the third party’s business name,
address and profession or occupation. NWR may verbally request information from any person
designated to receive a notice for REI



-30-









 







under Article K.6 and a verbal request shall be effective when made, provided the request is
confirmed in a written notice given in the manner provided in Article K.6 within two Business Days
of the making of the verbal request. Requests may also be made in writing delivered in the manner
of other notices under Article K.6 and shall be effective as provided in Article K.6.



     5. Time shall be of the essence in responding to requests for information under Articles I.4
and 1.5; provided REI shall not be required to create or process information for NWR and may
satisfy a request by providing the data in useable form from which the information requested may be
developed, subject to such data being available. When available, REI will provide all summaries of
requested data as well as the data. The fact that any requested information may be available in
the files of NWR or otherwise available to NWK from another source shall not excuse furnishing the
requested information. Failure of REI to provide timely information pursuant to a request by NWR
after effective notification of a Trigger Event shall extend the time for NWR to exercise its Right
of First Refusal by one full Business Day for each day or partial day that lapses after the day the
information was due to be provided.



     6. NWR shall exercise a Right of First Refusal by giving notice of the exercise in the manner
provided for notices in Article K.6. All information required by this Agreement to be in or with
the notice of exercise of the Right of First Refusal must be included for the notice to be
effective, provided substantial compliance shall be effective.



     7. The Parties acknowledge that the determination of cost of generation at LEGS using PRB Coal
(or another fuel) and determination of an equivalent cost using lignite is a fact intensive
exercise that requires a number of judgments be made as to the appropriate use of data. The
Parties have sought to develop a methodology that will allow mutually agreed costs to be developed
and that will limit the matters that might be disputed. Even with their good efforts,



-31-









 








good faith disputes as to a lignite price which produces a cost of generation to REI which is
equivalent to the cost of generation that REI may reasonably expect from using PRB Coal (or another
fuel) may arise. Subject to any limitations expressly included in the methodology for making such
determination found in Articles D.5 through D.12, either Party may during the period for exercise
of a Right of First Refusal elect to submit to summary arbitration under Article H any fact issue
that is material to the determination of the price or other terms upon which NWR may exercise the
Right of First Refusal, including the entire calculation. Further, if NWR gives notice exercising
the Right of First Refusal and REI asserts that the price or another term specified in the exercise
does not produce an equivalent cost of generation to the cost of generation at LEGS that REI
reasonably expects from using PRB Coal (or another fuel), then within three Business Days after the
effective date of the exercise of the Right of First Refusal, REI may elect to submit to
arbitration under Article H any disputed fact issue that is material to the determination of the
price or other terms upon which NWR may exercise the Right of First Refusal. The time for exercise
of the Right of First Refusal (or re-exercise if NWR has exercised, but the terms for exercise are
different after the arbitration) shall be automatically extended to the Business Day first
occurring on or after fifteen calendar days from the date the arbitration award is received by NWR
or the date the Parties settle the matters in arbitration by written agreement.



J. AMENDED PROVISIONS OF EXISTING CONTRACTS




     1. Except as modified by the terms of this Agreement, the LSA and the C&O Agreement and other
Existing Contracts remain in full force and effect and the Parties hereby ratify and confirm the
Existing Contracts as binding and sustaining obligations in accordance with their terms.



-32-









 





     2. Without limitation, the following sections of the LSA and the C&O Agreement are, by this
Agreement, retained, deleted or modified in the Post Transition Period as follows:



-33-









 





LIGNITE SUPPLY AGREEMENT




     Retained: Articles 2.4, 2.8, 4.2, 6.1, 6.2, 9.1, 9.4, 9.5, 9.6, 9.7, 9.8, 12, 13.1,
13.2, 14.3, 15, 16, 17, 20.2, 20.3, 21, 24.



     Deleted: Articles 5, 7.1, 8.2, 8.3, 8.5, 8.6, 9.2, 9.3, 10.7, 10.8, 14.1, 14.2, 14.5,
19, 20.1.



     Modified:




     1.1 — Modified to reflect the fact that if NWR fails to exercise one of its
right of first refusal, it loses the right to supply the pertinent quantity of
lignite.




     2.1 — Modified to remove reference to minimum requirements.




     2.2 — Modified to delete all text after the parenthetical phrase (“NWR
Reserves”) in first sentence.




     2.3 — Modified in the Post-Transition Period to delete the third and fourth
sentences. Further modified to provide that NWR will negotiate land acquisitions
and offer such acquisitions to REI and REI will have the first opportunity to
purchase land on negotiated terms, and NWR may purchase on those terms if REI elects
not to purchase. The Land Purchase Agreement is abrogated.




     2.5 — Modified to delete third sentence, except for instances where the Parties
are operating under the Old Price provisions.




     2.6 — Modified to delete, except for instances where the Parties are operating
under the Old Price provisions.




     2.7 — Modified to delete, except for instances where the Parties are operating
under the Old Price provisions.




     2.9 -Modified to delete reference to Column 1 of Exhibit C to LSA.




