Reciprocal Iru Lease And Exchange Option Agreement

RECIPROCAL IRU LEASE AND EXCHANGE OPTION AGREEMENT


This Reciprocal IRU Lease and Exchange Option Agreement ("AGREEMENT") is made as of the 25th day of February, 2000, by and among TOUCH AMERICA, INC., a Montana corporation, with offices at 130 North Main, Butte, Montana 59701 ("TA") and PF. NET CONSTRUCTION CORP., with offices at 1625 B Street, Washougal, Washington 98671 ("PFN"), sometimes referred to herein individually as "PARTY" and collectively as "PARTIES."


RECITALS


WHEREAS, TA will own and maintain a conduit and fiber optic communication system as generally set forth in EXHIBIT A attached hereto (the "TA SYSTEM");


WHEREAS, PFN will own and maintain a conduit and fiber optic communication system as generally set forth in EXHIBIT B attached hereto (the "PFN SYSTEM" and collectively with the TA System, the "SYSTEM");


WHEREAS, TA intends to lease IRUs ("INDEFEASIBLE RIGHT TO USE" or "IRU" as defined more particularly in Article 34 of this Agreement) relating to the TA System to PFN for a term of years and PFN intends to lease IRUs relating to the PFN System to TA for a term of years;


WHEREAS, the Parties intend that, in the absence of modification, the reciprocal leases of IRUs shall be classified as "true leases" for federal income tax purposes;


WHEREAS, the Parties intend that, during the term of the reciprocal leases of IRUs, each Party will have a mutually exercisable option to extend the term of such leases;


WHEREAS, the Parties intend that an exercise of the option to extend the terms of the reciprocal leases would effect a transfer of ownership of the IRUs for federal income tax purposes and that such mutual transfers will be treated as an exchange of property of like kind within the meaning of section 1031 of the Internal Revenue Code of 1986, as amended ("CODE");


WHEREAS, each Party is referred to herein as the "CONSTRUCTING PARTY" for its System and as the "NONCONSTRUCTING PARTY" for the other party's System;


WHEREAS, the Parties desire to set forth herein the terms and conditions agreed upon with respect to the aforementioned transactions.


NOW, THEREFORE, in consideration of the mutual promises set forth below, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:


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ARTICLE 1. CONSTRUCTION OF THE SYSTEMS


1.1 The Parties understand and agree that the actual route of the TA System and the PFN System shall be as set forth in EXHIBIT A or EXHIBIT B, as applicable; PROVIDED, however, that each of TA and PFN may deviate from the route set forth in EXHIBIT A or EXHIBIT B, as applicable, as long as each System traverses through (i) each named pair of cities (each, a "LINK") as designated on EXHIBIT A or EXHIBIT B, as applicable, and (ii) the POP locations (the portion between the POP locations being a "ROUTE") as set forth on EXHIBIT A-1 or EXHIBIT B-1, respectively.


1.2 On the Completion Date of each Constructing Party, such Constructing Party warrants and represents that its System shall be designed, engineered, installed and constructed (i) in compliance in all material respects with any and all applicable building, construction and safety codes for such construction and installation, as well as any and all other applicable governmental laws, codes, ordinances, statutes and regulations; and (ii) to perform in accordance with the specifications set forth in EXHIBITS C-1, C-2 AND C-3 for the TA System and EXHIBITS C-4, C-5, AND C-6 for the PFN System.


1.3 On the Completion Date of each Constructing Party, such Constructing Party warrants and represents that it has performed a complete and detailed engineering and design of such Constructing Party's System, including the development of system performance criteria for such Constructing Party's System.


1.4 On the Completion Date of each Constructing Party, such Constructing Party warrants and represents that it has performed all necessary surveying and mapping for its System, including, without limitation:


1.4.1 A complete locations survey of its respective System, including staking and marking thereof, in accordance with standard telecommunication engineering practices.


1.4.2. A complete locations survey of sites for regeneration stations, if any, and other facilities in accordance with standard telecommunications engineering practices.


