EXHIBIT 2
AGREEMENT IN PRINCIPLE
AGREEMENT IN PRINCIPLE dated as of March 19, 1997 by and among LONG
ISLAND POWER AUTHORITY, a corporate municipal instrumentality of the state of
New York ("LIPA"), LONG ISLAND LIGHTING COMPANY, a New York corporation
("LILCO"), and THE BROOKLYN UNION GAS COMPANY, a New York corporation ("BU").
WHEREAS, LIPA is authorized under the Long Island Power Authority Act,
Public Authorities Law Section 1020 et seq. (the "Act") to acquire all or any
part of LILCO's securities or assets; and
WHEREAS, the Act directs LIPA to enter into negotiations with LILCO for
the purpose of acquiring LILCO's stock or assets upon such terms as LIPA, in its
sole discretion, determines will result in rates equal to or less than would
result if LILCO were to continue in operation and to implement, if it seems
appropriate, the results of such negotiation; and
WHEREAS, the Act confers upon LIPA the power to condemn the securities
and/or assets of LILCO, including the Common Stock of LILCO to be acquired in
the proposed transaction, and LIPA has previously publicly announced its
intention to consider exercising its condemnation power to acquire the Common
Stock or assets of LILCO if a negotiated transaction cannot be achieved; and
WHEREAS, BU, LILCO and NYECO Corp. ("NYECO") have entered into an
Amended and Restated Agreement and Plan of Exchange, dated as of February 6,
1997 (the "BU/LILCO Agreement"), which provides for the business combination of
BU and LILCO as peer firms in a binding share exchange and the formation of
NYECO as a holding company to manage their combined businesses; and
WHEREAS, LIPA, LILCO and BU have undertaken negotiations as to various
methods of accomplishing the objectives set forth in the Act and in connection
with such negotiations, LIPA, LILCO and BU have reached agreement in principle
on certain major issues in connection with a proposed transaction (the "Proposed
Transaction").
NOW, THEREFORE, the following represents the non-binding agreement in
principle of the parties hereto with respect to certain terms and conditions of
the Proposed Transaction:
1. LILCO will restructure itself (the "LILCO Restructuring") so as to
transfer certain of its assets and liabilities to a new company ("Newco") and to
retain only certain assets and liabilities as agreed with LIPA.
2. In the LILCO Restructuring, the principal assets to be retained by
LILCO will include (A) the electric transmission and distribution system ("T&D
System"), (B) an appropriately sized parcel at the Shoreham site to serve as a
possible terminus for an undersound cable and as a possible site for new
generating facilities, (C) LILCO's 18% interest in Nine Mile Point 2, nuclear
fuel and nuclear decommissioning trust funds, (D) the Shoreham property tax and
PILOT claims and all other tax claims and tax certiorari matters arising with
respect to LILCO's pre-closing operations, including with respect to generation
and common plant, and (E) certain other assets, including regulatory assets and
accruals, each as more fully described in the Major Issues Term Sheet attached
hereto as Exhibit A (the "Major Issues Term Sheet").
3. In the LILCO Restructuring, the principal liabilities to be retained
by LILCO will include (A) certain of LILCO's regulatory liabilities, including
the regulatory liability component, 1989 settlement credits, and an appropriate
allocation of regulatory tax liabilities, (B) a portion of the LILCO preferred
stock, (C) a portion of long term debt, and (D) an appropriate allocation of
accounts payable, accrued expenses, customer deposits, other deferred credits,
and claims and damages, each as more fully described in the Major Issues Term
Sheet.
4. After the LILCO Restructuring, LIPA will acquire LILCO either
through a merger of LILCO and a wholly-owned subsidiary of LIPA, with LILCO
surviving the merger as a wholly-owned subsidiary of LIPA, or through a purchase
of LILCO's common stock (the "Acquisition").
5. The consideration to be paid by LIPA in connection with the
Acquisition in respect of LILCO's outstanding Common Stock will be $2.4975
billion, which shall be financed by the issuance, in one or more series, of
bonds and/or notes of LIPA pursuant to the Act.
6. LIPA/LILCO and Newco will enter into a management services
agreement, having those terms set forth on Exhibit B hereto, whereby Newco will
manage the T&D System according to the policies established by LIPA and provide
system operation and dispatch on behalf of LIPA.
7. LIPA/LILCO and Newco will enter into a power supply agreement,
having those terms set forth on Exhibit C hereto, whereby LIPA/LILCO will
purchase electric power from Newco among other supply sources.
8. Newco will grant to LIPA/LILCO a perpetual option to lease or
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purchase, for fair market value as determined at the time of exercise,
appropriately sized and sited parcels of real property located at any of Newco's
existing generating properties, for the construction of new generating
facilities to be owned by LIPA/LILCO or its designee, as more fully described in
the Major Issues Term Sheet.
9. LIPA and Newco will enter into an agreement providing for the
purchase by LIPA/LILCO from Newco of all of the generating assets at a purchase
price equal to fair market value at the date of purchase (the "Generation
Purchase Agreement"). The Generation Purchase Agreement will close in the fourth
year after consummation of the Acquisition. LIPA/LILCO's obligation to close the
Generation Purchase Agreement will be subject to prior approval by a two-thirds
vote of the entire LIPA Board of Trustees and approval by the Public Authorities
Control Board ("PACB").
10. The Proposed Transaction is subject to the following conditions:
(a) approval by the Board of Trustees of LIPA and the Boards of Directors of
LILCO and BU, respectively; (b) the execution and delivery of definitive
agreements and other necessary documents; (c) completion by the parties to their
satisfaction of their due diligence investigation in connection with the
Proposed Transaction; (d) obtaining all necessary governmental and third party
consents and approvals relating to the Proposed Transaction, including the
approval of the PACB; (e) receipt by LIPA of rulings from the Internal Revenue
Service (i) with respect to the exclusion from gross income of the interest on
its bonds and/or notes and certain related matters, (ii) that LILCO will not
recognize gain in the Proposed Transaction or by reason of the subsequent
exclusion of its income under Section 115 of the Internal Revenue Code of 1986,
as amended (the "Code"), and (iii) that following the Proposed Transaction,
LILCO's income will be excluded under Section 115 of the Code; and (f) issuance
by LIPA of bonds and/or notes sufficient to finance the Proposed Transaction.
11. The parties hereto hereby agree that, whether or not the Proposed
Transaction is ever consummated, they will pay their own (and their
representatives') respective fees and expenses incurred in connection with the
negotiation, preparation, execution and delivery of this agreement and of the
definitive agreements and any other agreements or documents contemplated
thereby.
12. This agreement shall be governed by and construed in accordance
with the law of the State of New York, without giving effect to its choice of
law principles.
13. By executing this agreement, the parties hereto confirm their
intentions specified herein with respect to the Proposed Transaction, but
(except for the provisions of Paragraphs 11 and 12 hereof which are intended to
and shall
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be legally binding and enforceable) this agreement is not intended to constitute
a contract nor an offer to enter into a contract nor to be binding upon the
parties or create legal obligations or rights. In the event that the parties
hereto fail to execute and deliver definitive agreements implementing the
agreement in principle described herein on or before May 16, 1997, then this
agreement shall terminate automatically (except for the provisions of Paragraphs
11 and 12 as aforesaid) without liability on the part of any party and without
further action by the parties.
IN WITNESS WHEREOF, LIPA, LILCO and BUG have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first above written.
LONG ISLAND POWER AUTHORITY
By
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Name: ▇▇▇▇▇ ▇. ▇▇▇▇
Title: Chairman
By
--------------------------------
Name: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Trustee
LONG ISLAND LIGHTING
COMPANY
By:
--------------------------------
Name: ▇▇. ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇▇
Title: Chief Executive Officer
THE BROOKLYN UNION GAS
COMPANY
By:
--------------------------------
Name: ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Chief Executive Officer
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Exhibit A
MAJOR ISSUES TERM SHEET
(3/19/97)
I. Purpose of Term Sheet The purpose of this Term Sheet is to identify the major issues of
agreement. The absence of discussion of any point should not be construed
as an indication of the significance or insignificance of such point to
either LIPA or NYECO.
II. Balance Sheet LIPA will acquire through the purchase of stock for $2.4975 billion the
assets and liabilities included in the 12/31/97 LILCO Pro-Forma Balance
Sheet attached as Exhibit A-1.
A. Ownership of/Access to NYECO will own all common plant and will charge LIPA for its beneficial
Common Plant use through the Management Services Contract. The allocation of costs
related to common plant between gas, generation, and T&D will be mutually
agreeable to all parties. Such charges to LIPA will be determined in the
same manner as common plant is charged to gas customers by LILCO's
regulated gas business; charges to rate payers will not increase as a
result of the BUG/LILCO merger or any future merger or business
combination by NYECO, or LIPA's acquisition of LILCO's stock.
LIPA and NYECO will mutually agree upon the appropriate allocation of
real property and will select personal property (e.g., billing/customer
service hardware and software) that LIPA should have access to or control
of as owner of the T&D System. NYECO will give LIPA the perpetual right
to enter into leases for such assets or sub-contract for such services
which it may assign to a subsequent Management Services Contractor.