     3.1 — Modified to the extent inconsistent with Article D.16 and related
provisions of this Agreement.




     3.2 — 3.4 — Modified to delete, except for instances where the Parties are
operating under the Old Price provisions.




     4.1 — Modified to delete requirement that NWR pay REI an overriding royalty
during the Post-Transition Period.




     7.2 — Modified to delete requirement that NWR submit mine plans and budgets,
except for instances where the Parties are operating under the Old Price provisions.



-34-









 






     8.1- Modified to delete first two sentences.




     8.4 — Modified to reflect that during the Post Transition Period, NWR acquires
and owns newly acquired equipment and facilities and NWR receives the associated tax
benefits. REI retains the tax benefits on equipment and facilities it now has or
which it acquires during the Transition Period.




     9.9 — Modified to delete, except for instances where the Parties are operating
under the Old Price provisions.




     10.1- 10.6 — Modified to delete, except for instances where the Parties are
operating under the Old Price provisions.




     11.1-11.4 — Modified to delete, except for instances where the Parties are
operating under the Old Price provisions.




     14.4 — Modified to delete, except for instances where the Parties are operating
under the Old Price provisions.




     18 — Modified to delete, except for instances where the Parties are operating
under the Old Price provisions. If a proceeding to remove NWR is not final, a
return to New Price under terms of the contract will moot the issue.




     22 — Modified to correct addresses.




     23 — Modified to reflect termination date of August 29, 2015.




     25 — Modified to correct addresses.




     26 — Modified to delete references to development and construction activities.



CONSTRUCTION AND OPERATION AGREEMENT




     Retained: Paragraphs 2.3, 3.1, 4.2, 4.5, 4.8, 4.9, 4.12, 7.2.1, 7.2.2, 7.3,
8.2.1-8.2.8, 8.2.10-8.2.13, 8.3



     Deleted: Paragraphs 2.4, 2.5, 2.6, 2.7, 3.3, 4.1, 4.11, 5, 6, 7.2.3



     Modified:




     1 — Modified to correct addresses.




     2.1 — Modified to delete reference to Limestone County.




     2.2 — Modified to add “as amended” following reference to LSA.




     3.2 — Modified to add “as amended” following reference to LSA.



-35-









 






     4.3, 4.4 and 4.6 — Modified to delete, except for instances where the Parties
are operating under the Old Price provisions.




     4.7 — Modified to delete reference to Limestone County.




     4.10 — Modified to delete, except for instances where the Parties are operating
under the Old Price provisions.




     7.1 — 7.2 — Modified to cover only mining facilities and equipment purchased by
REI or a predecessor.




     7.2.4 — Modified to delete, except for instances where the Parties are
operating under the Old Price provisions.




     7.4 — Modified to reflect Parties’ new responsibilities under Article D.28.




     8.1 — Modified to delete all provisions except subparts (4), (5) and (7).
Subparts 1, 2, 3 and 6 are deleted, except for instances where the Parties are
operating under the Old Price provisions.




     8.2 — Modified to delete subparts (3) and (7), after first comma, except for
instances where the Parties are operating under the Old Price provisions.




     8.2.9 — Modified to delete last sentence only, except for instances where the
Parties are operating under the Old Price provisions.




     8.2.14 — 8.2.17 — Modified to delete, except for instances where the Parties
are operating under the Old Price provisions.




     8.4 — Modified to delete, except for instances where the Parties are operating
under the Old Price provisions.




     8.5 — Modified to delete last clause only, except for instances where the
Parties are operating under the Old Price provisions.




     9 — Modified to reflect change in 9.16, which must provide that Liquidated
Damages are recoverable by the Parties under provisions of Agreement.



     2. Any other inconsistent provision in the Existing Contracts is hereby modified or rescinded
as required to conform to this Agreement.



-36-










 





K. MISCELLANEOUS




     1. The details of the negotiation of this Agreement and the terms of this Agreement shall be
kept confidential by the Parties. Nothing herein shall prevent the Parties from revealing the
terms of this Agreement when required to do so by any regulatory body or court, but the Parties
shall seek the highest possible level of confidentiality, with regard to such disclosures.



     2. This Agreement may not be transferred or assigned by either Party without the express
written consent of the other Party which consent shall not be unreasonably withheld. If WAP is
transferred to an affiliate of REI or an affiliate is responsible for purchasing coal for WAP, then
the affiliate will assume the obligations relating to WAP and information regarding WAP imposed by
this Agreement. If WAP is sold to a non-affiliated company or person, then the Parties shall
negotiate in good faith for 120 days to agree upon another price determination method. If no
agreement is reached within such 120-day period, then, within 30 days of the end of such period,
the determination of the PRB Coal price shall be submitted to arbitration under Article H.



     3. Within 120 days of the execution of this Agreement, the Parties shall meet and determine
through good faith negotiation which of the Policies and Procedures shall remain in effect during
the Post-Transition Period.



     4. This Agreement shall be governed by, and construed in accordance with, the laws of the
State of Texas.



     5. The Parties by dismissal of the appeals in the Harris County Lawsuit have made the district
court’s judgment (“Final Judgment”) in that case final and nonappealable.