1.5 On the Completion Date of each Constructing Party, such Constructing Party warrants and represents that it shall have acquired the Constructing Party's Required Rights (as defined in Article 9).


1.6 Subject to any restrictions including but not limited to right-of-way restrictions and other protocols, each Nonconstructing Party shall have the right, at its own expense and without unreasonable interference with the activities of the Constructing Party or the construction schedule, to observe construction of the System and to ensure that all construction is performed in accordance with the provisions of this Agreement. Each Constructing Party shall keep each Nonconstructing Party advised of the progress of the construction and installation of


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its System in order to facilitate Nonconstructing Party's right to conduct such observations. The right of the Nonconstructing Party to observe shall include, but not be limited to, the following:


1.6.1 Observing construction operations, including, but not limited to, clearing, grading, ditching, fiber placement, splicing, and clean-up; and


1.6.2 Observing tests of the fiber within the System, which observation shall not unreasonably interfere with such tests.


Any questions or concerns that a Nonconstructing Party may have regarding the Constructing Party's construction shall be directed as follows:


If to TA: Duane Wright
Project Manager Telephone: 406-442-8788
Facsimile: 406-4428730


If to PFN: Thomas R. McCaleb Telephone: 713-544-6022
Facsimile: 713-544-4366


ARTICLE 2. RECIPROCAL LEASES OF IRUS


2.1 Certain fibers and conduits are identified in Exhibit G as the TA IRU and the PFN IRU. It is understood that said fibers and conduits are sometimes referred to hereafter individually as "FIBERS" and "CONDUIT" and collectively as the "IRU FIBERS AND CONDUITS"


2.2 INTENTIONALLY DELETED


2.3 Upon the terms, covenants and conditions contained in this Agreement, effective on the Both Party Completion Date, TA hereby leases to PFN the TA IRU (the "TA IRU LEASE").


2.4 Upon the terms, covenants and conditions contained in this Agreement, effective on the Both Party Completion Date, PFN hereby leases to TA the PFN IRU (the "PFN IRU LEASE").


2.5 The term "IRU LEASES" shall refer collectively to the TA IRU Lease and the PFN IRU Lease.


2.6 Except as provided in Article 2.7, the initial term of the IRU Leases shall begin on the Both Party Completion Date and shall end twenty (20) years from the Both Party Completion Date ("INITIAL IRU LEASE TERM").


2.7 The initial term of the IRU Leases for the TA System Dallas to Denver and Chicago to Detroit Links (the "SPECIAL IRU LEASES") shall begin on the Both Party Completion


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Date and shall end eighteen (18) years from the Both Party Completion Date ("SPECIAL IRU LEASE TERM").


2.8 The Parties understand and intend that each of the IRU Leases will be classified as "true leases" for federal income tax purposes and for state and local tax purposes. The Parties further intend that each of the IRU Leases shall comply with the true lease guidelines issued by the Internal Revenue Service as set forth in Revenue Procedure 75-21, 1975-1 CB 715. The Parties agree to file all federal, state and local tax returns in a manner consistent with the classification of the IRU Leases as true leases, except as otherwise required by law, and not to take any position inconsistent therewith. The Parties understand and intend that the IRUs will be held for productive use in a trade or business as a result of the IRU Leases.


2.9 The Parties anticipate that there will be a difference in the total number of Fiber Miles ("FIBER MILE DIFFERENCE") and Conduit Miles ("CONDUIT MILE DIFFERENCE") between the TA IRUs and the PFN IRUs on the Both Party Completion Date. The Party which receives IRU Leases having a fewer number of Fibers Miles and/or Conduit Miles than the other Party shall be entitled to a one-time payment ("TRUE-UP PAYMENT"). The True-Up Payment shall equal the sum of (i) the Fiber Mile Difference multiplied by the Fiber Mile Value, as set forth in ADDENDUM 1 hereto, and (ii) the Conduit Mile Difference multiplied by the Conduit Mile Value, as set forth in ADDENDUM 1 hereto. The True-Up Payment shall be determined by reference to the information set forth in EXHIBIT G hereto. The True-Up Payment shall be made in accordance with the schedule set forth in Addendum 1 and shall be made by wire transfer to an account specified by the Party entitled to receive the True-Up Payment.