Terms of each lease will be at FMV as determined by independent appraisers.
B. Accounts Receivable LIPA and LILCO will agree on the expected level of receipts based upon
historical collections, and negotiate appropriate incentive/penalty
provisions in the event actual receipts differ materially. LIPA will
allow NYECO to use remedies similar to those currently available to LILCO
to enforce collection.
Materials and supplies will remain with NYECO, and will be charged to
C. Materials and Supplies LIPA at cost through the Management Services Contract. Any replacement
Management Services Contractor will be required to purchase all
materials and supplies at cost from NYECO.
D. Class Settlement Upon the closing of the transaction, NYECO will immediately pay the
present value of the remaining Class Settlement either to LIPA for
distribution to rate payers or, at LIPA's request, directly to rate
payers.
E. Accumulated Deferred LIPA will not assume the liabilities related to the gas and generation
Income Taxes businesses.
F. Other Post-retirement Employee LIPA recognizes that these costs should be recovered from the rate
Benefits payers. If LILCO funds this obligation with the proceeds of assumable,
callable debt, and if in LIPA's sole judgment the future costs/risks to
the rate payers can be reduced by assuming this debt in lieu of paying
the avoided annual charge, LIPA will assume such debt.
G. Shoreham Litigation Phase I Upon the closing of the transaction, LILCO will immediately pay to LIPA
Distribution $15 million relating to the Phase I judgment for distribution to rate
payers.
H. Shoreham Litigation Phase II LIPA will assume the Shoreham property tax and PILOT claims and all other
Settlement/Other Tax Certiorari Cases tax claims and tax certiorari matters arising with respect to LILCO's
pre-closing operations.
I. Interest Rate Hedge Recognizing this to be in the best interest of the rate payers, LIPA and
BUG/LILCO will jointly seek PSC approval to allow BUG/LILCO to fund, on LIPA's
behalf, the purchase of an interest rate hedge to minimize the risk of a
deterioration in savings due to higher interest rates at the time of the
closing. BUG/LILCO will fund for its own account, the first $60 million of
premiums relating to an interest rate hedge. In the event that the
LIPA/LILCO transaction closes, LIPA will reimburse BUG/LILCO for its net
cost relating to all interest rate ▇▇▇▇▇▇ funded. In the event that the
transaction does not close, BUG/LILCO will receive the benefit relating
to the net profits on the ▇▇▇▇▇▇ purchased by BUG/LILCO for its own
account and will seek to recover the net cost, if any, of such hedge
from rate payers; any net profit will be returned to the rate payers as
directed by the PSC.
III. BUG/LILCO Merger Synergies BUG/LILCO will recommend to the PSC that one-half of the ten year $1
billion expected synergy savings should be attributed to the LILCO
electric rate payers. LIPA's share of any synergy savings will be the
amount allocated by the PSC to the electric rate payers up to a maximum
of 2%. Such savings will be explicitly passed through to LIPA through the
MSA.
IV. Business Ventures Using T&D Assets NYECO recognizes that LIPA will own the T&D assets and
all the rights that entails. Specifically, LIPA will be entitled to any
attachment fees currently paid to LILCO for the use of T&D assets by third
parties, such as telecommunications companies. Subject to further information
regarding the relevant provisions of the agreements, LIPA agrees that NYECO
will retain all other business relationships-risks and rewards-with such
companies, which have been disclosed to LIPA. The definitive agreement will
address any rights regarding LIPA's review and approval of any new
relationships.
V. Key Executives Recognizing the need for an amicable working relationship, the key
executives responsible for providing service under both the Management
Services Agreement and the Power Supply Agreement must be approved by
LIPA, and such approval will not be unreasonably withheld.
VI. Management Contract
A. Basic Premise While the responsibilities of LIPA and NYECO will be detailed in the
Management Services Agreement, such responsibilities will be based upon
the premise that it is LIPA's responsibility to set policies and NYECO's
responsibility to implement those policies.
B. Term/ Mandatory Rebid 8/6 years. NYECO will have the right to bid on the new contract on the
same basis as other qualified bidders unless previously terminated due to
cause.
C. Cancellation/Notice; LIPA and NYECO will have the right to cancel the contract at any time for
Transition to New Manager cause. LIPA will have the right to give notice of its intent to cancel
the contract within 6 months of a change in control of NYECO. LIPA and
NYECO are required to give 2 years notice of intent to cancel. If NYECO
is terminated for cause, it will be precluded from bidding on the
replacement contract.
NYECO will cooperate in the smooth transition to the new manager; NYECO
will be reimbursed for reasonable, mutually agreeable transition costs.
D. Labor Issues NYECO will agree to honor existing labor contracts and will not rely upon
lay-offs to achieve any operational efficiencies. Any new Management
Services Contractor must abide by the same labor contracts and LIPA
policies as required of NYECO.
E. Compensation and Contract will be a "Qualified Management Contract" under IRS regulations
Performance Standards with incentive/penalty provisions tied to
performance standards.
F. Dispute Resolution Subject to the rights of either party to seek injunctive relief from a
court of competent jurisdiction, in the event of a dispute the parties
will pursue non-binding mediation before binding arbitration.
G. Access to Facilities Appropriate LIPA personnel will have unrestricted access to "allocated"
common plant, and will be provided with adequate on-site work space for
LIPA to exercise its oversight rights and responsibilities.
H. Ownership of Data LIPA will have sole ownership of information related to LIPA's customers
(except to the extent such information is also owned by NYECO in its role
as owner of the gas utility) and the operation of the T & D Systems.
NYECO may not use any such information for non-LIPA related purposes
without LIPA's permission. Such permission, if granted, will be granted on
a non-discriminatory basis.
I. Procurement and Sub- LIPA will identify legal issues/constraints and recommended policy
contractor Approval guidelines.
K. Insurance Coverage LILCO's insurance coverage will be reviewed for adequacy and, if
appropriate, additional coverage will be obtained .
VII. Power Sales Contract
A. Generation Charges Generation charges will not be increased as a result of the stepped-up
basis of the assets. The capital related charges will also reflect a
mutually agreeable theoretical capital structure.
B. "Ramp-down" 15 year contract with ramp down beginning in year 7 in an aggregate
potential reduction amount of approximately 1500 MW. The actual schedule
will be mutually agreed upon and will reference specific units. Any
amount ramped down must be for the full increment of capacity listed on
the schedule. After receiving bids, if LIPA exercises this option in
years 7 to 10, NYECO will receive 100% of the present value of the
related capacity charges for the remainder of the contract. Beginning
in the 11th year, the recovery percentage will decline each year in
increments of 12.5%, resulting in a 37.5% recovery in the 15th year.
Capital expenditures, if approved by LIPA, will be included in the
capacity charges and recovered as described above. If the economic
useful life of any proposed capital addition significantly exceeds the
remaining term of the contract, LIPA and NYECO will negotiate a mutually
agreeable cost recovery mechanism.
NYECO may use any capacity released pursuant to this option to bid on new
capacity or on other ramp-down amounts. Allocation of profits on
off-system sales from specific units during the term of the contract will
be shared based upon LIPA's then current payment of or, pursuant to the
ramp-down option, LIPA's prepayment of the related remaining capacity
payments according to the following schedule:
Non Ramped-Down Capacity LIPA/NYECO
Years 1 to 15 67%/33%
Ramped-Down Capacity
Years 7 to 10 67%/33%
Year 11 60%/40%
Year 12 53%/47%
Year 13 46%/54%
Year 14 39%/61%
Year 15 33%/67%
Profits on any system sales to LIPA from released capacity will be for
NYECO's account.
LIPA will provide open access to NYECO on its transmission system to the
extent available, priced at applicable FERC tariffs or other
non-discriminatory terms and prices.
If LIPA's exercise of this option results in operational inefficiencies
at Northport, the power sales capacity price will be adjusted to reflect
demonstrable cost increases due to such inefficiencies.
C. Ownership of Sites LIPA will have a perpetual right to lease or purchase appropriately
sized and sited parcels, as reasonably determined by LIPA's consulting
engineer and confirmed by a mutually agreeable independent consulting
engineer, at any of NYECO's existing generating properties for the
construction of new power plants to be owned by LIPA or its designee.
The lease or purchase will be at FMV as determined by an independent real
estate appraiser. Without limiting its future rights, LIPA has the right
to identify certain sites prior to closing. NYECO will in no way limit or
restrict LIPA's ability to investigate and identify parcels, and after
closing of either a lease or purchase, engage in site preparation or
construction and operation at any site. The appraisal methodology can be
determined prior to closing.
LIPA will be granted control over NYECO's ability to sell or
lease sites to a third party for the purpose of constructing a generating
facility (e.g., right of first or last refusal).
LIPA will acquire for FMV an appropriately sized parcel, as reasonably
determined by LIPA's consulting engineer and confirmed by a mutually
agreeable independent consulting engineer, at the Shoreham site to serve
as the terminus for an undersound cable (nominal rating approximately 600
MW) and the site for up to approximately 600 MW of new gas fired combined
cycle generating facilities and be granted unlimited access to the site
as well as appropriate easements. NYECO will retain ownership of the
combined turbine and diesel peaking units located on this site, and will
be granted unlimited access to such facilities.