-37-









 





     6. The notice provision in Section 25.2 of the LSA and all other notice provisions in any of
the Existing Contracts is amended to state current addresses and contact personnel and to designate
methods of delivery and is restated as follows:




     Any notice or other communication required or permitted under this Agreement or any
Existing Contract shall be in writing and effective upon receipt if hand-delivered or sent
by certified mail, postage prepaid, return receipt requested, by commercial overnight
delivery service, or by facsimile transmission (provided a conforming copy is mailed the
same day and any facsimile copy sent after 5:00 p.m. Central Time on a Business Day, or on a
day that is not a Business Day, shall not be effective until the next Business Day).
Notices shall be addressed:


If directed to REI:



Reliant Energy, Incorporated

Attention: Coal & Lignite Fuels

By U.S. Mail:

     P.O. Box 1700

     Houston, Texas 77251

By Delivery:

     1111 Louisiana, Tenth Floor

     Houston, Texas 77002



Facsimile No.: (713) 207-9016



If directed to NWR:



Northwestern Resources Co.

Attention: President — NWR



By U.S. Mail:

     P.O: Box 915

     Jewett, Texas 75846

By Delivery:

     8 Miles North of Jewett, Texas

     State Highway 39 North



Facsimile No.: (903) 626-5701




     Either Party may change its mailing address or facsimile number by giving notice of such
change to the other Party as provided herein.



     7. During the Post-Transition Period, REI and NWR will each be responsible for the ad valorem
taxes on (i) its respective lignite reserves (disregarding the sublease of REI’s reserves



-38-









 







to NWR) and (ii) its respective mining equipment and facilities (disregarding the lease of
mining equipment and facilities to NWR). For the sole purpose of ad valorem tax calculations
commencing July 1, 2002, the Parties shall agree to a reasonable and appropriate allocation of the
price paid for lignite into three components: cost recovery, management fee and dedication fee.
During the Post-Transition Period NWR shall be entitled to all tax credits and deductions with
respect to the lignite reserves in the Jewett Mine (including those reserves subleased from REI)
and with respect to the mining equipment and facilities acquired by NWR. During the
Post-Transition Period, REI shall be entitled to all tax credits and deductions with respect to
mining equipment and facilities acquired by REI or its predecessor and leased to NWR



     8. During the Post-Transition Period, REI shall have a reasonable right to inspect and monitor
the use and maintenance of the mining equipment and facilities leased by REI to NWR.



     9. Each Party shall bear its own expenses of any consultant or expert engaged under any
Article hereof.



     10. REI may, at any time, require NWR to deliver lignite under the Old Price methodology for
any two year forward looking period.



     11. The captions for the Articles and subcaptions for various sets of paragraphs within the
Articles have been inserted for convenience and reference only and shall in no way modify or
restrict any of the terms or provisions hereof.



     12. If any term or provision of this Agreement shall be held to be invalid or unenforceable,
then to the extent of such invalidity or unenforceability, and without invalidating the remaining
terms or provisions hereof, this Agreement shall, to the extent permitted by




-39-










 




applicable law, be construed as if such invalid or unenforceable term or provision had not
been contained herein; provided, if any Right of First Refusal is held to be invalid or
unenforceable, REI shall grant NWR an option that replaces the invalid or unenforceable Right of
First Refusal on the same terms, except as required to remove the invalidity or to make the option
enforceable. Any modification shall be consistent with the factual basis of the Parties’ bargain
as described in this Agreement.




     13. Nothing in this Agreement is intended or should be construed to give any person, other
than the Parties, any legal or equitable right, remedy or claim under or in respect of this
Agreement or any provision contained herein.



     14. The Parties acknowledge that at the termination of the LSA, as amended by this Agreement,
issues may remain to be resolved that are not the subject of a specific agreement in the Existing
Contracts, as amended by this Agreement. Such unresolved issues may include, without limitation,
issues with respect to the remaining lignite reserves owned or controlled by NWR, issues concerning
the proper designation of reclamation costs into the categories of final reclamation and
contemporaneous reclamation and issues with respect to the disposition of remaining facilities and
equipment. The Parties agree to meet in good faith to attempt to reach a mutually satisfactory
resolution of any and all remaining issues. If the Parties fail to resolve any such issues (except
for any issues relating to the lignite reserves owned or controlled by NWR) within 180 days of the
termination of the LSA, such unresolved issues shall be submitted to arbitration pursuant to the
provisions of Article H. Such arbitration shall commence within 30 days of the end of such 180-day
period of negotiation and the issues submitted to arbitration shall be determined consistent with
the general intentions of the Parties expressed in the Existing Contracts, as amended, with respect
to the operation of the Jewett Mine and the purchase and



