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AGREEMENT


dated as of September 30, 1998


BY AND AMONG


PEABODY NATURAL RESOURCES COMPANY ("PNRC"),
a Delaware general partnership,


GALLO FINANCE COMPANY ("Gallo"),
a Delaware corporation and


CHACO ENERGY COMPANY ("Chaco"),
a New Mexico corporation


iii


INDEX


Section Page


RECITALS 1 1 Sale and Purchase of the Assets 1.1 Assets 2 1.2 Closing Date 2 1.3 Disclaimer of Warranties 2 2 Prepayment of Advance Royalties and Purchase Price; Payment of
Net Payment 2.1 Prepayment of Advance Royalties 3 2.2 Adjustment to Net Payment 4 2.3 Payment at Closing 4 3 Representations and Warranties 3.1 Chaco's Representations and Warranties 5 3.2 Gallo's and PNRC's Representations and Warranties 9 4 Due Diligence 11 5 Covenants of Chaco 5.1 Conduct of Business Pending Closing 12 5.2 Access 12 5.3 Certain Electric Power Options 13 5.4 Consents Not Obtained 13 5.5 Delivery and Maintenance of Records 13 5.6 No Liquidation, Dissolution or Bankruptcy 14


6 Conditions Precedent 6.1 Gallo's and PNRC's Conditions 14 6.2 Chaco's Conditions 15 7 Closing 7.1 The Closing 16 7.2 Documents to be Delivered at Closing 16 7.3 Execution of Assignment, Notice, and Transfer Documents 17


7.4 Payment of Net Payment 17 8 Assumptions by Gallo 17 9 Tax Prorations 18 10 Termination 10.1 Termination Events 19 10.2 Effect of Termination 19 11 Survival, Indemnification and Liability 11.1 Survival 19 11.2 Gallo's and PNRC's Indemnification 19 11.3 Chaco's Indemnification 20 11. 4 Release and Covenant Not to Sue by Gallo and PNRC 20 11.5 Release and Covenant Not to Sue by Chaco 21 11.6 Limitation of Liability 21 12 Further Assurances 21 13 Access to Records by Chaco 22 14 Notices 22 15 Assignment 22 16 Governing Law 23 17 Expenses and Fees 23 18 Integration 23 19 Modification 23 20 Independent Investigation 23 21 Multiple Originals 24 22 Announcements 24 23 Negotiation of Agreement 25


EXHIBITS, ATTACHMENTS AND SCHEDULES


EXHIBIT A Schedule of Contracts EXHIBIT B Description of Properties EXHIBIT C Description of Other Interests ATTACHMENT I Assignment, Conveyance, Assumption, Consent And Release Agreement ATTACHMENT II Special Warranty Deed


2


AGREEMENT


THIS AGREEMENT ("Agreement") is made effective as of the 30th day of September, 1998 (the "Effective Date") between Chaco Energy Company, a New Mexico corporation ("Chaco"), Peabody Natural Resources Company, a Delaware general partnership (formerly called Hanson Natural Resources Company) ("PNRC") and Gallo Finance Company, a Delaware corporation and an affiliate of PNRC ("Gallo"). Chaco, PNRC and Gallo will be individually referred to herein as a "Party" and collectively as the "Parties."


RECITALS:


WHEREAS, Chaco is the lessee under that certain Coal Lease dated and effective as of April 15, 1977 from Hospah Coal Company, as lessor, to Chaco, as amended by Modification No. 1 dated February 12, 1981, as amended and restated by Modification No. 2 effective as of February 28, 1990, and as further amended by Amendment To Coal Lease dated June 25, 1993 (the Coal Lease, as so amended, being referred to in this Agreement as the "Lease"); Memoranda of the Lease being recorded with the Clerk of McKinley County, New Mexico in Book 47 of Leases, Pages 338 through 342; in Book 52 of Leases, Pages 302 through 305; and in Book 1 COMP, Pages 6051 through 6054; and