D. Approval of Future Development/ See limitations above on NYECO's ability to sell or lease sites to third
T&D Rights parties for the construction of generating facilities.
LIPA will have the exclusive right to provide transmission or
distribution service on Long Island except that NYECO may provide
non-retail delivery of power on LILCO's property to serve existing common
plant and generating facilities. NYECO agrees not to compete with LIPA
directly or indirectly as a provider of T & D service on Long Island. The
delivery of any capacity or energy sold directly or indirectly by NYECO
in LILCO's current service territory will be through LIPA's T & D
system. NYECO will not oppose any tariff, access charge or fees for the
use of LIPA's T and/or D system whether or not such is established by or
on behalf of LIPA, provided such tariff, access charge or fee is
non-discriminatory between NYECO and other affected parties.
E. Generation Purchase LIPA and NEWCO will enter into an agreement providing for the purchase by
Agreement LIPA/LILCO from NEWCO of all of the generating assets at a purchase price
equal to FMV at the date of the purchase. This agreement will close in
the fourth year after closing of the transaction. LIPA/LILCO's
obligation to close the agreement will be subject to prior approval by
two-thirds of the entire LIPA Board of Trustees and approval by the
Public Authorities Control Board. The generating assets will include
appropriately sized parcels, as determined by LIPA's consulting engineer
and confirmed by a mutually agreeable independent consulting engineer,
at each of its existing generating sites. LIPA and LILCO will each select
an investment bank to negotiate the price; if no agreement can be reached
a third investment bank, acceptable to both LIPA and LILCO, will be
selected to determine FMV. LIPA will pay all investment banking fees,
but must agree to all fees in advance.
LIPA agrees that no layoffs or salary cuts to NYECO non-
union personnel will result from its purchase of NEWCO's assets for two (2)
years.
VIII. Gas Transmission Interruptible gas transportation to the existing generation units will be
continued on the same basis as is currently provided. LILCO will also
provide an interruptible gas transportation rate on the LILCO
distribution system to new generation (regardless of who owns it) above a
mutually agreeable MW threshold, of 19 cents/dekatherm adjusted only for
any system capital improvements specifically required which will be
charged on a cost-based, return on rate base basis, using LILCO's cost of
capital for its gas system. This pricing will be continued for 11.5
years after the acquisition is completed.
EXHIBIT A-1
Long Island Lighting Company
Pro forma Balance Sheet
At December 31, 1997
(In Millions)
New
Assets LILCO
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Utility Plant (net of accumulated depreciation)
Electric (including CWIP)
Nine Mile Point 2 & nuclear fuel $ 684.9
Transmission & Distribution 1,386.1
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Total Net Utility Plant 2,071.0
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Regulatory Assets
Base financial component 3,180.6
Rate moderation component 270.8
Shoreham post-settlement costs 1,006.4
Shoreham nuclear fuel 67.0
Unamortized cost of issuing securities 143.6
Postretirement benefits other than pensions 290.8
Regulatory tax asset 1,720.2
Other 119.3
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Total Regulatory Assets 6,798.7
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Nonutility Property and Other Investments 17.9
Current Assets 373.8
Deferred Charges 48.1
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Total Assets $9,309.5
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Capitalization and Liabilities
Capitalization
Total Long-Term Debt, including current maturities $3,576.0
Total Preferred Stock 339.2
Total Common Shareowners' Equity 2,500.8
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Total Capitalization 6,416.0
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Regulatory Liabilities 398.3
Current Liabilities 105.8
Deferred Credits 2,115.9
Operating Reserves 273.5
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Total Capitalization and Liabilities $9,309.5
=========================================================================
Exhibit B
MANAGEMENT SERVICES AGREEMENT PRINCIPLES
As used herein, "Manager" refers to the Management Services Contractor for the
T&D system and system dispatch and operator.
1. Basic Premises of Management Services Agreement:
a. While the responsibilities of LIPA and Manager will be
detailed in the Management Service Agreement (Agreement), such
responsibilities will be based upon the premise that LIPA will
set policies and Manager's responsibility will be to implement
those policies.
b. Manager must perform its responsibilities consistent with
LIPA's statutory and policy goals and objectives (to be
identified) and will report directly and regularly to a
designated representative of LIPA. Manager must manage and be
responsible for the delivery of power to LIPA's customers, and
cooperate with all parties (e.g., new power generators, owners
of new or existing interconnections, power marketers, energy
service companies, etc.) involved with the delivery of power
or provision of other energy services.
2. Term/Mandatory Rebid:
a. The term of the agreement will be for eight years. There will
be a mandatory competitive bid in the sixth year of the term
of the contract for the next contract.
b. Manager will have the right to bid on the new contract on the
same basis as other qualified bidders unless previously
terminated pursuant to Section 23.b or for any reason due to
cause.
3. Termination/Notice, Transition to New Manager:
a. LIPA and Manager will have the right to terminate the
Agreement at any time for cause (as defined in Section 23). If
Manager is terminated for cause pursuant to Section 23. b., it
will be precluded from bidding on the replacement contract.
b. Manager will cooperate in the smooth transition to the new
manager. Manager will be reimbursed for reasonable, mutually
agreeable transition costs.
c. Each party shall be required to fully perform its obligations
under the Agreement after notice of termination has been given
through the date of actual termination of the Agreement. The
parties acknowledge that certain obligations under the
Agreement will survive the termination date.
d. During the period after a termination notice is given, LIPA
will have unrestricted access to Manager's facilities and
personnel necessary to monitor Manager's performance. In
addition, in the event of termination for cause, during the
termination notice period LIPA shall have the right to appoint
a representative to direct Manager's day-to-day performance in
accordance with the terms of the Agreement. If, in the event
of such termination for cause LIPA assumes such responsibility
for day-to-day direction, LIPA shall be responsible for all
incremental costs that result from such action and Manager
will receive its Management Fee as defined in Section 11.a.i.
In addition, in such event, Manager will be eligible for
incentive fees or responsible for penalty payments under the
Agreement up to the date LIPA assumes responsibility for
day-to-day operations.
4. Labor Issues: Manager will agree to honor existing labor contracts and
will not rely upon mandatory lay-offs to achieve any operational
efficiencies. Any new Manager must abide by the then existing labor
contracts and LIPA policies as is required of the Manager under the
Agreement. Work which is outsourced by Manager and which would
otherwise have been performed by union labor will be bid based upon
payment of prevailing wage rates and employee benefits.
5. Separation of Distribution and Power Supply Functions: To prepare for
the anticipated future separation of retail distribution service from
power supply, there should be two totally separable functions for the
Agreement: (1) T&D O&M and (2) system operation and dispatch, such that
changes in the system operation responsibilities can be modified if an
Independent System Operator is required to be provided due to changes
in state or federal law or associated regulatory policy.
6. Description of the T&D system: The "T&D system" owned by LIPA refers to
all assets or facilities related to the operation of the T&D system
owned by LILCO at the time LILCO is acquired by LIPA, except for those
listed in the closing documents on the date of closing. The Manager
will operate and maintain (for LIPA) the T&D system from the point of
the interconnection with Consolidated Edison, NYPA and Connecticut
Power & Light and the on-island generating plants owned by NYECO or
others and interconnec- tions as they are built to the meters of the
T&D facilities, equipment and property up through the retail and
wholesale electric customers' point of interconnection with the meter.
7. Responsibilities of Manager: Specific responsibilities of Manager (the
performance of which are subject to LIPA approval) are expected to
include, but are not limited to:
a. T&D Operation and Maintenance:
- day-to-day operation, protection and maintenance of
the T&D system, including emergency repairs other
than for storm restoration;
- performance of routine facility additions and
improvements, including customer connections;
- routine construction activities performed by
Manager's T&D work force as part of normal O&M
activities;
2
- supervision (including engineering and related
construction management services) of routine and
major facility additions and improvements;
- preparation and monitoring of annual capital and
operating expenditure budgets and long range system
and strategic plans including integrated resource
planning, system and policy modifications to
transition to a competitive environment;
- recommendation of energy efficiency and conservation
programs and implementation of such programs approved
by LIPA or incorporating the energy efficiency and
conservation programs and associated measures
developed on behalf of LIPA or by energy service
companies authorized to provide services on Long
Island, as approved by LIPA.