-40-









 







sale of lignite during the Post Transition Period. If agreement on any lignite reserve
issue[s] cannot be reached after reasonable attempt[s] at resolution are made by the Parties, such
issue[s] shall not be referable to arbitration under this Agreement and NWR shall have no
obligation to dedicate such lignite reserves to any continuation of the Jewett Mine by REI. NWR,
however, grants to REI, effective at the termination of the LSA, as amended by this Agreement, an
irrevocable right of first refusal with regard to any sale or other disposition by NWR of NWR’s
remaining lignite reserves. The obligation to extend a right of first refusal for the lignite
reserves remaining at termination requires that if NWR finds a bona fide purchaser or lessee for
all or part of the remaining NWR lignite reserves NWR will, within ten days of receipt of a bona
fide offer which NWR is prepared to accept, notify REI of the offer in accordance with Article K.6
hereof and include in the written notice all of the material terms of the bona fide offer. REI
will thereafter have fifteen days from the date such notice is effective to notify NWR in
accordance with Article K.6 that REI intends to meet, or does not intend to meet, all of the
material terms contained in the offer made by the bona fide purchaser or lessee. If REI fails to
respond within fifteen days, or responds negatively, then the right of first refusal as to such
offer shall lapse and NWR may immediately go forward with the sale or lease free and clear of the
right of first refusal. If REI responds affirmatively within fifteen days and indicates it wishes
to match the bona fide offer, the Parties shall proceed to a closing of the transaction within
ninety days of REI’s response. The right of first refusal granted to REI does not include a right
to acquire any lignite leases that NWR elects in whole or in part to terminate by operation of the
lease terms or to surrender and does not apply to any disposition by NWR to an afflicted entity
provided the affiliated entity shall be bound by REI’s right of first refusal. The right of first
refusal shall survive the termination of this Agreement.



-41-









 





     15. Each Party:




	 	a.	 	acknowledges, understands and agrees that all Parties hereto participated in
the drafting of this Agreement;
	 
	 	b.	 	hereby waives all right to assert any rule or presumption of construction
specifying that an ambiguity in the language of a written contract be construed against
the drafter; and
	 
	 	c.	 	specifically provides that no such rule or presumption shall be applied by any
court or tribunal (including arbitration) having jurisdiction over the interpretation
or construction of this Agreement.





     16. Neither Party may assign this Agreement or any rights or obligations hereunder in whole or
in part without the prior written consent of the other party; which shall not be unreasonably
withheld. Provided no such consent will be required where assignment is (i) to a successor in
interest of a substantial part or all of the assets of such Party by way of merger, consolidation,
sale of substantially all of its assets, divestiture pursuant to an order or decree of a court, or
similar corporate reorganization; (ii) to an affiliated corporate entity; or (iii) to a purchaser
of LEGS. No such assignment shall be effective unless and until such assignee shall assume in
writing the obligations of the assignor.



     17. This Agreement, subject to the limitations set forth in Article J, is intended by the
Parties to be the final expression of their agreement and the complete and exclusive statement of
the terms of their agreement with respect to the subject matter hereof and there are no oral
promises, agreements or warranties affecting it.



-42-









 





Executed as of the date shown in the caption of this Agreement




	 	 	 	 	 
	 	RELIANT ENERGY, INCORPORATED

 	 
	 	By:  	/s/ CARLA J. MITCHAM
 	 
	 	 	 	 
	 	 	 	 
	 
	 	NORTHWESTERN RESOURCES CO.

 	 
	 	By:  	/s/ R.F. CROMER
 	 
	 	 	 	 
	 	 	 	 
	 




-43-









 








Exhibit A




Settlement Agreement and Amendment of Existing Contracts




Capital Expenditures




	 	 	 	 	 
	1999
	 	 	 	 
	Purchase Rails and Rollers for DL25
	 	$	520,000	 
	Tools & Small Equipment
	 	 	105,000	 
	Tract Purchases
	 	 	200,000	 
	Surface Improvements
	 	 	45,000	 
	 
	 	 	 
	 
	 	$	870,000	 
	 
	 	 	 	 
	2000
	 	 	 	 
	D-E Haulroad
	 	$	766,000	 
	Replace Front End Loader
	 	 	1,100,000	 
	Replace Backhoe
	 	 	1,000,000	 
	Replace 16G Motor Grader
	 	 	520,000	 
	Replace Three 405bp Dozens
	 	 	1,793,400	 
	Replace Two 520hp Dozens
	 	 	1,380,000	 
	Replace Generator
	 	 	12,000	 
	Replace Light Plants
	 	 	18,000	 
	Replace One 2 1/2 Ton Truck
	 	 	100,000	 
	Replace Sixteen Pickups
	 	 	346,800	 
	Replace Air Compressor
	 	 	18,000	 
	Tools & Small Equipment
	 	 	100,000	 
	Tract Purchases
	 	 	189,800	 
	 
	 	 	 
	 
	 	$	7,344,000	 
	 
	 	 	 	 
	2001
	 	 	 	 
	B2 Haulroad
	 	$	643,000	 
	Pond 026 Modification
	 	 	750,000	 
	Replace One 10 Ton Truck
	 	 	95,000	 
	Replace Light Plants
	 	 	54,000	 
	Replace One 2 1/2 Ton Truck
	 	 	100,000	 
	Replace Eight Pickups
	 	 	173,200	 
	Replace Air Compressor
	 	 	18,000	 
	Tools & Small Equipment
	 	 	100,000	 
	Tract Purchases
	 	 	298.800	 
	 