WHEREAS, PNRC has succeeded to the rights of Hospah Coal Company as lessor under the Lease; and WHEREAS, Chaco is a wholly-owned subsidiary of Texas Utilities Company ("TUC"), which assured the performance of certain of Chaco's obligations under the Lease pursuant to that surety agreement dated April 15, 1977, as amended and restated by Amended and Restated Surety Agreement effective February 28, 1990 between TUC and Hospah Coal Company (the original surety agreement, as amended and restated, being referred to in this Agreement as the "Surety Agreement"); and


WHEREAS, Chaco wishes to prepay the net present value of all remaining advance royalties that may become payable under the Lease and PNRC wishes to accept such payment; and


WHEREAS, Gallo wishes to acquire from Chaco and to assume all obligations and liabilities on or after the Closing Date with respect to, and Chaco wishes to assign to Gallo, all of Chaco's interest in: (i) the Lease, (ii) certain related contracts and (iii) certain related properties in McKinley County, New Mexico; and Gallo and PNRC wish to release Chaco and TUC from: (a) all such obligations and liabilities relating to the Lease, the contracts, the properties; and (b) the Surety Agreement, as hereinafter described.


NOW, THEREFORE, in consideration of the premises, together with other good and valuable consideration, the receipt and sufficiency of which are acknowledged by all Parties, Chaco, PNRC and Gallo agree as follows:


1. Sale and Purchase of the Assets.


1.1 Assets. Subject to the terms and conditions in this Agreement,
Chaco agrees to sell, assign, convey and deliver to Gallo, and Gallo agrees
to accept and receive and to pay $27,500,000.00 (the "Purchase Price") for,
all of Chaco's interest in and to the following (collectively, the
"Assets"):


1.1.1 the Lease;


1.1.2 the contracts (the "Contracts") described in Exhibit A
attached to and made a part of this Agreement;


1.1.3 certain surface lands, oil, gas, coal, mineral and other
interests in McKinley County, New Mexico (the "Properties"), which are
described in Exhibit B attached to and made a part of this Agreement;
and


1.1.4 certain coal leases and rights of way (the "Other
Interests"), which are described in Exhibit C attached to and made a
part of this Agreement.


1.2 Closing Date. The transfer of the Assets from Chaco to Gallo will
occur and be effective at the date of Closing (the "Closing Date").


1.3 Disclaimer of Warranties. Except as specifically set forth in this
Agreement and the Assignment (which is described in Section 7.2.1), the
Deed (which is described in Section 7.2.3), and the Transfer Documents
(which are described in Section 7.2.4), the Assets will be conveyed without
warranties of any kind and EXCEPT TO THE EXTENT SET FORTH IN THIS
AGREEMENT, THE ASSIGNMENT, THE DEED, AND THE TRANSFER DOCUMENTS TO THE
CONTRARY, CHACO EXPRESSLY DISCLAIMS ALL WARRANTIES OF ANY KIND, EITHER
STATUTORY, EXPRESS OR IMPLIED, WITH RESPECT TO THE ASSETS, INCLUDING,
WITHOUT LIMITATION, THE DISCLAIMER OF ANY WARRANTIES AS TO TITLE,
HABITABILITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR THE
PRESENCE OF COAL ON THE LEASED PREMISES, AND ASSIGNEE ACCEPTS THE ASSETS
"WITH ALL FAULTS," "AS-IS," WITHOUT ANY WARRANTIES OF ANY KIND AND WITHOUT
REPRESENTATION OR WARRANTY BY CHACO WITH REGARD TO PHYSICAL DEFECTS
(WHETHER LATENT OR PATENT).


2. Prepayment of Advance Royalties and Purchase Price; Payment of Net Payment.


2.1 Prepayment of Advance Royalties. At Closing, subject to adjustment
as provided in Section 2.2 and the offset of the Purchase Price as provided
in Section 2.3, Chaco will pay to PNRC the "Advance Royalty Prepayment" in
the amount of $163,402,961.00, which is the amount that the Parties agree
is the net present value on September 30, 1998 of the future advance
royalties payable under the Lease, calculated based on an interest rate of
8.1% per annum.