- performance of T&D accounting and tax reporting
functions and preparation of monthly reports;
- the procurement of other goods and services from
third parties and inventory management in accordance
with pre-established guidelines;
- compliance with then current federal, state, and
local environmental and regulatory requirements
associated with the T&D system;
- operation of system in compliance with LIPA's
specified requirements pertaining to tax-exempt
bonding regulations and applicable provisions of ▇▇▇▇
▇▇▇▇ resolutions as provided by LIPA;
- routine repair or modification activities required
due to public works infrastructure projects which
impact the T&D system;
- personnel and human resource matters and personnel
training, including provision of emergency and other
training to LIPA personnel (the extent of such LIPA
personnel and training to be defined and established
in adopted annual T&D O&M budgets approved by LIPA);
- day to day legal and tax management responsibilities;
- maintenance of system operation and training manuals
for use by Manager;
- Manager shall comply with applicable provisions of
State law governing LIPA contracts, including, but
not limited to, provisions requiring efforts to
increase participation of minority and women-owned
enterprises.
b. Emergency Response and Reporting, Including Storms:
- timely reporting to LIPA of such emergency
conditions;
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- storm monitoring and anticipated storm mobilization;
- media, fire, police, and local government
coordination;
- customer communications;
- system condition monitoring;
- repair and replacement;
- public safety activities;
- restoration of T&D system to pre-emergency conditions
c. Customer Service:
- response to customer inquiries;
- development of Manager's recommended revenue
requirements, rate classification and designs;
- at LIPA's request, public presentation of recommended
rate and capital expenditure adjustments at LIPA rate
hearings;
- information and accounting systems and controls;
- marketing for system expansion/customer retention;
- reading of customer meters, issuance of customer
bills, and collection of customer payments and
investigation of customer ▇▇▇▇ inquiries;
- collection of reliability and customer satisfaction
performance data;
- inclusion of any communications to customers
requested or approved by LIPA in customer bills
related to the provision of energy services;
- work under LIPA supervision with outside parties or
other resources to develop energy conservation
programs.
d. Power Supply:
- obligation, subject to documented and auditable
transmission and reliability constraints, to purchase
and deliver power to meet LIPA load at least cost
from all sources regardless of generating plant
ownership;
- off system sales from power supply sources under
contract to or owned by LIPA;
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- preparation of load forecasting and power resource
modeling/planning;
- maintenance of electronic bulletin board on pricing
of power and preparation of periodic summaries;
- administration of LIPA's ownership share of Nine Mile
Point 2 and related contracts and obligations.
8. Performance standards: Manager will be responsible for management and
operation of the T&D system within mutually agreed performance
measurement criteria. Such criteria will include benchmarks and indices
similar to, but not expressly identical to those which are used by the
New York Public Service Commission (NYPSC) and various state utility
commissions for performance based rate making programs for electric
utilities in the areas of system reliability, response time for and
cost control of storm restoration, adherence to capital and operating
budgets, customer service satisfaction, worker safety record, and
construction and maintenance project schedule adherence. This section
will differentiate between the termination standards and the general
performance standards.
9. Responsibilities of LIPA: LIPA will retain ultimate responsibility,
authority and control over the assets and operations of the T&D system.
Specific responsibilities are expected to include, but are not limited
to:
a. rate setting, line extension policies and service rules and
regulations;
b. determination of all policies and procedures for the T&D
system. LIPA recognizes that changes in its policies and
procedures may have an impact on costs to the Manager,
requiring adjustment of compensation or cost recovery from
LIPA;
c. review and approval of annual capital and operating
expenditure budgets pursuant to the procedures outlined in
Section 11.b.ii and approval of long-range strategic plans;
d. determination of customer service programs;
e. determination of customer and public communications policy;
including approval in advance of billing format, ▇▇▇▇ inserts,
flyers and other advertisements by Manager (other than
communications required to address emergencies);
f. review and approval of power resource model/plan and of
Manager's load forecast;
g. determination of energy efficiency and conservation policies
and planning;
h. financial management such as determining the source of
financing for major projects;
i. compliance with bond resolution regarding third party expert
review of annual operating and capital budgets and rate
resolution;
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j. overall legal responsibilities;
k. governmental relations and reporting;
l. oversight and audit of Manager operations and performance;
m. the management contract solicitation procedure and selection
of the new Manager;
n. approval of contracts to the extent required to meet the
requirements of the state law applicable to LIPA;
o. timely response to all requests of Manager for action or
decision by LIPA.
10. Dispute resolution: Subject to the rights of either party to seek
injunctive relief from a court of competent jurisdiction, in the event
of a dispute the parties shall seek non-binding mediation before
binding arbitration.
11. Annual T&D Budget and Five Year Planning Budget Process
a. Annual T&D Budget
i. The T&D budget, payment, and incentive sections of
the Agreement will provide for the determination and
payment of T&D costs, inclusive of fees paid to
Manager, comprised of two broad categories: Direct
Costs and Third Party Costs. These categories of
costs will exclude "Incremental Internal Costs" (as
defined in Section 13) and additional Third Party
Costs relating to Major Capital projects, public
works projects, and Other Costs, which are discussed
in Sections 13 and 14.
ii. "Direct Costs" are anticipated to be reasonably
predictable and shall include (1) all capital or
operating costs incurred by Manager through the
utilization of either its work force, or its owned
assets in carrying out its responsibilities under the
Agreement and (2) the Manager's fee ("Management
Fee"). Costs related to its work force shall include
compensation paid to employees of the Manager as well
as an appropriate allocation of such costs of
employees of the Manager's parent or affiliates to
the extent such employees provide service to LIPA
pursuant to the Agreement. Costs related to its owned
assets shall include an appropriate allocation of
depreciation and return on the undepreciated balance
and shall include an appropriate allocation of
projects in progress at the time of closing of the
LIPA/LILCO transaction. The determination of
depreciation and return to be allocated shall be
based upon historical costs and an agreed upon
capital structure. The Management Fee shall be an
annual fixed amount of $15 million. Of this amount,
however, $5 million must result from cost savings. As
a result, the initial Direct Costs budget will
include a net Management fee of $10 million. (see
11.b.iv.)
iii. "Third Party Costs" shall include all recurring
capital or operating costs
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incurred by Manager in carrying out its
responsibilities under the Agreement and paid to
parties other than Manager, its parent and
affiliates, and any of their employees. Such costs
shall include, for example, professional fees,
postage, materials and supplies, third party contract
labor, rents, property taxes on common plant,
telecommunications, insurance, dues and fees,
advertising, etc.
iv. Incentive compensation to the Manager for costs
savings (Cost Incentive Fees) will be for reductions
from the approved budgets for these two broad
categories. The Agreement will also provide for other
incentive and penalty payments described more fully
in Section 15 (Non-cost Performance Incentive Fees)
related to system reliability, worker safety,
customer service and system operation and dispatch.
b. Annual T&D Budget Preparation
i. Six months prior to closing of the LIPA/LILCO
transaction, and thereafter annually, Manager will
prepare an annual budget for T&D (for total revenue
requirements inclusive of LIPA's own costs, with the
costs to be paid by LIPA to Manager under this
Agreement specifically and separately identified).
This budget will be accompanied by a five year T&D
planning budget. LIPA will hold at least one hearing
to solicit public input on both initial budgets.
ii. The annual and five year planning budgets will be
divided into Direct Costs and Third Party Costs in
accordance with budget categories to be set forth in
an exhibit to the Agreement, consistent with the
general definition of these two cost categories in
Section 11 (a). The initial Direct Cost budget, once
established and approved by LIPA, will be indexed for
each subsequent year during the term of the Agreement
as described in 11.b.v. The Third Party Cost budget
will be determined and approved annually. Each annual
budget and five year planning budget will be composed
of the indexed Direct Cost budget, and the annually
determined and approved Third Party Cost budget.
iii. Manager and LIPA will adopt the initial annual budget
and five year planning budget prior to closing of the
LIPA/LILCO transaction. Such initial annual and five
year planning budgets will reflect an agreed upon
estimate of adjustments in T&D costs attributable to
productivity improvements to be undertaken by Manager
and estimated synergy savings from the BU/LILCO
merger to the extent allocated to the electric
ratepayers by the NYPSC up to a maximum of 2% of
total electric revenues before the LIPA/LILCO
transaction.
iv. The initial budget for Direct Costs will be based
upon the agreed upon disaggregated T&D costs portion
of the proposed 1997 test year budget in the LILCO
1996 rate case filing with the NYPSC, adjusted to
1999 (the anticipated first full calendar year of
operation under the Agreement). Adjustments to the
1997 base budget will include, but not be limited to
adjustment of union labor costs in accordance with
the existing union labor contract, non-union labor
costs in accordance with agreed upon indices, other
indices as used in the 1996 rate case filing to
adjust from the 1997 test year to the 1999 revenue
requirements estimate, addition of the net Management
Fee
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of $10 million and known changes in facts and
circumstances. Such budget shall also consider actual
historical results for 1996 up to the date of
adoption of the final budget. Payment of any bonus or
incentive pay to officers of BU/LILCO Holding Company
shall not be part of the Direct Cost budget unless
mutually agreed to by the parties.
v. Subsequent annual Direct Cost budgets will be
calculated based upon the initial Direct Cost budget,
subject to adjustments for appropriate cost and
customer growth indices, as follows:
o The union labor portion of the Direct Costs
will be adjusted in accordance with existing
union contracts through February 13, 2001.
