TAX INDEMNITY AGREEMENT
Dated as of February 29, 1996
between
OLD DOMINION ELECTRIC COOPERATIVE
and
FIRST UNION NATIONAL BANK OF FLORIDA,
as Owner Participant
CLOVER UNIT 1 GENERATING FACILITY
AND
COMMON FACILITIES
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS.................................................... 1
SECTION 2. TAX ASSUMPTIONS................................................ 2
SECTION 3. TAX REPRESENTATIONS, WARRANTIES AND COVENANTS.................. 3
SECTION 4. INDEMNITY...................................................... 5
SECTION 5. TAX SAVINGS.................................................... 12
SECTION 6. CONTESTS....................................................... 13
SECTION 7. CERTAIN ADJUSTMENTS............................................ 15
SECTION 8. MISCELLANEOUS.................................................. 15
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TAX INDEMNITY AGREEMENT
This TAX INDEMNITY AGREEMENT, dated as of February 29, 1996
(this "Tax Indemnity Agreement" or this "Agreement"), between OLD DOMINION
ELECTRIC COOPERATIVE, a wholesale power supply cooperative organized under the
laws of the Commonwealth of Virginia (together with its successors and assigns,
"Old Dominion"), and FIRST UNION NATIONAL BANK OF FLORIDA, a national banking
association (together with its successors and assigns, the "Owner Participant").
WITNESSETH:
WHEREAS, in entering into the transactions contemplated by the
Operative Documents, the Owner Participant made the assumption that it would be
entitled to certain income tax benefits identified in Section 2 of this
Agreement, and Old Dominion has agreed to indemnify the Owner Participant under
certain circumstances for the loss of certain of such benefits.
NOW, THEREFORE, as an inducement to the Owner Participant to
enter into the transactions contemplated by the Operative Documents and in
consideration of the mutual covenants contained in this Agreement and in the
other Operative Documents, the parties agree as follows:
SECTION 1. DEFINITIONS.
Unless the context otherwise requires, capitalized terms used
in this Tax Indemnity Agreement and not otherwise defined herein shall have the
respective meanings specified in Appendix A to the Participation Agreement,
dated as of February 29, 1996 (the "Participation Agreement"), between Old
Dominion, State Street Bank and Trust Company, not in its individual capacity
except as expressly provided therein, but solely as trustee of the Trust
Agreement referred to therein and Utrecht-America Finance Co., as a lender and
as agent for the lenders named therein. For purposes of this Agreement, the term
"Owner Participant" includes any member of an affiliated group of corporations
of which the Owner Participant is, or shall become, a member if consolidated
returns are or shall be filed for such affiliated group for federal income tax
purposes; the term "Head Lease" shall mean the Equipment Head Lease together
with the Foundation Head Lease; the term "Undivided Interest" shall mean the
Equipment Interest together with the Foundation Interest; the term "Basic Head
Lease Rent" shall mean the Basic Equipment Head Lease Rent plus the Basic
Foundation Head Lease Rent; the term "Operating Lease" shall mean the Equipment
Operating Lease together with the Foundation Operating Lease; the term "Basic
Rent" shall mean the Basic Rent plus the Foundation Basic Rent; the term
"Undivided Interest Cost" shall mean the Equipment Interest Cost plus the
Foundation Interest Cost; and the term "Purchase Option Price" shall mean the
Purchase Option Price together with the Foundation Purchase Option Price. All
references to Sections herein are to Sections of this Tax Indemnity Agreement
unless otherwise indicated and the words "herein", "hereof" and "hereunder" and
other words of similar import refer to this Tax Indemnity Agreement as a whole
and not to any particular Section or other subdivision.
SECTION 2. TAX ASSUMPTIONS.
Old Dominion acknowledges that the Owner Participant entered
into the transactions contemplated by the Operative Documents on the basis of
certain income tax assumptions, including, among others, the following
assumptions for federal income tax purposes (the "Tax Assumptions"):
(a) The Head Lease will be treated as a current sale of the
Undivided Interest by Old Dominion to the Owner Trustee and the Basic
Head Lease Rent will be treated as the purchase price for such sale.
(b) The Operating Lease will be a "true lease", the Owner
Participant will be treated as the purchaser, owner and lessor of the
Undivided Interest and Old Dominion will be treated as the lessee
thereof.
(c) The obligations evidenced by the Loans will constitute
indebtedness of the Owner Trustee, and the Owner Participant will be
entitled to current deductions under section 163 of the Code for
interest accrued thereon (the "Interest Deductions").
(d) The Undivided Interest will be treated as "tax-exempt use
property" as defined in section 168 of the Code.