2.10 The Parties agree to allocate the True-Up Payment in equal amounts to each month of the IRU Lease Term and the Special IRU Lease Term for federal, state and local tax purposes. The Parties understand and agree that a portion of each allocation of the True-Up Payment will include a rent component and an interest component which will be determined in a manner consistent with the Treasury Regulations issued under Code section 467. It is understood and agreed by the Parties that such allocation of the True-Up Payment shall be used for federal and all applicable state and local tax purposes. The Parties agree to file all federal, state and local tax returns in a manner consistent with the allocation described in this Article 2.10, except as otherwise required by law, and not to take any position inconsistent therewith.


2.11 During the Initial IRU Lease Term and the Special IRU Lease Term, as applicable, each Constructing Party will exercise its best efforts to renew or replace existing rights-of-way, IRUs or other underlying rights to continue to maintain such Constructing Party's System in place during such periods. If, despite its best efforts, the Constructing Party determines that it cannot renew or replace any of its existing rights-of-way, IRUs or other underlying rights, then the Constructing Party shall cooperate with the Nonconstructing Party and allow the Nonconstructing Party to attempt to renew or replace such right-of-way, IRU or other underlying right, but at the Nonconstructing Party's sole expense. The ability of the Constructing Party to renew or replace existing rights-of-way, IRUs or other underlying rights


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shall not affect, or produce an adjustment to, any fee payable under Article 2.9, Article 7 or Article 8.


ARTICLE 3. COMPLETION OF SYSTEM CONSTRUCTION


3.1 The Parties understand and intend that the scheduled date for completion of all construction, installation and Fiber Acceptance Testing of the TA System and the PFN System shall be December 31, 2001. TA and PFN each shall use commercially reasonable efforts to complete all construction and testing obligations by such date.


3.2 Prior to the Both Party Completion Date, the Parties may mutually agree to enter into reciprocal leases of IRUs relating to completed portions of the TA System and the PFN System ("ADVANCE IRU LEASES"). The Parties understand and agree that the Advance IRU Leases will be undertaken only to the extent that the Fiber Miles included in the Advance IRU Leases of each Party are substantially equivalent.


ARTICLE 4. ACCEPTANCE AND TESTING OF IRU FIBERS AND CONDUIT


4.1 Prior to the Both Party Completion Date, and except as provided below, Constructing Party or its designee shall test and verify the Fibers in the Nonconstructing Party's IRU Fibers and Conduit in accordance with the procedures specified in EXHIBIT C-3 ("TA Link Fiber Cable Splicing, Testing and Acceptance Standards") for the TA System and EXHIBIT C-6 ("PFN Link Fiber Splicing, Testing and Acceptance Standards") for the PFN System (collectively, "FIBER ACCEPTANCE TESTING") to verify that the respective Fibers within the IRU Fibers and Conduit are operating in accordance with the specifications in EXHIBIT C-2 and EXHIBIT C-3 for the TA System and EXHIBIT C-5 and EXHIBIT C-6 for the PFN System. Constructing Party shall provide Nonconstructing Party with three (3) business day's written notice prior to the first day of testing. Fiber Acceptance Testing shall progress along the Routes and Links as cable splicing is completed, so that test results may be reviewed in a timely manner.


4.2 Within fourteen (14) days of the conclusion of the Fiber Acceptance Testing, the Constructing Party shall provide the Nonconstructing Party with a copy of the test results. Upon receipt of Constructing Party's Fiber Acceptance Testing results, the Nonconstructing Party shall have seven (7) days to provide written notice stating the reasons the test results are unacceptable to the Nonconstructing Party. In the case of such written notice by Nonconstructing Party rejecting the Fiber Acceptance Testing, Constructing Party shall conduct as many as two (2) additional tests on the Fibers within the IRU Fibers and Conduit in the manner set forth in Exhibit C, as applicable to each Party, and shall resubmit each test result to the Nonconstructing Party in accordance with the provisions of this Article 4.2.