	 
	 	 	 
	 
	 	$	2,232,000	 
	 
	 	 	 	 
	2002
	 	 	 	 
	Pond 04-E (50%)
	 	$	750,000	 
	Replace Nine Pickups (50%)
	 	 	101,000	 
	Tools & Small Equipment (50%)
	 	 	50,000	 
	Tract Purchases (50%)
	 	 	178 000	 
	 
	 
	 	 	 
	 
	 	$	1,079,000	 







 









 








Exhibit B




Page 1 of 5




Settlement Agreement and Amendment of Existing Contracts




Calculation of “New Price” for Lignite




	 	 	 	 	 	 	 
	Net Coal Cost	 	 	 	 
	(1)	 	PRB Coal
	 	$	24,894,589	 
	(2)	 	Rail Transportation
	 	$	80,842,258	 
	(3)	 	Railcar Maintenance
	 	$	1,576,567	 
	(4)	 	Railcar Ad Valorem Taxes
	 	$	902,754	 
	(5)	 	Railcar Unloading Facility Ad Valorem Taxes
	 	$	215,879	 
	(6)	 	Railcar Unloading Facility O&M
	 	$	650,000	 
	(7)	 	Unrealized Plant Savings
	 	$	(22.660.777	)
	(8)	 	Pre-tax Cost
	 	$	86,421,270	 
	 	 	 
	 	 	 	 
	Avoided Capital	 	 	 	 
	(9)	 	Railcar Cost
	 	$	64,025,118	 
	(10)	 	Railcar Unloading Facility
	 	$	23,032,100	 
	(11)	 	Subtotal
	 	$	87,057,218	 
	(12)	 	Interest @ Pre-tax Cost of Capital (15.30%)
	 	$	13,319,754	 
	 	 	 
	 	 	 	 
	Avoided Expense	 	 	 	 
	(13)	 	Final Reclamation
	 	$	41,105,165	 
	(14)	 	Interest @ Pretax Cost of Debt (7.59%)
	 	$	3,119,882	 
	 	 	 
	 	 	 	 
	New Price for Lignite	 	 	 	 
	(15)	 	Pre-tax Cost of Coal
	 	$	102,860,906	 
	(16)	 	Lignite Quantity (mmBtu’s)
	 	 	119,066,818	 
	(17)	 	Pre-tax Cost of Coal ($/mmBtu)
	 	$	0.8639	 







 









 













Exhibit B



Page 2 of 5




Settlement Agreement and Amendment of Existing Contracts




Assumption in “New Price” Calculation




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	PRB Coal Price

	 	 	1998	 	 	Quality
	 	 	1998	 	 	Quantity
	 	Annual Cost
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	($’s/ton)
	 	(Btu/lb)
	 	($’s/mmBtu)
	 	(mmBtu’s)
	 	($’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	(A)	 	(B)	 	(C)	 	(D)	 	(E)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	$	3.62	 	 	 	8,700	 	 	$	0.2080	 	 	 	119,659,074	 	 	$	24,894,589	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Rail Transportation

	 	Aluminum Rate
	 	Distance
	 	Aluminum
	 	Distance
	 	Aluminum Rate
	 	Specification
	 	Aluminum
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	TO WAP
	 	to WAP
	 	Rate to WAP
	 	to LEGS
	 	to LEGS
	 	Quality
	 	Rate to LEGS
	 	Coal Quantity
	 	Annual Cost
	 	 	 	 	 	 	 	 
	 

	 	($’s/ton)
	 	(miles via BN)
	 	($’s/ton-mile)
	 	(miles via BN)
	 	($’s/ton)
	 	(Btu/lb)
	 	($’s/mmBtu)
	 	(mmBtu’s)
	 	($’s)	 	 	 	 	 	 	 	 
	 

	 	(F)	 	(G)	 	(H)	 	(I)	 	(J)	 	(K)	 	(L)	 	(M)	 	(N)	 	 	 	 	 	 	 	 
	 

	 	$	13.25	 	 	 	1,573	 	 	$	0.0084	 	 	 	1,372	 	 	$	11.56	 	 	 	8,553	 	 	$	0.6756	 	 	 	119,659,074	 	 	$	80,842,258	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Railcar Maintenance

	 	Railcar
	 	Specification
	 	Distance
	 	Maintenance
	 	Maintenance
	 	Maintenance
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Capacity
	 	Quality
	 	to LEGS
	 	Cost
	 	Cost
	 	Cost
	 	Coal Quantity
	 	Annual Cost
	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	(tons)
	 	(Btu/lb)
	 	(miles)
	 	($’s mile)
	 	($’s/ton)
	 	($’s/mmBtu)
	 	(mmBtu’s)
	 	($’s)	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	(O)	 	(P)	 	(Q)	 	(R)	 	(S)	 	(T)	 	(U)	 	(V)	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	121.75	 	 	 	8,553	 	 	 	1,372	 	 	$	0.01	 	 	$	0.2254	 	 	$	0.0132	 	 	 	119,659,074	 	 	$	1,576,567	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Plant Savings Due to Coal