(e) The Owner Participant's tax basis in the Undivided
Interest on the Closing Date will be equal to the Undivided Interest
Cost, and the Owner Participant will be entitled to cost recovery
deductions beginning in the taxable year of the Owner Participant that
includes the Closing Date under section 168(g)(2) of the Code on a
straight-line basis using a "half-year" convention and a recovery
period equal to (i) 125% of the combined Interim Term and Basic Term in
the case of the portion of the Undivided Interest which constitutes ADR
"electric utility steam production plant" assets, (ii) 30 years in the
case of the portion of the Undivided Interest which constitutes ADR
"electric utility transmission and distribution plant" assets and (iii)
40 years in the case of the portion of the Undivided Interest which
constitutes non-residential real property under section 168 of the Code
(the "Depreciation Deductions").
(f) The Owner Participant will be entitled to amortize the
Transaction Costs paid by it attributable to (i) the Operating Lease on
a straight-line basis over the combined Interim Term and Basic Term and
(ii) the Loans on a straight-line basis over the term of the Loans
(collectively, the "Amortization Deductions").
(g) The Owner Participant's marginal federal income tax rate
at all times during the Term will be 35% and its combined effective
federal, state and local tax rate will be 36.7875% (the "Effective
Rate"); the Effective Rate will be applicable to all items of income
and deduction of the Owner Participant for federal income tax purposes
attributable to the transactions contemplated by the Operative
Documents; and, the Owner Participant will always have sufficient
taxable income to utilize the Interest Deductions, Depreciation
Deductions and Amortization Deductions.
(h) The Owner Participant's accrual of Basic Rent will not be
computed by reference to section 467(b)(2) of the Code.
(i) The Basic Rent and all other amounts received under the
Operating Lease or with respect to the transactions contemplated by the
Operative Documents and the Interest Deductions, Amortization
Deductions and Depreciation Deductions will be treated as derived from,
or allocable to, sources within the United States pursuant to section
861 of the Code.
(j) The Undivided Interest will be treated as "placed in
service" by the Owner Participant within the meaning of section 168 of
the Code on the Closing Date.
(k) As a result of entering into the transactions contemplated
by the Operative Documents, the Owner Participant will not be required
to include any amount in gross income other than (i) Basic Rent in the
amounts and at the times such payments are accrued pursuant to the
terms of the Operating Lease, (ii) gain upon the receipt of Termination
Value (or other amounts based on Termination Value) on the date such
amount is determined to be paid and in the amount equal to the excess
of the payment over the Owner Participant's adjusted basis in the
Undivided Interest or the relevant portion thereof, (iii) gain upon the
receipt of the Purchase Option Price at the time such payment is
required to be made, (iv) any amount payable to the Owner Participant
on an After-Tax Basis on the date such amount is payable, (v) any other
amount to the extent it results in an equal and offsetting deduction of
the same character in the same taxable year as the inclusion and (vi)
amounts identified as interest under the Operative Documents.
(l) The Trust created for the benefit of the Owner Participant
will be treated as a grantor trust, and the Owner Participant, as owner
of the Trust, will be entitled and required to take into account, in
computing its federal taxable income, all items of income, gain, loss
or deduction with respect to the Undivided Interest.
Old Dominion does not make any representation, warranty or covenant with respect
to any of the foregoing assumptions (except to the extent set forth in Section 3
hereof). Except as expressly provided herein, Old Dominion has no obligation to
indemnify the Owner Participant by reason of any of the above assumptions
proving to be incorrect. If the Owner Participant shall suffer a Loss (as such
term is defined in Section 4 below) with respect to which Old Dominion is
required to pay an indemnity hereunder or in the event of any rental adjustment
under Section 3.4 of the Operating Lease involving a change in the Tax
Assumptions, then the Tax Assumptions, without further act of the parties
hereto, shall thereafter be and be deemed to be amended, if and to the extent
appropriate, to reflect such Loss or change in Tax Assumptions.
SECTION 3. TAX REPRESENTATIONS, WARRANTIES AND COVENANTS.
Old Dominion represents, warrants and covenants that for federal income
tax purposes:
(a) All written information supplied by or on behalf of Old
Dominion to the Appraiser or the Engineer and identified in an appendix
to the Appraisal or the Engineering
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Report as relied upon by the Appraiser or the Engineer, as the case may
be, was accurate in all material respects as of the date so supplied
and as of the Closing Date, and Old Dominion did not omit to supply any
other information available to Old Dominion which would render such
supplied information misleading in any material respect.
