Exhibit 10.7


 


	
   

  	
   

  	
  1000 Superior Blvd., Suite 201

  	
   

  	
  914 North Golden Prairie

  
	
   

  	
   

  	
   

  	
   

  	
  Burton,
  Kansas

  
	
   

  	
  U.S. ENERGY

  	
   

  	
  Wayzata, MN 55394-1873

  	
   

  	
  Office
  316 835-2399

  
	
   

  	
  SERVICES, INC.

  	
   

  	
  Office 952 473-4300

  	
   

  	
  Fax      316
  835-6507

  
	
   

  	
   

  	
  Fax   952
  473-1224

  	
   

  	
   

  



 


March 9,
2004


 


Bill
Pracht, President


Kansas
Agri-Energy


210
1⁄2 East 4th


Garnett,
KS 66032


Dear
Mr. Pracht:


 


The
purpose of this letter is to set forth the understanding and agreement between
U.S. Energy Services, Inc. (“U.S. Energy”) and East
Kansas Agri-Energy LLC (EKAE).


 


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


 


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


 


A. Energy Infrastructure Advisory Services During the
Construction Period


 


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


 


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


 


2.                                       Determine whether firm, interruptible, or a
blend of transportation entitlement will provide the lowest burnertip
cost.  Factors that will be considered
include pipeline credits for the new interconnect, cost of an alternate fuel
system, and availability of specific receipt point capacity.


 


3.                                       Provide advisory services to EKAE regarding
electric pricing and service agreements.


 


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


 

















 


U.S. Energy Initials   /s/


 


EKAE Initials /s/


 


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


 


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


 


4.                                       Evaluate the proposed electric distribution
infrastructure (substation) for reliability, future growth potential and
determination of the division of ownership of facilities between the utility
and the Plant.


 


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


 


B. On-Going Energy Management Services Following the
Completion Period


 


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


 


Provide
natural gas supply information to minimize the cost of natural gas
purchased.  This will include acquiring
multiple supply quotes and reporting to EKAE the various supply
index and fixed prices. U.S. Energy will not take title to EKAE gas supplies, but will communicate supply
prices and potential buying strategies.


 


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


 


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


 


4.                                       Provide daily nominations to the suppliers,
pipeline, and other applicable shippers for natural gas deliveries to the
Plant.  This will include daily
electronic confirmations to EKAE
of all nominations and actual
daily usage.  U.S. Energy will utilize
customer or utility supplied telemetering to obtain actual usage data.


 


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


 


6.                                       Provide a monthly usage report of electric
energy consumption and costs. Also, where applicable and available from the
utility, obtain monthly interval electric load data and provide monthly load
profile graphs.


 


7.                                       On going review and renegotiation of electric
service costs, as required.  This may
include:


 

















 


 


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


 


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


 


c.                                       Identifying on-site generation opportunities
as market conditions change.


 


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


 


8.                                       Provide natural gas and electric energy
operating budgets for the Plant.


 


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


 


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


 


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


 


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


 


TAXES: EKAE will be responsible for payment of all taxes including, but not
limited to, all sales, use, excise, BTU, heating value and other taxes
associated with the purchase and/or transport of natural gas or electricity and
the provision of services hereunder.


 


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


 

















 


known
to be prohibited from disclosing such information to U.S. Energy by legal,
contractual or fiduciary obligation to the supplier, or (d) is required by U.S.
Energy to be disclosed by court order, or (e) is permitted by EKAE.  All
such information shall be and remain the property of EKAE unless such
information is subject to another Confidentiality Agreement, and upon the
termination of this Agreement, U.S. Energy shall return all such information
upon EKAE’s request.  Notwithstanding
anything to the contrary herein, U.S. Energy shall not disclose any information
which is in any way related to this Agreement or U.S. Energy’s services
hereunder without first discussing such proposed disclosure with EKAE.


 


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


 


	
  East
  Kansas Agri-Energy:

  	
   

  	
  East
  Kansas Agri-Energy LLC

  
	
   

  	
   

  	
  Attn:
  Jill Zimmerman

  
	
   

  	
   

  	
  PO
  Box 225

  
	
   

  	
   

  	
  Garnett,
  KS 66032

  
	
   

  	
   

  	
   

  
	
  U.S.
  Energy:

  	
   

  	
  U.S.
  Energy Services, Inc.

  
	
  (Payment)

  	
   

  	
  c/o
  US Bank SDS 12-1449

  
	
   

  	
   

  	
  Account
  #: 173100561153

  
	
   

  	
   

  	
  P.O.
  Box 86

  
	
   

  	
   

  	
  Minneapolis,
  MN 55486

  
	
   

  	
   

  	
   

  
	
  (Notices):

  	
   

  	
  U.S.
  Energy Services, Inc. 1000

  
	
   

  	
   

  	
  Superior
  Blvd, Suite 201

  
	
   

  	
   

  	
  Wayzata,
  MN 55391

  
	
   

  	
   

  	
  Attn:
  Bruce L. Hoffarber

  



 


ASSIGNMENT OR AMENDMENT:  The Agreement may not be assigned or amended
without the written consent of U.S. Energy and EKAE.


 


APPLICABLE LAW:  The Agreement shall be construed in
accordance with the laws of the State of Kansas.


 


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


 

















 


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


 


Sincerely,


 


 


U.S. ENERGY SERVICES, INC.


 


	
  By: 

  	
        /s/
  Todd D. Overgard

  	
  (Sign)

  	
   

  
	
   

  	
   

  
	
  Name: 

  	
  Todd D. Overgard

  	
  (print)

  	
   

  
	
   

  	
   

  
	
  Title:  Chief Operating Officer

  	
   

  
	
   

  	
   

  
	
  Date:  March 15, 2004

  	
   

  
					



 


 


ACCEPTED AND DATED TO THIS


15th DAY OF MARCH, 2004.


 


EAST KANSAS AGRI-ENERGY, LLC


 


	
  By: 

  	
  /s/ William R.
  Pracht

  	
  (Sign)

  	
   

  
	
   

  	
   

  
	
  Name:  

  	
  William R. Pracht

  	
  (print)

  	
   

  
	
   

  	
   

  
	
  Title:  Chairman

  	
   

  
	
  Date:  3-9-04