2.2 Adjustment to Net Payment. If Closing does not occur on September
30, 1998, the Advance Royalty Prepayment will be adjusted as follows:


2.2.1 if Closing occurs before September 30, 1998, the Advance
Royalty Prepayment (i.e., the amount of $163,402,961.00) will be
reduced by an amount equal to $36,262.03 multiplied by the number of
days between the Closing Date (including the Closing Date) and
September 30, 1998; and


2.2.2 if Closing occurs after September 30, 1998, the Advance
Royalty Prepayment (i.e., the amount of $163,402,961.00) will be
increased by an amount equal to $36,262.03 multiplied by the number of
days between September 30, 1998 and the Closing Date (including the
Closing Date).


2.3 Payment at Closing. At Closing, Chaco will pay PNRC by wire
transfer in immediately available funds the "Net Payment," which is the
amount of the Advance Royalty Prepayment (as adjusted in accordance with
Section 2.2) offset and reduced by the amount of the Purchase Price to be
paid to Chaco by Gallo. PNRC and Gallo have made appropriate arrangements
between themselves so that such netting may occur. The Net Payment amount
will be $135,902,961.00, if no adjustment is required under Section 2.2.


3. Representations and Warranties.


3.1 Chaco's Representations and Warranties. Chaco represents and
warrants to Gallo and PNRC as follows:


3.1.1 Authority and Enforceability. Chaco is a corporation, duly
formed, validly existing, and in good standing under the laws of the
State of New Mexico. Chaco has full power and authority to enter into
this Agreement, the Deed and the related instruments and agreements
pursuant hereto (the "Related Instruments") and to perform its
obligations under this Agreement, the Deed and the Related
Instruments. The execution, delivery and performance of this
Agreement, the Deed and the Related Instruments by Chaco has been duly
and validly authorized by all requisite action on the part of Chaco.
This Agreement has been duly executed and delivered on behalf of Chaco
and constitutes, and the Deed and the Related Instruments, when
executed and delivered on behalf of Chaco, will constitute, the legal,
valid and binding obligations of Chaco, enforceable in accordance with
their terms, except as enforceability may be limited by applicable
bankruptcy, reorganization or moratorium statutes, equitable
principles or other similar laws affecting Chaco or the rights of
creditors generally.


3.1.2 Litigation and Claims. (a) Chaco has received no notice of
any pending claim, demand, filing, cause of action, administrative
proceeding, lawsuit or other litigation, and (b) to the best knowledge
of Chaco there is no claim, demand, filing, cause of action,
administrative proceeding, lawsuit or other litigation, threatened,
that in either case (a) or (b) would reasonably be expected to: (i)
adversely affect the consummation of this transaction by Chaco; or
(ii) adversely affect the ownership or operation of any of the Assets
to a material extent, other than proceedings relating to the coal
mining industry generally and as to which Chaco is not a named party.


3.1.3 No Violation. This Agreement and the execution and delivery
hereof by Chaco do not, and the fulfillment of and compliance with the
terms and conditions hereof and the consummation of the transactions
contemplated hereby will not:


3.1.3.1 Violate or conflict with any provision of the
certificate of incorporation or bylaws, each as amended to date,
of Chaco;


3.1.3.2 To the best knowledge of Chaco, violate or conflict
with or require any consent, authorization or approval under any
provision of any law or administrative regulation or any
judicial, administrative or arbitration order, award, judgment,
writ, injunction or decree applicable to or binding upon Chaco;


3.1.3.3 Result in a breach of, constitute a default or
violation under (whether with notice or lapse of time or both) or
require any consent, authorization or approval under any
mortgage, indenture, loan or credit agreement or any other
agreement or instrument evidencing indebtedness for money
borrowed to which Chaco is a party or by which any of its
properties or assets is bound;


3.1.3.4 Except with respect to the Other Interests or that
appear of record, require any consent, authorization or approval
by any other third party with respect to which the Assets are
bound; or


3.1.3.5 Result in the creation or imposition of any lien,
charge, security interest or other encumbrance upon the Assets.


3.1.4 Compliance with Laws and Regulations. To the best knowledge
of Chaco, Chaco's ownership of the Assets is in compliance with all
applicable laws, regulations, orders, judgments or decrees of any
Governmental Authority having jurisdiction over the Assets. For the
purposes of this Agreement, "Governmental Authority" shall mean the
United States of America, any state, commonwealth, territory or
possession thereof and any tribe, and any political subdivision of any
of the foregoing, including, but not limited to, courts, departments,
commissions, boards, bureaus, agencies or other instrumentalities.