(b) Neither Old Dominion, nor any Person in possession of the
Undivided Interest or any portion thereof, the Pollution Control Assets
Lessor, Virginia Power or any Affiliate of any thereof (each, a "Lessee
Person" and collectively, the "Lessee Group"), will take any position
in any filing by it for United States federal, state or local income
tax purposes that is inconsistent with the Tax Assumptions.
(c) Old Dominion, together with its Affiliates, will not at
any time hold directly or indirectly (i) more than 90% in aggregate
principal amount of all Loan Certificates then outstanding; or (ii) any
interest whatsoever in a Series B Loan Certificate.
(d) On the Closing Date, there will not be any agreements,
side letters or other arrangements (or plan or expectation of such
agreements, side letters or other arrangements) not disclosed in
writing to the Owner Participant prior to Closing (i) between any
member of the Lessee Group and any Person pertaining to the exercise or
non-exercise by Old Dominion of any of the options set forth in Section
15 of the Operating Lease and (ii) between any member of the Lessee
Group and any Person or, to Old Dominion's knowledge, between any
Persons (other than Owner Participant or the Owner Trustee) pertaining
to the Loan Certificates or the Deposit.
(e) On the Closing Date, the Clover Unit 1 Generation Facility
will not require any improvement, modification or addition (other than
ancillary items of removable equipment of a kind that are customarily
selected and furnished by purchasers and lessees of similar equipment
and various "punch list" type items) in order for the Undivided
Interest to be rendered complete for its use by any Lessee Person.
(f) After payment of the Undivided Interest Cost of the
Undivided Interest, each Lessee Person will have been fully reimbursed
for the cost of its investment in the Undivided Interest.
(g) The Undivided Interest will have been "placed in service"
within the meaning of section 168 of the Code prior to the Closing
Date.
(h) Old Dominion will treat the Head Lease as effecting a sale
of the Undivided Interest by Old Dominion to the Owner Participant for
all United States federal, state and local income tax purposes.
(i) The allocation of the Undivided Interest Cost among the
components of the Undivided Interest are as set forth in the Appraisal
(this is not a representation that the Owner Participant is the owner
of the Undivided Interest for federal income tax purposes).
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(j) Old Dominion and Virginia Power have effectively elected
to be excluded from the provisions of subchapter K of the Code with
respect to Clover Unit 1 Generation Facility pursuant to section 761(a)
of the Code, and such exclusion election is in full force and effect as
of the Closing Date.
(k) Other than capital improvements which would normally be
expected with a power generating facility similar to Clover Unit 1
Generation Facility, Old Dominion has no plan or expectation, and is
unaware that Virginia Power has any plan or expectation, of making any
capital improvements to Clover Unit 1 Generation Facility during the
Term, except as disclosed in writing to the Appraiser prior to Closing.
(l) The Depreciation Deductions will not fail to be available
to the Owner Participant by reason of section 168(f)(2) of the Code
unless such failure results from the Owner Trustee or the Owner
Participant being a public utility (other than solely by reason of the
transactions contemplated by the Operative Documents).
SECTION 4. INDEMNITY.
(a)(1) If as a result of:
(i) any act or failure to act by a Lessee Person (including
any amendment or supplement to any Operative Document, the Clover
Agreements, the Pollution Control Assets Lease, the Old Dominion
Indenture or Old Dominion Bonds) other than (w) the execution and
delivery of the Operative Documents, the Clover Agreements, the Old
Dominion Indenture or the Pollution Control Assets Lease, (x) any act
required or expressly permitted by any Operative Document (other than
refinancings pursuant to Section 10 of the Participation Agreement and
modifications and substitutions pursuant to Section 7 or 8 of the
Operating Lease), (y) any omission to perform any act, which omission
is required or expressly permitted by any Operative Document and (z)
any act or failure to act taken or not taken at the express written
request of any member of the Lessor Group other than an act or failure
to act that is (I) required by the Operative Documents or (II) a
permitted act or omission excluded by the parenthetical phrase in
clause (x); or
(ii) the breach or inaccuracy of any representation, warranty
or covenant set forth in Section 3(a) through 3(l) of this Agreement or
Sections 7.12 of the Participation Agreement; or
(iii) any Event of Loss or other loss, damage, destruction,
non-use, theft, seizure, confiscation, forfeiture, condemnation,
taking, requisition of title, requisition of use, removal or
replacement of, or substitution to, the Undivided Interest or any
portion thereof; or
(iv) any payment to Old Dominion or any other Person of any
damages, refunds, warranty, indemnity or other similar amounts with