Thereafter, union labor will be adjusted
based on appropriate cost indices. At LIPA's
option, Manager will consult with LIPA on
all future renegotiations of union labor
contracts;
o All other portions of the Direct Cost
budget, including non-union labor, will be
adjusted for the appropriate cost and
customer growth indices.
vi. The annual budget and five year planning budget
prepared by Manager and submitted to LIPA for review
and approval, will be accompanied by any recommended
rate adjustments for the upcoming year and shall be
submitted six months before the beginning of the next
rate year. LIPA will have 60 days to review the
proposed annual and five year planning budgets
pursuant to the provisions in Section 11.b.ii and
rate adjustments, if any, and request modifications
as deemed appropriate. The objective would be to have
the budgets adopted two months before the beginning
of the next rate year. If there is a rate adjustment,
the LIPA/Manager review effort could be expedited to
enable the public review process for a rate
adjustment to begin sufficiently early to allow
approximately 4 months of public review, comment, and
adoption by LIPA before the new rate year begins.
vii. Acceptance of the year 2 through 5 planning budgets
is not approval of such budgets, although these later
year planning budgets will be used as guidance for
the reasonableness of any adjustments to subsequent
annual budgets to be adopted by LIPA.
viii. The annual and five year planning budgets shall be in
a form acceptable to LIPA, with the initial annual
and five year budgets to be prepared with the same
categories and levels of detail for historical costs
and documented in a manner which enables comparison
to actual expenditures.
ix. The Agreement will include an exhibit listing the
type and format of the information to be included in
the annual and five year planning budget.
x. T&D costs, whether Direct Costs or Third Party Costs,
in the adopted annual budget will be calculated and
included at cost without ▇▇▇▇-up. All fees paid by
LIPA to Manager other than specific actual cost items
reimbursed by LIPA to Manager will be limited to the
Management Fee, the Cost Incentive Fee, and
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the Non-cost Performance Fees defined herein.
xi. If, in LIPA's sole opinion, trends in cost of
service, customer loads or other factors indicate a
need to consider rates, cost allocation, or rate
design, LIPA may request a revised budget and rate
recommendation from Manager or preparation of the
budget on an accelerated schedule, with reasonable
notice. LIPA and Manager will agree on any reasonable
incremental costs which may be subject to
reimbursement for such accelerated budget
preparation.
xii. At LIPA's request upon reasonable notice, Manager
will provide, in any public or private forums,
explanation and support for the Manager's T&D
management activities (e.g. O&M budgets, capital
improvement budgets, rates, rate design, etc.). The
rate proposal is subject to public hearings prior to
approval by LIPA.
c. Adjustment to Annual and Five Year Planning Budgets
i. The five year planning budget will include a
projection of the Direct Cost budget based on the
load forecast most recently adopted by LIPA and a
projection of the applicable indices.
ii. The Third Party Cost annual and five year planning
budget will be adjusted annually.
iii. If Manager proposes changes in components of Third
Party Costs (e.g. rates for professional services,
unit costs for materials and supplies, postage rates,
insurance premiums, etc.) due to claims by Manager of
changes in costs significantly different from
previously applicable rates used in the adopted Third
Party Cost budget, Manager will provide documentation
of the basis of such changes. LIPA may require that
Manager demonstrate justification for increases in
components of Third Party Costs through competitively
bidding for contracts or services, or through other
means.
12. Determination and Payment of Direct Cost, Third Party Cost, and
Incentive Payments
a. LIPA will make a monthly payment to Manager equal to ninety
percent (90%) of the approved annual Direct Cost budget (the
"Fixed Direct Fee"). LIPA will make a monthly payment to
Manager for the monthly allocation of the approved Third Party
Cost annual budget. (Monthly allocation of such payments to be
determined based on historical monthly trends to minimize
working capital costs.).
The Agreement will also establish applicable interest rates
and charges due from one party to the other for carrying costs
for the timing of reimbursement for balances due one party by
the other for differences between the lesser of actual Total
Costs or the approved budgeted Total Costs and the monthly
payments for such costs.
b. In addition to the Fixed Direct Fee, Manager will be entitled
to a Variable Payment equal to the lesser of (a) the
difference between actual Total Costs (the sum of the Direct
Cost and the Third Party Cost), less the sum of the Fixed
Direct Fee and the
9
lesser of actual or budgeted Third Party Costs or (b) the
difference between the approved Total Cost budget (the sum of
the Direct Cost budget and the Third Party Cost budget) and
the sum of the Fixed Direct Fee and the lesser of the actual
or budgeted Third Party Cost. (Monthly allocation of such
payment to be determined based on historical monthly trends to
minimize working capital costs). For administrative ease, the
calculation of the variable payment to be made on a monthly
basis will be based on the difference between the Total Cost
budget and the sum of the amounts paid for the Fixed Direct
Fee and Third Party Costs.
c. To the extent actual Total Costs are less than the approved
Total Cost budget for the year, Manager will be paid the
portion of its Management Fee, described in paragraph 11.a.ii
relating to cost savings, in an amount equal to such cost
savings up to $5 million. Beyond such $5 million level,
Manager will be paid a Cost Incentive Fee equal to 50% of such
additional savings up to 15% of the Total Cost Budget. All
savings above this cap will be for the benefit of LIPA.
To the extent actual Total Costs, excluding the Management
Fee, are greater than the Total Cost budget, excluding the net
Management Fee, for the year, Manager will absorb the first
dollars of such overruns up to a total of $15 million. For
cost overruns in excess of this amount, Manager will be
entitled to a payment equal to the amount of such excess
overruns (the "Overrun Payment").
d. In no event will the ratio of (a) the sum of the Variable
Payment plus the Cost Incentive Fee plus the sum of the
Non-cost Performance Incentive Fees (described in Section 15)
plus the Overrun Payment divided by (b) the sum of (a) and the
Direct Fixed Fee be greater than twenty percent (20%).
e. During the first quarter of the next year of the Agreement,
the monthly payments will be (i) reduced by any overpayment by
LIPA resulting from the sum of actual Direct Costs and actual
Third Party Costs being less than the payments made by LIPA to
Manager for such costs during the previous year or (ii)
increased to reflect any Non-Cost Performance Fee earned by
Manager during the previous year and/or any Overrun Payment
Due. In the last year of the Agreement, such adjustments will
be made in the last month of the year for the first nine
months of the year, and a final adjustment will be made within
90 days after the end of the year.
13. Other Costs
a. "Other Costs" Definition
i. Other costs are those costs which cannot reasonably
be anticipated and shall include those costs Manager
and LIPA agree are not included in Direct Cost, Third
Party Cost or Major Capital Improvements, Additions
and Public Works budgets ("Other Costs"). Other Costs
will be defined in the
10
Agreement to include the Incremental Internal Costs
and additional Third Party Costs incurred by Manager,
as a result of events (including but not limited to
major storms and extreme weather) that Manager and
LIPA agree have caused costs to be incurred by
Manager to respond to significant (i) damage to or
adverse affects on the T&D system, (ii) changes in
the level of required maintenance or operation of the
T&D system, or (iii) tasks which are necessary for
safety reasons.
In addition, costs will be reimbursed as Other Costs
to the extent such costs are not included in the
Direct Cost Third Party Cost budget or Major Capital
Improvements, Additions and Public Works budget and
are incurred by Manager for work resulting from or as
a consequence of:
o changes in work scope and projects agreed to
by Manager and LIPA;
o changes in laws and regulations;
o determinations made by LIPA pursuant to
Section 9; or
o LIPA's assumption "of the day-to-day
direction" of Manager pursuant to Section
3(d).
ii "Incremental Internal Costs" shall include those
incremental internal costs incurred by Manager and
approved by LIPA to provide for Major Capital
projects, public works projects, and Other Costs
pursuant to the Agreement to the extent such costs
are not otherwise included as a Direct Cost or a
Third Party Cost. Such costs shall include, for
example, overtime wages, and wages and benefits for
any additional employees hired to perform the task
and any incremental allocation of costs related to
employees of the Manager's parent or affiliates.
iii. LIPA and Manager shall agree upon the occurrence of
an event that qualifies as one that has or is
anticipated to lead to Other Costs. LIPA's approval
of the reimbursement of Other Costs shall not be
unreasonably withheld. Other Costs will not be taken
into consideration in any determination of incentives
or penalties as contemplated in the Agreement.
b. Other Costs Reserve Estimate
Although Other Costs will not be budgeted, Manager will
recommend, and LIPA will adopt an annual reserve level for
Other Costs for each annual and five year T&D budget to enable
estimation of total revenue requirements for the T&D system.
Such estimate will also be used by LIPA for determination of
financial reserve requirements for the T&D system.
c. Other Costs Reimbursement
Manager will be reimbursed for reasonably incurred Other Costs
(as defined in Section 13. a.i). Payment for such costs will
be made as needed from reserves retained by LIPA. Approved
costs in excess of available reserves will be reimbursed in a
manner which minimizes working capital costs to LIPA. The
Agreement will establish a formula for applicable interest
rates and charges due
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from LIPA to Manager for carrying costs for the timing of
reimbursement by LIPA of approved Other Costs. The Agreement
will provide a timetable for payment of such approved Other
Costs.