4.3 The Parties understand and agree that TA has completed Fiber Acceptance Testing for the Denver to Dallas portion of the TA System. Unless, pursuant to Article 3, PFN requests such test results prior to the Both Party Completion Date, TA shall provide the Fiber Acceptance Testing results for the Denver to Dallas portion of the TA System at the time it provides Fiber Acceptance Testing results for the last Link of the TA System. In either case, the


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procedures set forth in Article 4.2 and Article 4.4 shall apply to the acceptance by PFN (as the Nonconstructing Party) of the Denver to Dallas Fiber Acceptance Testing results as of the date PFN actually receives the Denver to Dallas Fiber Acceptance Testing results.


4.4. The Nonconstructing Party shall be deemed to have accepted the IRU Fibers and Conduit unless it notifies the Constructing Party within seven (7) days of receipt of the Constructing Party's Fiber Acceptance Testing results that such results are unacceptable. If the results of Constructing Party's Fiber Acceptance Testing are within the parameters of the specifications in EXHIBIT C-2 and EXHIBIT C-3 for the TA System and EXHIBIT C-5 and EXHIBIT C-6 for the PFN System, the Nonconstructing Party, within seven (7) days of receipt of the test results, shall provide the Constructing Party with a written notice accepting the Fiber Acceptance Testing results for the Constructing Party's IRU Fibers and Conduit.


4.5 The date of the notice of acceptance or the date of deemed acceptance, as the case may be, of the Nonconstructing Party's IRU Fibers and Conduit with respect to the final Route in a Link to be tested shall be the "LINK IRU ACCEPTANCE DATE." The Link IRU Acceptance Date with respect to the completion of the final Link of the PFN System shall be the "TA IRU ACCEPTANCE DATE." The Link IRU Acceptance Date with respect to the completion of the final Link of the TA System shall be the "PFN IRU ACCEPTANCE DATE."


ARTICLE 5. SYSTEM DOCUMENTATION


Prior to the Both Party Acceptance Date, and within ninety (90) days following a Link IRU Acceptance Date, the applicable Constructing Party shall provide the Nonconstructing Party with documentation ("DELIVERABLES") which shall consist of the following:


5.1 As-built drawings in accordance with Exhibit D-1 for the TA Link and Exhibit D-2 for the PFN Link, as applicable.


5.2 Technical specifications of the optical fiber cable and associated splices, regenerators and other equipment placed in the Link, as the case may be.


ARTICLE 6. EXCHANGE OPTION


6.1 Subject to the condition described in Article 6.3, on the first business day that is two years after the Both Parties Completion Date (the "EXCHANGE OPTION DATE"), the Parties by notification as described in this Article 6 may extend of the Initial IRU Lease Term and the Special IRU Lease Term to thirty-eight (38) years from the Both Party Completion Date (such period being the "EXCHANGE PERIOD" and such option being the "EXCHANGE OPTION"). The Exchange Option shall be exercisable only as to all IRU Leases.


6.2 Within one hundred and twenty (120) days prior to the Exchange Option Exercise Date (the "EXCHANGE OPTION NOTIFICATION PERIOD"), but not prior to such time, each Party may notify the other Party in writing of its intention to exercise the Exchange Option (the


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"EXCHANGE OPTION NOTIFICATION"). If either Party provides the Exchange Option Notification, then the Exchange Option shall be deemed exercised by both Parties on the Exchange Option Date.


6.3 If, following the steps outlined in Article 6.6, the Parties cannot keep the existing right-of-way, IRU's or other underlying rights in place for TA's Denver to Dallas and/or Chicago to Detroit Links for the entire Exchange Period or a shorter time, then the Exchange Period for TA's Denver to Dallas and/or Chicago to Detroit Links shall terminate eighteen years after the Both Party Completion Date. If the Parties are able to renew or replace all material existing rights-of-way, IRUs or other underlying rights necessary for the Denver to Dallas and/ or the Chicago to Detroit Link, then the Exchange Period with respect to the TA IRU in the TA System Denver to Dallas and/or Chicago to Detroit Links shall continue for so long as the term remaining under any material R of W Agreement, IRU or other underlying right continues through the remainder of the Exchange Period. Extension of the Exchange Period shall be governed by Article 6.6.