3.1.5 Taxes. All taxes, assessments and charges by Governmental
Authorities which are currently due and payable by Chaco with respect
to the Assets have been paid.


3.1.6 Environmental.


3.1.6.1 For the purposes of this Agreement, "Environmental
Laws" shall mean federal, state or municipal laws, rules and
regulations governing, regulating or relating to pollution or the
protection of the environment, including, but not limited to, the
Resource Conservation and Recovery Act of 1976, as amended, the
Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, and all similar state,
municipal and local laws, ordinances, rules, regulations, orders,
directives, determinations and requirements each as in effect on
the Effective Date for purposes of the representations given on
the Effective Date and as in effect on the Closing Date for all
other purposes of this Agreement;


3.1.6.2 Chaco has not received written notice from any
Governmental Authority of any unresolved violation of or pending
or threatened action, suit, inquiry, proceeding or investigation
relating to any Environmental Law applicable to the Assets; and


3.1.6.3 Chaco has not received any currently outstanding
written notice from any Governmental Authority of any license
required under any Environmental Law or legally required
environmental removal, remediation or clean-up obligation with
respect to the Assets.


3.1.7 Contracts; No Notice of Contract Breach. The Contracts
listed in Exhibit A hereto are, to the best knowledge of Chaco, all of
the contracts to which Chaco is a party which in any way relate to the
Lease, the Properties, or the Other Interests; such Contracts, to the
best knowledge of Chaco, are in full force and effect; and Chaco has
not received any notice, whether written or, to the best knowledge of
Chaco, oral, of any breach of any of the Contracts by any party
thereto.


3.1.8 Properties; Encumbrances. The Properties listed in Exhibit
B hereto are all of the properties of Chaco in McKinley County, New
Mexico, which in any way relate to the Lease, the Contracts, or the
Other Interests. Chaco has disclosed to Gallo all unrecorded
mortgages, liens, charges, security interests, overriding royalty
interests or other encumbrances on the Assets. No adverse title claims
are pending or, to the knowledge of Chaco, threatened, with respect to
any portion of the Assets, which are not of record.


3.1.9 No Third Party Options. To the best knowledge of Chaco,
there are no unrecorded existing agreements, options, commitments, or
rights with or to any person to acquire any of the Assets, except as
are referenced in any exhibits to this Agreement.


3.1.10 Funds Available. Chaco has, or will have on the Closing
Date, sufficient cash, available lines of credit or other sources of
immediately available funds to enable it to pay the Net Payment.


3.1.11 Mining Permits. Chaco represents and warrants that there
are no mining permits currently in effect with respect to any of the
Assets.


3.1.12 Chaco's Assets. Chaco represents and warrants that the
Assets being conveyed constitute all or substantially all of Chaco's
assets.


3.1.13 Surface Transportation Board. To the best of Chaco's
knowledge, Chaco represents and warrants that Chaco holds no
certificates or permits from the Federal Surface Transportation Board.