14 Major Capital Projects & Public Works
a. Preparation of Major Capital Projects & Public Works ("Major
Capital") Plan and Budget
Contemporaneously with the annual O&M budget, Manager will
prepare an annual and five year Major Capital (to be defined)
plan and budget. Such plan and budget will identify:
i. proposed Major Capital expenditures by function (e.g.
transmission, substation, distribution,
communication, common plant, and public works) and
project location.
ii. project description
iii. planned initiation of the project and duration of
project, including capital expenditure per year if
the project requires more than a year to complete
iv. explanation of relationship to other planned or
subsequently required capital addition or improvement
of which the individual Major Capital project is a
component
v. the anticipated useful life of the improvement or
addition
vi. the reason for the capital improvement or addition,
accompanied by any evaluation of cost-effectiveness,
if the basis for the improvement or addition is for
net cost savings to system revenue requirements
vii. indication of whether the improvement or addition is
planned for performance by Manager work force or
contractor
Such Major Capital plan and budget will include explanation
and justification of costs in a form acceptable to LIPA. The
Agreement will include policies for determining which costs
are capital and which are O&M costs.
b. Schedule for Capital Plan and Budget Review
i. The annual and five year Major Capital improvement
plan and budget will be filed with the annual T&D
budget proposal. LIPA will provide preliminary
comments on the plan and budget within 60 days after
receipt, provided additional time for review, if
required, may be agreed to by the parties. LIPA will
release for public review and comment any proposed
annual and five year capital plan and budget
submitted to LIPA by Manager.
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ii. The annual Major Capital plan and budget must be
approved by LIPA before or contemporaneously with the
adoption of the annual T&D budget, and prior to or
contemporaneously with the adoption of any rate
adjustment by LIPA.
c. Basis for Capital Improvement and Addition Cost Determination
Capital improvements and additions will be performed, whether
by Manager's own forces or by contractor, at the cost of the
service without any multiplier fee or ▇▇▇▇-up. Construction
management and administration costs will either be
specifically budgeted on a project-specific outsourced basis,
or such costs will be captured within the Direct Cost budget.
d. Source of Financing of Capital Additions and Improvements
i. Approved capital additions and improvements will be
financed by LIPA, provided that LIPA and Manager may
agree to have Manager fund, subject to reimbursement,
capital additions below a certain budget level
threshold (to be established) in the event of
emergency (to be defined).
ii. LIPA will determine the means by which Major Capital
improvements will be financed by LIPA and applied to
revenue requirements (i.e. LIPA will determine
frequency of bond issues, principal amounts,
refundings, terms, etc.). Manager will reflect the
principal and interest repayment for capital
improvement financing in its projections for revenue
requirements. (LIPA will retain the right to fund
capital improvements and additions from current
revenue).
e. Procurement and Contracting Procedures
i. Along with its annual Major Capital plan and budget,
Manager will provide LIPA with an explanation of its
process for procuring equipment, construction, and
other services related to implementing the Major
Capital improvement and additions plan to achieve
favorable cost completion of the capital
improvements.
ii. LIPA may require Manager to solicit competitive bids
for all major (to be defined) capital improvements
and award such project(s) to the lowest responsible
bidder, which may be Manager itself, provided a
process is used which creates equal consideration of
bidders other than Manager. Manager shall promptly
notify LIPA of any reasonable objection to LIPA's
inclusion of a party on a bidders list.
f. Advancement of Funds for Capital Improvements and Additions
Once an annual Major Capital improvement budget is approved,
LIPA will advance funds in accordance with an agreed upon
draw-down schedule established to the mutual satisfaction of
LIPA and Manager for payment of approved capital
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expenditures.
Payment for public works projects will take into consideration
reimbursement made by the local authority or party requesting
the project.
g. Major Capital Improvements and Additions Cost Savings
Incentive
A formula for incentives for cost savings and penalties for
cost overruns and delays in scheduled completion of approved
Major Capital improvements or additions will be established,
with fees accruing to Manager for savings below the Major
Capital budget for the year on an aggregate basis. Incentives
and penalties will be trued-up upon the closing and acceptance
by LIPA of approved capital projects. Manager and LIPA
acknowledge that public works projects shall be treated apart
from other Major Capital in determination of these incentives
and penalties.
15. Non-Cost Performance Incentives and Penalties
In addition to the cost saving incentives described in Section 12,
Manager will be eligible for incentives for performance above certain
threshold target levels of performance standards and subject to
penalties for performance below certain other threshold minimum
performance standard levels, with an intermediate band of performance
in which neither incentives nor penalties shall apply, for reliability,
worker safety, customer service and system operation and dispatch as
described below:
a. Reliability - LIPA and Manager will establish a set of
reliability performance incentives and penalties, by
geographic operating division of the Long Island service
territory, using the objective and minimum values for the
System Average Interruption Frequency Index (▇▇▇▇▇) and the
Customer Average Interruption Duration Index (CAIDI) as
established by the NYPSC and which are in effect as of March
1997
b. Worker Safety - LIPA and Manager will establish mutually
agreeable targets for chargeable accidents based upon
historical levels.
c. Customer Service - LIPA and Manager will establish a set of
objective, measurable, customer service targets designed to
provide a basis for incentives or penalties for customer
service functions performed by Manager and within its control
such as customer call answering, meter reading, and customer
appointments.
d. System Operation and Dispatch Incentive Payments LIPA and
Manager will develop incentives and penalties for performance
related to agreed upon criteria, such as (1) providing least
cost of power supply; (2)maintaining a net required dependable
capacity; and (3) off-system sales from all dispatchable power
supply capacity. LIPA and Manager agree that the level of
funding provided pursuant to established budgets will be
consistent with the target performance standards to be
established as contemplated above.
e. In any one year in no event will the total of the non-cost
performance incentives, net
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of any applicable non-cost performance penalties, be greater
than $7.5 million, nor will the total non-cost performance
penalties, net of any applicable non-cost performance
incentives be greater than $7.5 million.
16. Manager's Reporting Requirements
a. Manager will provide LIPA, on a monthly and year to date
basis, a report of actual total T&D costs versus budget and
prior year. Such report shall be received no later than the
20th day of the following month and shall contain explanations
of significant variations to budget or prior year results.
b. Manager will, on a semi-annual basis within 60 days after the
end of each half of the operating year, provide LIPA with a
report of actual Direct Costs and Third Party Costs together
with:
i. explanation of significant variations from budget and
prior year amounts
ii. identification of those costs which are classified as
capital versus operating in order to allow LIPA to
determine which costs qualify for tax-exempt bonding
and which are recoverable through rates.
iii. identification of any material Direct Costs projects
or Third Party Costs projects which were included in
the Direct Cost Budget or the Third Party Costs
budget from the previous year which were deferred to
the current or proposed to be deferred to a
subsequent year, or such costs in the current year
which Manager proposes deferring beyond the current
operating year.
c. Manager will promptly notify LIPA when an event occurs, or is
anticipated to occur, that Manager believes qualifies for
treatment as an Other Cost. If practicable, Manager will
provide LIPA with an explanation and estimate of the
incremental costs caused by the event at the time of
notification. Manager will submit a billing, together with
appropriate supporting documentation, for reimbursement of the
related incremental costs of such event as soon as
practicable. LIPA will have the opportunity to review such
billing and, if necessary, will be granted access to Managers
books and records prior to reimbursing Manager. Such review
will be performed in a timely manner.
d. Manager will submit, concurrent with its annual report, its
request for payment of incentives earned in the period. Such
request shall include appropriate supporting documentation for
review by LIPA. LIPA will have the opportunity to review such
billing and, if necessary, will be granted access to Manager's
books and records prior to reimbursing Manager. Such review
will be performed in a timely manner.
17. Ownership of/Access to Facilities and Information: Appropriate LIPA
personnel or representatives will have unrestricted access to the T&D
system and to "allocated" common plant, and will be provided with
adequate on-site work space for LIPA to exercise its oversight rights
and responsibilities.
15
In addition, LIPA and its agents and advisors shall have reasonable
access to T&D System operation and training manuals (referred to in
paragraph 7a), and shall be required to maintain the confidentiality of
the information contained therein. A mutually agreed upon number of
copies of the operation and training manuals will be provided to LIPA.
Such manuals will be available for use by any subsequent manager,
provided any such manager is required by LIPA to also maintain the
confidentiality of the information contained therein and is prohibited
from using any such information other than in connection with the
management of the T&D System. In the event of future contract bids for
the management of the T&D System, such information, with the exception
of that information that the parties mutually agree is proprietary,
will be available to any qualified bidder.
LIPA will require qualified prospective bidders for such bid of the
Agreement to treat such operation and training manuals confidentially.
LIPA will hold Manager harmless from any claims made by third parties
based upon use by subsequent managers of such manuals.
18. Ownership of Information and Documentation: LIPA will have sole
ownership of information related to customers served by LIPA's T&D
system (except to the extent such information is also owned by NYECO in
its role as owner of the gas utility) and the operation of the T&D
System ("LIPA customer & operations data"). Manager may not use any
LIPA customer & operations data for non-LIPA related purposes without
LIPA's permission. Such permission, if granted, will be granted on a
nondiscriminatory basis. Neither Manager nor any affiliate will (1) use
customer information systems to extract, sort or otherwise use LIPA
customer & operations data (i.e. name, address, telephone number,
energy usage, etc.) or (2) mechanisms for customer access (e.g., meter
reading, customers representatives and service call center) achieved
solely as a result of Manager's role as Manager to market any services
to customers served by LIPA's T&D system other than the services
provided under the Agreement. To the extent LIPA customer & operations
data is available from other sources, neither Manager nor its
affiliates are precluded from using in its business such data obtained
from other sources.