6.4 The Parties understand and intend that the exercise of the Exchange Option shall effect (i) a transfer of ownership for federal, state and local tax purposes of the TA IRUs to PFN and (ii) a transfer of ownership for federal, state and local tax purposes of the PFN IRUs to TA, as of the Exchange Option Date. The Parties further intend to treat the exercise of the Exchange Option as a mutual exchange of property of like kind within the meaning of section 1031 of the Code or any successor provision ("LIKE KIND EXCHANGE"). The Parties agree to file all federal, state and local tax returns in a manner consistent with the classification of the Exchange Option as a Like Kind Exchange, except as otherwise required by law, and not to take any position inconsistent therewith, except as may be required solely for financial accounting purposes. Following the Like Kind Exchange, TA shall hold the PFN IRUs for productive use in a trade or business, and PFN shall hold the TA IRUs for productive use in a trade or business.


6.5 The Parties understand and agree that upon exercise of the Exchange Option, the portion of the True-Up Payment that has not been allocated to periods prior to the Exchange Option Date (the "UNALLOCATED TRUE-UP PAYMENT") shall be taken into account for federal, state and local tax purposes as of the Exchange Option Date as part of the consideration associated with the exercise of the Exchange Option. The Parties agree to file all federal, state and local tax returns in a manner consistent with such treatment of the Unallocated True-Up Payment, except as otherwise required by law, and not to take any position inconsistent therewith, except as may be required solely for financial accounting purposes.


6.6. Subject to Article 6.3, each Constructing Party will exercise commercially reasonable efforts to renew or replace existing right-of-way, IRU's or other underlying rights to continue to maintain such Party's Conduit in place beyond the Exchange Period. If, despite commercially reasonable efforts, the Constructing Party determines that it cannot renew or replace its existing rights-of-way, IRU's or other underlying rights, then the Constructing Party shall cooperate with the Nonconstructing Party and allow the Nonconstructing Party to attempt to renew or replace such right-of-way, IRU's or other underlying rights, but at the Nonconstructing Party's sole expense. If a Party is able to renew or


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replace all material existing rights-of-way, IRUs or other underlying rights to continue to maintain the applicable Conduit in place for the applicable renewal term, the IRU granted under this Agreement with respect to Conduit may be renewed by the Nonconstructing Party for two renewal terms of ten (10) years each or, if shorter, the term remaining under any material R of W Agreement, IRU or other underlying right (a "RENEWAL TERM"). The IRU of a Nonconstructing Party with respect to fiber shall not be renewable and shall expire at the expiration of the Exchange Period. Between March 31 and July 1 of the calendar year preceding the calendar year of the expiration of the Exchange Period or the then effective Renewal Term, the Constructing Party shall give notice to the Nonconstructing Party of the Constructing Party's determination as to whether it will renew or replace its existing rights-of-way, IRU's or other underlying rights. All terms and conditions of this Agreement shall be applicable to any Renewal Terms; provided, however, there shall be no adjustment or refund of any fee payable under Paragraph 2.9 of the Article entitled Reciprocal Leases of IRUs or Paragraph 7.1 of the Article entitled Collocation and Interconnection or Paragraph 8.1 of the Article entitled Operation, Maintenance and Repair of the System. Further, in the event only one party exercises its renewal right, in addition to the continued applicability of the other terms of this Agreement, the exercising party shall pay the nonexercising party annual fees, equal to the then fair market value, for (i) the right to use the Conduit, (ii) the maintenance of the Conduit by the Constructing Party and (iii) the use of collocation space. 6.7 The Parties understand and agree that, in the event the Exchange Option is not exercised, the IRU Leases shall remain in effect in accordance with the provisions of Article 2 of this Agreement.