	 	Make-up
	 	 	O&M	 	 	Limestone
	 	Dlbasic
	 	Fly
	 	Bottom
	 	FGD
	 	SO2
	 	NOX
	 	Total
	 	 	 	 
	 

	 	Energy
	 	Wear
	 	Rock
	 	Acid
	 	Ash
	 	Ash
	 	Sledge
	 	Credits
	 	Credits
	 	Savings
	 	 	 	 
	 

	 	($’s)	 	($’s)	 	($’s)	 	($’s)	 	($’s)	 	($’s)	 	($’s)	 	($’s)	 	($’s)	 	($’s)	 	 	 	 
	 

	 	(W)	 	(X)	 	(Y)	 	(Z)	 	(AA)
	 	(BB)
	 	(CC)
	 	(DD)
	 	(EE)
	 	(FF)
	 	 	 	 
	 

	 	$	10,904,469	 	 	$	2,742,549	 	 	$	3,044,432	 	 	$	182,648	 	 	$	1,129,404	 	 	$	1,076,065	 	 	$	1,392,462	 	 	$	2,188,748	 	 	$	0	 	 	$	22,660,777	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Railcar Capital

	 	 	 	 	 	 	 	 	 	 	 	 	 	Railcar Cycle
	 	Railcar
	 	 	 	 	 	 	 	 	 	 	 	 	 	Railcar
	 	Railcar
	 	Ad Valorem

	 

	 	Coal Quantity
	 	Specification
	 	Coal Req’d
	 	Time
	 	Availability
	 	Railcar
	 	Railcar Spares
	 	Railcars Req’d
	 	Cost
	 	Cost
	 	Taxes

	 

	 	(mmBtu’s)
	 	Quality (Btu/lb)
	 	Annually (tons)
	 	(hours)
	 	(%)	 	Capacity (tons)
	 	(%)	 	(#)	 	($’s/car)
	 	($’s)	 	($’s)
	 

	 	(GG)
	 	(HH)
	 	(II)
	 	(JJ)
	 	(KK)
	 	(LL)
	 	(MM)
	 	(NN)
	 	(OO)
	 	(PP)
	 	(QQ)

	 

	 	 	119,659,074	 	 	 	8,353	 	 	 	6,995,152	 	 	 	170	 	 	 	96.0	%	 	 	121.75	 	 	 	5.0	%	 	 	1,220	 	 	$	52,500	 	 	$	64,025,118	 	 	$	902,754	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Railcar Unloading Facility

	 	Capital
	 	Ad Valorem
	 	 	O&M	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Cost
	 	Taxes
	 	Cost
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	($’s)	 	($’s)	 	($’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	(RR)
	 	(SS)
	 	(TT)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	$	23,032,100	 	 	$	215,179	 	 	$	650,000	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Final Reclamation

	 	Reclamation
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	Cost
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	($’s)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	(UU)
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	$	41,105,165	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 






 









 








Exhibit B



Page 3 of 5




Settlement Agreement and Amendment of Existing Contracts




CQIM Output Summary




	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Lignite 800 GMW	 	 	Coal 800 QMW	 	 	Comments
	Plant supplied outage related unavailability =>
	 	 	5.495	%	 	 	3.93	%	 	 	 	 
	based on 5 yr PRB outage.
	 	 	Delta 	= 	 	 	2.102	%	 	 	 	 
	CQIM output
	 	 	 	 	 	 	 	 	 	 	 	 
	85% Capacity factor – annual net MWH
	 	 	11,182,446	 	 	 	11,346,434	 	 	 	 	 
	 
	1998 NEGOTIATION
	 	 	 	 	 	 	 	 	 	 	 	 
	Evaluation Spreadsheet 800 MW Gross
	 	 	 	 	 	 	 	 	 	 	 	 
	Operating Availabilities
	 	 	 	 	 	 	 	 	 	 	 	 
	1 Liner Materials Reduce Boiler Overhauls %
	 	 	1.46	%	 	 	1.46	%	 	 	 	 
	CQIM Operating Equivalent Availability %
	 	 	86.00	%	 	 	86.80	%	 	 	 	 
	Delta Eq. Avail & Capacity factor
	 	 	1.00	%	 	 	1.80	%	 	 	 	 
	2 CQIM input capacity factor
	 	 	85.00	%	 	 	85.00	%	 	 	 	 
	3 Outage interval credit to availability
	 	 	0.00	%	 	 	2.75	%	 	Negotiated increase of 2.75%
	Plant Rating
	 	 	 	 	 	 	 	 	 	 	 	 