19. Access Policies and Prices: LIPA intends to establish
non-discriminatory prices and policies for access to, and use of, its
transmission facilities for its customers, Manager, and other parties
providing similar services in a manner which are designed to enable
LIPA to recover its costs and will not inequitably shift costs among
customers or classes of customers.
20. Limitations of Rights of LIPA: Manager must not have any role or
relationship with LIPA that, in effect, substantially limits LIPA's
ability to exercise its rights, including cancellation rights, under
the contract.
21. Scope of Manager Services: Manager is required to furnish all of the
tools, materials, equipment and labor to safely, reliably and
economically operate and maintain the system and carry out the
responsibilities described above. All services will be provided in
accordance with applicable codes, rules, regulations, and in accordance
with good utility practice. In the event Manager is not retained beyond
the basic contract term
16
or the contract is terminated, the contract requires that employees of
Manager be free to switch employment to LIPA or the successor manager.
22. Transfer of Operations
a. LIPA will notify Manager of the selection of a new manager, as
a result of the competitive bid discussed above, no later than
6 months before the services to be provided under the
agreement are to be terminated. Manager will be reimbursed for
mutually agreeable transition costs. Manager will cooperate in
the smooth transition to the new manager including the
transfer of all records, customer lists and account
information, operations and training manuals for all
facilities, personnel information, etc. If required by LIPA,
Manager will endeavor to retain any or all key operating and
management employees and make them available after the
termination of the contract for an agreed upon period to
provide consulting advice to the new manager at a commercially
reasonable negotiated rate.
b. An exit test will be performed at the date of transfer of the
T&D system to confirm (1) that Manager has performed the
maintenance and capital improvement activities which were
budgeted for the final year of the Agreement or as otherwise
previously approved by LIPA and Manager, in such final year
and (2) that Manager has completed any remedial activities to
cure maintenance deficiencies or capital improvements which
were previously determined to be incomplete as noted by LIPA
pursuant to the most recently conducted review of the
condition of the system which review shall be conducted
annually. If, as a result of such exit test, an independent
engineer selected by LIPA and agreed to by Manager, finds that
maintenance, capital improvement, replacement, or remedial
activities described in (1) and (2) above have not been
performed in accordance with the Agreement, and that LIPA has
provided the funds for such activities as part of the payments
made during such final year or in the case of items noted as
deficiencies or incomplete items pursuant to (2) above were
funded by LIPA in a previous year, Manager shall, in its
discretion, either perform such incomplete maintenance,
capital improvement, replacement, or remedial activities
without further compensation from LIPA, or within 90 days
after termination of the Agreement, Manager shall reimburse
LIPA for the cost to complete such work.
23. Termination Causes and Obligations Upon Termination:
a. LIPA and Manager will each have the right to terminate the
Agreement for cause. Except in the case of termination for
bankruptcy or insolvency, any such termination will be subject
to a 2-year notice provision.
▇. ▇▇▇▇'▇ causes for termination will include:
i. A change of control of Manager, with notice to be
given within 6 months of the change of control. The
LILCO/BUG combination will not constitute a change of
control for purposes of the Agreement;
17
ii. Bankruptcy, insolvency, etc. of Manager;
iii. Failure to achieve, for two out of three consecutive
years both an ▇▇▇▇▇ and CAIDI for any of the same
individual system geographic operating divisions
which is greater than an agreed upon acceptable
respective ▇▇▇▇▇ or CAIDI level. If such failure is
not capable of being cured within the three year
period, Manager shall provide assurances satisfactory
to LIPA that appropriate steps have been taken to
effect a cure and that such failure will be cured
within an appropriate period;
iv. Failure for two out of three consecutive years, for
reasons other than extreme weather, to achieve a
Worker Safety index which is no less than an agreed
upon deviation below a minimum threshold index level,
based on the last three years of data;
v. Failure for two out of three consecutive years to
achieve a Customer Service level no less than an
agreed upon deviation below the level established in
the initial year of operation; and
vi. Material breach of the Agreement, after notice and an
appropriate period to either cure such breach, or, if
such breach is not capable of being cured within such
period, to provide assurances satisfactory to LIPA
that appropriate steps have been taken to effect a
cure and that such breach will be cured within an
appropriate period.
c. Manager's causes of termination will include:
i. A change in control of LILCO (after acquisition by
LIPA) which results in ownership control of LILCO by
other than a State agency, with notice to be given
within 6 months of the change of control;
ii. Failure to make any required payment under the
Agreement within 90 days of being due, except to the
extent that such payment is being disputed; and
iii. Material breach of the Agreement, after notice and an
appropriate period to cure such breach, or, if such
breach is not capable of being cured within such
period, to provide assurances satisfactory to Manager
that appropriate steps have been taken to effect a
cure and that such breach will be cured within an
appropriate period.
d. Except in the case of termination for a change of control or
bankruptcy or insolvency, the Agreement will provide for an
accelerated process for arbitration with an intermediate step
of expedited, limited mediation in the event of challenge by
Manager due to LIPA's termination of Manager. The 2-year
period for notice of termination shall continue to run during
the pendency of any such arbitration, and the Agreement shall
terminate at the end of such period, absent a final ruling to
the contrary.
18
e. In addition to the right to terminate the Agreement, Manager
and LIPA shall each be entitled to seek injunctive relief in
the event of any material breach by the other party of the
Agreement.
24. Audit/oversight function: Manager must ▇▇▇▇▇ ▇▇▇▇ access to Manager's
books, records and facilities as reasonably required to perform LIPA's
audit and oversight of the Agreement. Such function shall include, to
the extent necessary, on-site contemporaneous direct observation and
audit of operations.
25. Key Executives: Key executives responsible for providing service under
the Agreement must be approved by LIPA, and such approval will not be
unreasonably withheld.
26. Other terms: The agreement will also include provisions for, other
matters not addressed herein.
19
Exhibit C
POWER SUPPLY AGREEMENT (GENCO) - MATERIAL TERMS
Power Supply Agreement shall contain, among other provi-
sions, the following material terms and conditions:
I LIPA will purchase all the Long Island generation capac-
ity currently owned by LILCO from GENCO for an initial
period of 15 years, subject to the ramp down provisions
of section XVI. The current summer Dependable Maximum
Net Capability (DMNC) of this capacity is approximately
3900 MW.
II At the end of the initial 15 year contract period, LIPA
will have the option of renewing the Power Supply Agree-
ment, for all capacity upon which it has not exercised
its "ramp down" option, under essentially the same terms
and conditions herein described.
III LIPA will pay GENCO a Capacity Charge on an annual basis
for this capacity, the capacity charge will be paid
monthly in an amount equal to one-twelfth (1/12) of the
capacity charge, where:
Capacity Charge is equal to the total fixed
cost revenue requirements of its generation,
based on a cost of service calculation,
including: capital and approved capital
addition costs, return, depreciation, federal
income taxes, property and other taxes,
administrative costs and fixed operations and
maintenance costs, but not including tear
down costs, environmental remediation or site
restoration beyond what is presently in the
depreciation charge.
Generation charges will not be increased as a
result of the stepped-up basis of the assets.
The capital related charges will also reflect
a mutually agreeable theoretical capital
structure.
IV LIPA will pay GENCO a variable cost component which con-
tains variable operation and maintenance charges where:
Variable O&M costs for each generating unit
will become effective only after a threshold
number of starts for the steam units (or MW
hours of operation for the internal combus-
tion units) have been experienced on the spe-
cific generating unit, in order to account
for excessive wear and tear. In addition,
for the steam units, a variable O&M charge
will become effective for each fuel swap (gas
to
1
oil or oil to gas) after a threshold amount.
The fixed O&M charges will only account for
costs up to the threshold number of starts,
operations, or fuel swaps.
V Whenever GENCO's units are required to operate for grid
support to maintain the reliability of the electric system
on Long Island, LIPA agrees to pay for all additional
costs.
VI The contract will include true-ups on a periodic basis to
account for unforeseen changes in costs such as: appro-
priate inflation indices, taxes, environmental compliance
(due to a change in law and/or regulation), approved
unbudgeted capital additions, etc. A provision will be
established by mutual agreement to provide an incentive
for GENCO to seek an appropriate assessment of property
taxes.
VII GENCO shall have the responsibility for managing the fuel
supply. GENCO will be compensated for such fuel manage-
ment services, which compensation will include incentives.
GENCO, in consultation with LIPA, shall determine the type
of fuel used for operating the Generation Facilities, and
the source of such fuel supply. GENCO will:
1) negotiate and execute fuel supply contracts with one
or more entities;
2) nominate fuel deliveries; and
3) take all action related to the delivery, receipt,
handling, storage, on-site transportation and use of
fuel.
VIII NYECO will market excess capacity/energy from the GENCO
generating units which is not needed by LIPA's customers
under its Management Services Agreement with LIPA. NYECo
will share with LIPA any revenues in excess of marginal
costs resulting from such energy sales. NYECo will
receive an incentive payment for any excess capacity
sales.
IX LIPA will provide open access to NYECo on its transmission
system to the extent available, priced at applicable FERC
tariffs or other non-discriminatory terms and prices.
