The City and Coles Gray, LLC have negotiated an Effluent Option Agreement (“Agreement”), a copy of which is attached. The Agreement’s effectiveness is contingent on Council’s approval.
Coles Gray is negotiating for the purchase of approximately 300 acres of land from Gallup Land Partners (the “Property”) in the area near the terminus of Carbon Coal Road and the Santa Fe Rail Loop (Section 3, Township 15 South, Range 19 West). Assuming the purchase occurs, Coles Gray or its successor (collectively, “Coles”) intends to construct a steel recycling and manufacturing complex (“Complex”) at the site. To operate that complex, a supply of effluent water is required. The Agreement addresses the terms on which the City will supply the effluent at and from its Wastewater Treatment Plant (“Plant”).
The Agreement must be reviewed and understood in light of all its terms and conditions. However, to summarize, the Agreement grants Coles an option to purchase a guaranteed amount of effluent up to 109,500,000 gallons (approximately 336 acre-feet) during each of the City’s fiscal years (the “Guaranteed Amount”) while the Agreement is in effect. Coles must exercise the option within three (3) years following the Agreement’s Effective Date (July 25, 2023). In addition, Coles must complete the purchase of the Property within one (1) year of the Effective Date. If the purchase is not completed during that year, the City may terminate the Agreement. The City may also terminate the Agreement if Coles does not commence construction of the Complex within three (3) years of the Effective Date. The Agreement provides that Coles will pay for the effluent at the City’s 2023 published rate ($4.04/1,000 gallons) for 15 years following the Effective Date, at which point the price will be adjusted to that specified by the City’s 2038 published rate. The 2038 price will remain in place for the balance of the Agreement’s term, including any extension (a maximum of 30 years from the date the Option is exercised).
The Agreement requires that beginning in the fifth year following the Effective Date, Coles must either take or pay for one-third (33%) of the Agreement’s Guaranteed Amount. If it fails to do so, the City may terminate the Agreement. In addition, at the beginning in the 5th fiscal year following the Effective Date, Coles must provide the City a “Yearly Call Amount” (a statement of the amount of effluent it will purchase in the coming fiscal year). If the Yearly Call Amount is less than the Guaranteed Amount, the City will be entitled to sell or use the surplus. If Coles wishes to purchase more than the yearly Guaranteed Amount, it will be afforded that opportunity, subject to the City’s other commitments.
The Agreement contains other provisions, including that Coles will pay for the construction of, and operate, a new delivery system from the Plant to the Property, and will support annexation of the Property and contiguous or other properties deemed necessary by City to such annexation. It commits the parties to cooperated with one another as needed to effectuate its terms. The Agreement is freely assignable by Coles Gray to another person or entity.
If approved, the Agreement should have no immediate fiscal impact, as it does not obligate the City to pay for any expense associated with its performance. Assuming the Agreement is approved and proceeds without termination, the City will incur administrative and personnel expense related to the Agreement, but such amounts are difficult to project. If approved, the Agreement will yield an immediate, non-refundable payment of $5,000 to the City, and if the option is exercised, and the Agreement is not terminated, the Agreement will yield income to the City in exchange for effluent.