	Gross (MW)
	 	 	800	 	 	 	800	 	 	 	 	 
	Net (MW) CQIM System
	 	 	751	 	 	 	758	 	 	Negotiated increase of 7 MW
	Total Plant Equivalent Availability %
	 	 	86.46	%	 	 	89.21	%	 	 	 	 
	Annual Gross Generation (mwh, Total Plant)
	 	 	12,118,234	 	 	 	12,503,674	 	 	 	 	 
	Annual Net Generation (mwh, Total Plant)
	 	 	11,375,992	 	 	 	11,847,231	 	 	 	 	 
	Operating Characteristics
	 	 	 	 	 	 	 	 	 	 	 	 
	Gross Heat
Rate (Btu/kwh)
	 	 	9,825	 	 	 	9,570	 	 	 	 	 
	Net Heat
Rate (Btu/kwh)
	 	 	10,467	 	 	 	10,100	 	 	Negotiated increase of 3.5%
	Total fuel used (mmBtu)
	 	 	119,066,818	 	 	 	119,659,074	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 
	Fuel Heating
Value (BTU/lb)
	 	 	6,499	 	 	 	8,553	 	 	 	 	 
	Fuel Used (Tons, two units)
	 	 	9,160,395	 	 	 	6,995,152	 	 	 	 	 
	Fuel Price
($/mmBtu)
	 	$	0.97	 	 	$	0.92	 	 	 	 	 
	Fuel Cost (Plant)
	 	$	115,137,613	 	 	$	110,505,155	 	 	 	 	 
	Equivalent Net Capacity Factor %
	 	 	86.46	%	 	 	89.21	%	 	 	 	 
	Replacement Energy Cost
	 	 	 	 	 	 	 	 	 	 	 	 
	Make-up energy (mwh)
	 	 	471,239	 	 	 	 	 	 	 	 	 
	Make-up cost
at system lambda, $/MWH
	 	$	23.14	 	 	 	 	 	 	 	 	 
	Make-up energy cost
	 	$	10,904,469	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 
	Total Energy Equivalent Cost
	 	$	126,042,082	 	 	$	110,505,155	 	 	 	 	 
	 
	Savings Due to PRB Fuel Switch
	 	 	 	 	 	 	 	 	 	 	 	 
	O&M Wear
	 	 	 	 	 	$	2,742,549	 	 	 	 	 
	Crushed Limestone Rock
	 	 	 	 	 	$	3,044,432	 	 	 	 	 
	Dibasic Acid
	 	 	 	 	 	$	182,648	 	 	 	 	 
	Fly Ash
	 	 	 	 	 	$	1,129,404	 	 	 	 	 
	Bottom Ash
	 	 	 	 	 	$	1,076,065	 	 	 	 	 
	FGD Sludge
	 	 	 	 	 	$	1,392,462	 	 	 	 	 
	S02 Credits
	 	 	 	 	 	$	2,188,748	 	 	 	 	 
	NOX Credits
	 	 	 	 	 	$	0	 	 	 	 	 
	 
	Total Savings
	 	 	 	 	 	$	11,756,309	 	 	 	 	 
	Total Generation Cost
	 	$	126,042,082	 	 	$	98,748,846	 	 	 	 	 
	Savings Due to Fuel Conversion
	 	 	 	 	 	$	27,293,237	 	 	 	 	 






 









 






Exhibit B



Page 4 of 5



Settlement Agreement and Amendment of Existing Contracts




Assumption/Calculations for Data on Page 2 of 5 (Assumptions in “New Price” Calculation)



of this Exhibit B




	 	 	 
	“New Price”	 	 
	Element	 	Assumption or Equation
	PBB Coal Price
	 	 
	A
	 	PRB coal price pct REI's 1998 spot agreement with Kennecott's Jacobs Ranch Mine
	B
	 	Quality specification is REI's 1998 spot agreement with Kennecott's Jacobs Ranch Mine
	C
	 	(A) / [(B) * 2000 / 1000000]
	D
	 	Input from CQIM model output: “Total fuel used (mmBtu)” under column “Coal 800 GMW" (page 3 of this Exhibit B)
	E
	 	(C) * (D)
	 
	 	 
	Rail Transportation
	 	 
	F
	 	Rail transportation rate ($'s/ton is aluminum railcars) to WAP bred on REI's contract with Union Pacific
	G
	 	Rail distance from PRB to WAP via BN, in miles
	H
	 	(F) / (G)
	I
	 	Rail distance from PRB to LEGS via BN, is miles
	J
	 	(H) * (I)
	K
	 	Quality specification as per Article D.14.c of this Agreement
	L
	 	(J) / [(K) * 2000 / 1000000]
	M
	 	Same as (D)
	N
	 	(L) * (M)
	 
	 	 
	Railcar Maintenance
	 	 
	O
	 	Input from REI
	P
	 	Same as (K)
	Q
	 	Same as (I)
	R
	 	Input from REI
	S
	 	[(Q) * (R) * 2] / (O)
	T
	 	(S) / [(P) * 2000 / 1000000]
	U
	 	Same as (D)
	V
	 	(T) * (U)
	 