X GENCO will operate the GENCO generating units to provide
various ancillary services as defined by the New York
Power Pool (NYPP). LIPA will pay for/receive any net
incremental cost/benefit.
XI LIPA will assume all existing LILCO contracts for firm
power purchases and transmission agreements, including
Independent Power Producer (IPP) and
2
cogeneration purchases, and the firm capacity contracts
for the New York Power Authority (NYPA) ▇▇▇▇▇▇▇▇▇▇▇ and
Gilboa plants. Upon the signing of a definitive
acquisition agreement with LILCO, LIPA will be consulted
regarding any changes or additions to these contracts
prior to the transaction date. For new firm capacity or
transmission purchases in excess of 75 MW, or lasting more
than two (2) years beyond the date of the agreement in
principle, consent will be obtained from LIPA.
XII As part of the Management Services Agreement between NYECo
and LIPA, a dispatch operation will be established on Long
Island to which all power sources on Long Island and off
Long Island will have equal access.
XIII GENCO's nonessential personnel will be made available to
perform storm restoration duties for LIPA upon LIPA's
request. LIPA will pay for all incremental costs of storm
restoration services performed by GENCO personnel.
XIV Three performance incentive/penalty mechanisms are estab-
lished in the GENCO contract:
DEPENDABLE MAXIMUM NET CAPABILITY (DMNC):
GENCO will maintain its generating units such that
during the summer capability period the DMNC deter-
mined in accordance with the New York Power Pool (or
successor entity) MP-2 procedure (or successor proce-
dures) meets or exceeds the target.
LIPA and GENCO will agree upon a DMNC target level
for GENCO's steam and IC units.
An incentive is earned for DMNC above the agreed upon
level.
The incentive will be an agreed upon level per MW,
capped at an agreed upon level.
AVAILABILITY:
During the three month summer peak period, the avail-
ability of its steam and IC units will meet or exceed
the target as measured by the NERC-GADS Availability
Factor formula.
The target availability for GENCO's units will be
agreed upon by Genco and LIPA.
3
An incentive is earned for availability above an
agreed upon level.
The incentive earned will be an agreed upon level for
each 0.1% that availability is above the target, and
will be capped at an agreed upon annual level.
FUEL:
An incentive amount equal to 50 percent of the sav-
ings realized when comparing the monthly system aver-
age cost of oil and gas purchased for the generating
facilities versus an agreed to monthly system average
oil/gas index. This incentive amount will not exceed
$7.5M on an annual basis.
XV GENCO shall prepare and submit to LIPA three five-year
budget plans during the term of the fifteen-year contract.
The initial budget for Direct Costs will be based upon the
agreed upon disaggregated GENCO costs portion of the pro-
posed 1997 test year budget in the LILCO 1996 rate case
filing with the New York State Public Service Commission,
adjusted to 1999 (the anticipated first full calendar year
of operation under the Agreement). Adjustments to the
1997 base budget will include, but not be limited to
adjustment of union labor costs in accordance with the
existing union labor contract, non-union labor costs in
accordance with agreed upon indices, other indices as used
in the 1996 rate case filing to adjust from the 1997 test
year to the 1999 revenue requirements estimate, and known
changes in facts and circumstances. Such budget shall
also consider actual historical results for 1996 up to the
date of adoption of the final budget.
Subsequent budget plans will be based upon the rate case
costs, subject to appropriate inflation indices and will
be submitted for LIPA review in advance of each five-year
budget period. LIPA shall be provided an opportunity to
request changes, additions, or deletions prior to the
adoption of a final budget plan. GENCO and LIPA will
develop a mutually agreeable mechanism for LIPA to review
GENCO's performance relative to the final budget plan. In
addition, as part of each five-year budget, GENCO will
provide an annual projection for incremental capital
expenditures and associated rate adjustments for LIPA
review and approval.
XVI "RAMP DOWN"
A. Contract will have a capacity "ramp down" option
beginning in year 7 in an aggregate potential reduc-
tion amount of approximately 1500 MW. The order of
the ramp down will be established by mutual agree-
ment. The currently anticipated schedule is as fol-
lows:
4
CAPACITY CONTRACT CAPACITY
BLOCK YEAR UNITS DMNC
1 7 - 9 Far Rockaway 4 300 MW
Glenwood 4 & 5
2 10 - 11 ▇.▇. ▇▇▇▇▇▇▇ 1 & 2 380 MW
3 12 - 13 Pt Jefferson 3 & 4 380 MW
4 14 - 15 Northport 1 380 ▇▇
▇. The bid amount shall be for the full amount of the
capacity in each agreed upon capacity block.
C. After receiving bids, if LIPA exercises this option
in years 7 to 10, GENCO will receive 100% of the
present value of all the related Capacity Charges it
would have otherwise received for that capacity block
of unit(s) for the remainder of the 15 year contract
adjusted for the removal of net salvage from the
depreciation calculation. GENCO will have the
responsibility for all tear down costs, environmental
remediation and site restoration. If LIPA exercises
this option in subsequent years, the recovery per-
centage will be reduced for such capacity block(s)
through the end of the 15 year contract as follows:
YEAR OPTION CAPACITY
EXERCISED CHARGE REDUCTION
11 12.5%
12 25%
13 37.5%
14 50%
15 62.5%
D. The present value will be determined by GENCO's
weighted cost of capital used in the capacity charge
to LIPA.
E. Capital expenditures, if approved by LIPA, will be
included in the capacity charges and recovered as
described above. If the economic
5
useful life of any proposed capital addition
significantly exceeds the remaining term of the
contract, LIPA and GENCO will negotiate a mutually
agreeable cost recovery mechanism.
▇. ▇▇▇▇▇ may use any capacity released pursuant to this
option to bid on new LIPA capacity or on other ramp-
down amounts. If GENCO wins the bid, it will be paid
its bid price.
G. Allocation of profits on off-system sales (wholesale
or future retail) for capacity and energy from spe-
cific units during the term of the contract will be
shared based upon LIPA's then current payment of or,
pursuant to the ramp down option, LIPA's prepayment
of the related remaining capacity payments according
to the following schedule:
NON RAMPED DOWN CAPACITY
Years 1 to 15 67% LIPA/33% LILCO
RAMPED DOWN CAPACITY
Years 7 to 10 67/33
Year 11 60/40
Year 12 53/47
Year 13 46/54
Year 14 39/61
Year 15 33/67
H. If LIPA's exercise of this option results in opera-
tional inefficiencies, at Northport, the power sales
capacity price will be adjusted to reflect demon-
▇▇▇▇▇▇▇ cost increases due to such inefficiencies.
XVII GENERATION PURCHASE PROVISION
A. After the third year of the generation contract term,
LIPA has a one year window in which it can purchase
for Fair Market Value not less than all of GENCO's
generating assets on Long Island (i.e. - All existing
generating capacity on Long Island currently owned by
LILCO), including appropriately sized parcels, as
determined by LIPA's consulting engineer and con-
firmed by a mutually agreeable
6
independent consulting engineer at each of its
existing generating sites.
▇. ▇▇▇▇ and LILCO will each select an investment bank to
determine the price at Fair Market Value. If no
agreement can be reached a third investment bank,
acceptable to both NYECo and LIPA will be selected to
mediate. LIPA will pay all investment banking fees,
but must agree to all fees in advance.
C. All proceeds from the sale are to NYECo's account.
D. If LIPA exercises this option, it will have the right
to choose a new manager of the generating assets or
establish a generating management contract with NYECo
with sufficient notice to provide for an orderly
transition or enter into a contract with NYECo.
▇. ▇▇▇▇ agrees that no layoffs or salary cuts to NYECO
non-union personnel will result from its purchase of
GENCO's assets for two (2) years.
7
OWNERSHIP OF GENERATION SITES
LIPA will have a perpetual right to lease or purchase
appropriately sized and sited parcels, as reasonably
determined by LIPA's consulting engineer and con-
firmed by a mutually agreeable consulting engineer,
at any of NYECo's existing generating properties for
the construction of new power plants to be owned by
LIPA or its designee.
The lease or purchase price will be at Fair Market
Value (FMV) as determined by an independent real
estate appraiser. The appraisal methodology can be
determined prior to closing.
Without limiting its future rights, LIPA has the
right to identify certain sites prior to closing.
NYECo will in no way limit or restrict LIPA's ability
to investigate and identify parcels. After closing
of either a lease or purchase, LIPA may then engage
in site preparation or construction and operation at
any site.
LIPA will be granted some measure of control over
NYECo's ability to sell or lease sites to a third
party for the purpose of constructing a generating
facility (e.g. right of first or last refusal).
LIPA will acquire for FMV an appropriately sized par-
cel, as reasonably determined by LIPA's consulting
engineer and confirmed by a mutually agreeable inde-
pendent consulting engineer, at the Shoreham site to
serve as the terminus for an undersound cable (nomi-
nal rating approximately 600 MW) and the site for up
to approximately 600 MW of new gas fired combined
cycle generating facilities and be granted unlimited
access to the site as well as appropriate easements.
GENCO will retain ownership of the combustion turbine
and diesel peaking units located on this site, and
will be granted unlimited access to such facilities.
8