3.1.14 Rail Facilities Agreement. Chaco represents and warrants
that it has not modified or amended, and has not knowingly waived or
relinquished, any of its rights under the Amended and Restated Rail
Facilities Agreement identified on Exhibit A hereto, including,
without limitation, the right (if certain events occur or fail to
occur as specified) to receive certain payments from Star Lake
Railroad Company pursuant to Section 3.2(b) thereof. 3.2 Gallo's and
PNRC's Representations and Warranties. Gallo and PNRC represent and
warrant to Chaco as follows: 3.2.1 Authority and Enforceability. Gallo
is a corporation, duly formed, validly existing, and in good standing
under the laws of the state of Delaware and is authorized to do
business and in good standing under the laws of the State of New
Mexico. PNRC is a general partnership duly formed and validly existing
under the laws of Delaware and is authorized to do business under the
laws of the State of New Mexico. Each of Gallo and PNRC has full power
and authority to enter into this Agreement and to perform its
obligations under this Agreement. The execution, delivery and
performance of this Agreement and the Related Instruments by Gallo and
PNRC has been duly and validly authorized by all requisite action on
the part of Gallo and PNRC, respectively. This Agreement has been duly
executed and delivered on behalf of Gallo and PNRC and constitutes,
and the Related Instruments, when executed and delivered on behalf of
Gallo and PNRC, will constitute, the legal, valid and binding
obligations of each of Gallo and PNRC, enforceable in accordance with
its terms, except as enforceability may be limited by applicable
bankruptcy, reorganization or moratorium statutes, equitable
principles or other similar laws affecting Gallo and PNRC or the
rights of creditors generally. 3.2.2 Independent Investigation. As of
Closing, Gallo and PNRC agree and represent that each of them: (i) has
been given the opportunity to conduct complete and independent
inspections and investigations of the Assets, including, without
limitation, inspections and investigations with respect to title to
the Assets and with respect to environmental conditions; (ii) has
consummated the transactions contemplated by this Agreement on the
basis of its own independent investigation and inspection of the
physical, chemical, and environmental condition of the Assets, as well
as on the basis of the representations, warranties and agreements of
Chaco in this Agreement, the Assignment, the Deed, and the Transfer
Documents; and (iii) with full knowledge of the foregoing and after
conducting its own independent investigation and inspection, EXCEPT TO
THE EXTENT SET FORTH IN THIS AGREEMENT, THE ASSIGNMENT, THE DEED, AND
THE TRANSFER DOCUMENTS, GALLO IS ACQUIRING THE ASSETS AS-IS, WHERE-IS,
WITH ALL FAULTS. 3.2.3 Litigation and Claims. Gallo and PNRC have not
received any notice of any pending claim, demand, filing, cause of
action, administrative proceeding, lawsuit or other litigation, and to
the best knowledge of Gallo and PNRC, there is no claim, demand,
filing, cause of action, administrative proceeding, lawsuit or other
litigation, threatened, that in either case would reasonably be
expected to adversely affect the consummation of this transaction by
Gallo and PNRC, and there are no approvals or consents necessary for
Gallo and PNRC to perform their obligations hereunder that Gallo and
PNRC have not obtained or, unless waived by Chaco, will not have been
obtained prior to Closing.


4. Due Diligence.


4.1 From the date of this Agreement until the earlier of: one day
prior to the date of Closing or November 7, 1998, Gallo and PNRC will have
the right, subject to consent from Chaco, to: (a) inspect the Lease
premises and the Properties; (b) to review documents or records pertaining
to the Lease, the Contracts and the Properties; (c) to conduct an
environmental review of the Lease premises and the Properties; and (d) to
conduct such other reasonable investigations and review of the Assets as
Gallo and PNRC consider appropriate. Subject to Chaco's consent and subject
to the terms of that Confidentiality Agreement dated September 8, 1998
between Chaco and P&L Coal Holdings, Inc., Chaco will: (i) assemble and
make available at reasonable times all records, lease agreements,
transportation agreements, other documents and data related to the Assets;
(ii) allow Gallo, PNRC and their consultants to make physical inspections
of the Lease premises and Properties at reasonable times; and (iii)
reasonably cooperate with Gallo and PNRC's other reasonable due diligence
requests.


4.2 If Gallo and PNRC should determine, in their sole and absolute
discretion, that the Lease, the Contracts and the Properties are not
satisfactory to Gallo or PNRC for any reason, Gallo or PNRC may terminate
this Agreement by delivering written notice of such termination to Chaco
one day prior to Closing. If Gallo or PNRC properly elect to terminate this
Agreement pursuant to the terms hereof, thereafter no Party shall have any
further rights, liabilities or obligations hereunder.


4.3 Should Gallo or PNRC elect to conduct an environmental
investigation of the Lease premises or the Properties, a copy of any
written report will be furnished to Chaco immediately upon Gallo or PNRC's
receipt of same.


4.4 Gallo and PNRC shall not permit any liens to attach to any of the
Assets by reason of the exercise of their rights under this Agreement.
Gallo and PNRC agree to indemnify and hold Chaco harmless from and against
any and all liens by employees, agents, representatives, contractors,
subcontractors, materialmen, laborers and consultants performing such work
and tests for Gallo or PNRC and from and against any and all claims for
damag
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