	 	 
	Railcar Maintenance
	 	 
	O
	 	Input from REI
	P
	 	Same as (K)
	Q
	 	Same as (I).
	R
	 	Input from REI
	S
	 	[(Q) * (R) * 2] / (O)
	T
	 	(S) / [(P) * 2000 / 1000000]
	U
	 	Same as (D)
	V
	 	(T) * (U)
	 
	 	 
	Plant Savings Due to Coal
	 	 
	W
	 	From CQIM model output: “Make-up energy cost” under column “Lignite 800 GMW” {Page 3 of this Exhibit B}
	X
	 	From CQIM model output: “O&M Wear” under column “Coal 800 GMW” {Page 3 of this Exhibit B}
	Y
	 	From CQIM model output: “Crushed Limestone Rock” under column “Coal 800 GMW”  {Page 3 of this Exhibit B}
	Z
	 	From CQIM model output: “Dibasic Acid” under column “Coal 800 GMW” {Page 3 of this Exhibit B}
	AA
	 	From CQIM model output: “Fly Ash” under column “Coal 800 GMW” {Page 3 of this Exhibit B}
	BB
	 	From CQIM model output “Bottom Ash” under column “Coal 800 GMW” {Page 3 of this Exhibit B}
	CC
	 	From CQIM model output: “FGD Sludge” under column “Coal 800 GMW” {Page 3 of this Exhibit B}
	DD
	 	From CQIM model output: “SO2 Credits” under column “Coal 800 GMW” {Page 3 of this Exhibit B}
	EE
	 	From CQIM model output: “NOX Credits” under column “Coal 800 GMW” {Page 3 of this Exhibit B)
	FF
	 	(W) + (X) + (Y) + (Z) + (AA) + (BB) + (CC) + (DD) + (EE)






 









 






	 	 	 
	“New Price”	 	 
	Element	 	Assumption or Equation
	Railcar Capital
	 	 
	GG
	 	Same as (D)
	HH
	 	Same as (K)
	II
	 	[(GG) * 100000] / [(HH) * 2000]
	JJ
	 	Input from REI
	KK
	 	Input from REI
	LL
	 	Same as(O)
	MM
	 	Input from REI
	NN
	 	(II) /[(8760 * (KK) / (JJ) * (LL)] * [1 + (MM)]
	OO
	 	Input from REI, taken from market survey
	PP
	 	(NN) * (OO)
	QQ
	 	(PP) * 0.0141 {Ad valorem tax rates provided by REI’s corporate tax department; Railcar ad valorem tax rate @ 1.41% of net book value}
	 
	 	 
	Railcar Unloading Facility
	 	 
	RR
	 	Railcar unloading facility costs taken from REI engineering analysis
	SS
	 	(RR) * 0.46 * 0.020376 {Ad valorem, tax rates provided by REI’s corporate tax department;   Railcar unloading facility ad valorem tax rate @ $2.0376 per $100 based on 46% of cost}
	TT
	 	Railcare unloading facility operating cost as proposed by NWR
	 
	 	 
	Final Reclamation
	 	 
	UU
	 	Final reclamation cost taken from 2nd Quarter.  1999, Jewett Mine report







 









 








Exhibit B




Page 5 of 5




Settlement Agreement and Amendment of Existing Contrasts




Assumptions/Calculations for Data on Page 1 of 5 (Calculation of “New Price” for

Lignite) of this Exhibit B




	 	 	 
	“New/Price”	 	 
	Element	 	Assumption or Equation
	1
	 	(E), From Assumptions in “New Price” Calculation {Page 2 of this Exhibit B}
	2
	 	(N), From Assumptions in “New Price” Calculation {Page 2 of this Exhibit B)
	3
	 	(V), From Assumptions in “New Price” Calculation {Page 2 of this Exhibit B}
	4
	 	(QQ), From Assumptions in “New Pace” Calculation {Page 2 of this Exhibit B}
	5
	 	(SS), From Assumptions in “New Price” Calculation {Page 2 of this Exhibit B}
	6
	 	(TT), From Assumptions in “New Price” Calculation {Page 2 of this Exhibit B}
	7
	 	(FF), From Assumptions in “New Price” Calculation {Page 2 of this Exhibit B}
	8
	 	(1)+(2)+(3)+(4)+(5)+(6)+(7)
	9
	 	(PP), From Assumptions in “New Price” Calculation {Page 2 of this Exhibit B}
	10
	 	(RR), From Assumptions in “New Price” Calculation {Page 2 of this Exhibit B}
	11
	 	(9) + (10)
	12
	 	(II) * 0.1530 [15.30% - REI pretax cost of capital}
	13
	 	(UU), From Assumptions in “New Price” Calculation {Page 2 of this Exhibit B}
	14
	 	(13) * 0.0759 {7.59% = REI pretax cost of debt}
	15
	 	(8) + (12) + (14)
	16
	 	Input from CQIM model output: “Total fuel used (mmBtu)” under column “Lignite 800 GMW” {Page 3 of this Exhibit B}
	17
	 	(15)/(16)