ARTICLE 7. COLLOCATION AND INTERCONNECTION


7.1 The Constructing Party will provide the Nonconstructing Party collocation space at all optical amplifier, regenerator, junction and POP sites along its Links in locations controlled by the Constructing Party. The Constructing Party will provide such collocation space in secure shelters with the standard HVAC, commercial AC power, DC power, heat and door alarms, as well as diesel or gasoline generator and battery backup as provided in EXHIBIT F at a cost to be agreed upon by the Parties.


7.2 Subject to the provisions herein, Nonconstructing Party shall be responsible for all costs to connect its facilities with its IRU Fibers and Conduit. Subject to EXHIBIT F, Nonconstructing Party may connect its system or other fiber optic systems controlled by it with its IRU Fibers and Conduit at its sole cost, at any optical amplifier, regenerator or junction site or other splice points agreed to by the Parties; PROVIDED, however, any connection requiring a splice to be entered shall be performed by the Constructing Party at the Nonconstructing Party's sole expense. To schedule a connection of this type, the Nonconstructing Party shall coordinate the work at least thirty (30) days in advance of the date the connection is requested to be completed. Constructing Party shall use commercially reasonable efforts to accommodate the request.


7.3 Constructing Party may prohibit Nonconstructing Party from making a


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connection if Constructing Party can demonstrate to Nonconstructing Party's reasonable satisfaction that use of a proposed Connecting Point would materially and adversely affect the Constructing Party's System. Nonconstructing Party shall not employ equipment or technologies that would interfere with the use of, or cause damage to, any fibers or conduit in the System.


ARTICLE 8. OPERATION, MAINTENANCE AND REPAIR OF THE SYSTEMS


8.1 During the Term hereof, the Constructing Party or its designee shall be responsible, at its sole expense, for the emergency and nonemergency training of personnel, maintenance and repair of the Constructing Party's System, the Nonconstructing Party's IRU Fibers and Conduit and any common equipment of the Parties on the Constructing Party's System, all pursuant to the operations specifications set forth on Exhibit E so as to assure continuing conformity of the Constructing Party's System and the Nonconstructing Party's IRU Fibers and Conduit with their respective specifications, including replacement of individual fibers and any maintenance as is reasonably necessary for the normal operation of the Constructing Party's System and the Nonconstructing Party's IRU Fibers and Conduit at a cost agreed upon by the Parties. To the extent the Constructing Party provides maintenance or repair services for fibers or conduit that relate to the Non-constructing Party's IRU, it is understood and agreed by the Parties that such maintenance or repair services are rendered by the Constructing Party in its capacity as an independent contractor for the Non-constructing Party. The Constructing Party, at the Nonconstructing Party's sole expense and at the Constructing Party's then prevailing rates, shall perform maintenance and repair necessitated by the Nonconstructing Party's negligence, willful misconduct, or its elective maintenance or repair requests. The Constructing Party shall not be responsible for maintenance or repair of any Nonconstructing Party's equipment except as set forth above.


8.2 The Constructing Party may subcontract for maintenance and repair services hereunder. Notwithstanding any other provisions of this Agreement, the Constructing Party shall require the subcontractor(s) to meet maintenance and repair standards for the Constructing Party's System which shall be at least as high as those standards utilized by the Constructing Party for the maintenance and repair of other portions of its communications systems. The Constructing Party shall be responsible for splicing of the cables in the Constructing Party's System so as to assure continuing conformity with their respective specifications, including, without limitation, conducting continual monitoring of the cable system containing the Nonconstructing Party's IRU Fibers and Conduit in the Constructing Party's System, location of faults, splicing and splice testing associated with any repair, and procurement of replacement cable used in repair. The Constructing Party shall, at no charge to the Nonconstructing Party, perform or cause its subcontractor(s) to perform, routine inspections of the Constructing Party's System and routine right-of-way maintenance in accordance with its standard maintenance procedures, including, without limitation, any flights that may be made over the routes where the Constructing Party's System is located. The use of any such subcontractor shall not relieve the Constructing Party of its obligations hereunder.


8.3 The Nonconstructing Party will perform all maintenance on Nonconstructing


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Party's equipment (other than common equipment) on the Constructing Party's System. However, in the event the Nonconstructing Party requests, a ...