respect to the Undivided Interest or any portion thereof to the extent
such payment is not paid over to or retained by the Owner Trustee or
the Owner Participant; or
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(v) any bankruptcy or insolvency of any Lessee Person or any
foreclosure or remedies taken while an Event of Default shall have
occurred and be continuing; or
(vi) the failure on or before two years from the Closing of
Clover Unit 1 to achieve an operating capacity of 391 (net) MW on a
continuous basis while meeting the NOx emission limitations of 0.32
lb./mmbtu and 1,307.2 lb./hr. (in each case as determined on a thirty
day rolling average);
the Owner Participant shall for federal income tax purposes lose, shall not
have, or shall suffer a disallowance of the right to claim, shall suffer a
disallowance, elimination, reduction, disqualification or deferral of, or shall
be required to recapture all or any portion of, or shall not claim (based on a
written opinion of independent tax counsel selected by the Owner Participant and
reasonably acceptable to Old Dominion not less than 30 days prior to the date on
which the tax return is filed on which such claim will not be made, to the
effect that there is no Reasonable Basis to make such claim) the Interest
Deductions, Depreciation Deductions or Amortization Deductions (any of the
events so resulting being referred to hereinafter as a "Loss of Deductions"); or
(2) if as a result of:
(i) any (x) Event of Loss to the extent the actual date on
which the income tax consequences thereof are required to be taken into
account is different from the date assumed in calculating the income
tax consequences reflected in the applicable Termination Value or (y)
refinancings, substitutions or improvements of the Undivided Interest
or any portion thereof; or
(ii) any payment to Old Dominion or any other Person of any
damages, refunds, warranty, indemnity or other similar amounts with
respect to the Undivided Interest or any portion thereof to the extent
such payment is not paid over to or retained by the Owner Trustee or
the Owner Participant; or
(iii) the prepayment of Basic Rent, or any Lessee Person's
taking of a deduction for Basic Rent with respect to a period that is
inconsistent with the allocation of Basic Rent under the Operating
Lease; or
(iv) a change, adjustment or modification of the schedule of
Basic Rent following an Event of Default; or
(v) the payment by any Lessee Person of any contest expenses
in respect of the transactions contemplated by the Operative Documents;
or
(vi) any foreclosure or other pursuit of remedies while an
Event of Default shall have occurred and be continuing; or
(vii) any loss, damage, casualty, theft, taking, confiscation,
requisition, seizure or condemnation of the Undivided Interest or
Clover Unit 1 Generation Facility not constituting an Event of Loss; or
(viii) the payment by Lessee of any of the expenses of the
Owner Participant, the Owner Trustee, the Trust Estate, or any Lender;
or
(ix) any payments made in connection with the establishment of
a Power Sales Agreement (to the extent that the payment is not made to
the Owner Participant on an AfterTax Basis pursuant to Section 15.3 of
the Operating Lease);
the Owner Participant shall be required to include in gross income for federal
income tax purposes any amount at any time other than as set forth in Section
2(k) (an "Income Inclusion", any "Loss of Deductions" or "Income Inclusion"
being referred to herein as a "Loss"), then Old Dominion will pay to the Owner
Participant an indemnity determined pursuant to Section 4(b) below. If a Loss
shall occur, the Loss shall be deemed to include a corresponding loss of tax
benefits for state and local income tax purposes, as follows: (x) state and
local income tax deductions shall be treated as allowable or lost in the same
amounts, at the same time and to the same extent as the corresponding federal
income tax deduction are allowable or lost, and (y) an Income Inclusion shall be
treated as requiring an inclusion in gross income for sate and local income tax
purposes corresponding in timing and amounts to the inclusion for federal income
tax purposes.
(b) If a Loss shall occur, then Old Dominion will pay to the
Owner Participant as an indemnity an amount, at the election of Old Dominion,
determined in accordance with paragraph (1), (2) or (3) below:
(1) So long as no Event of Default has occurred and is
continuing and Old Dominion's Bonds are rated at least BBB- by S&P or
Baa3 by ▇▇▇▇▇'▇, Old Dominion may elect to make indemnity payments in
the form of upward adjustments in the amount of Basic Rent payable by
Old Dominion pursuant to the Operating Lease, commencing on the next
Rent Payment Date after the date the payment obligation commences under
Section 4(c) below and continuing on each Rent Payment Date occurring
thereafter during the Basic Term, in amounts such that, on an After-Tax
Basis, the sum of all such payments provided by this paragraph (1)
shall be at least sufficient to preserve the Net Economic Return of the
Owner Participant as if such Loss had not occurred. The computation
thereof shall be made utilizing the methodology and assumptions,
including the Tax Assumptions, utilized by the Owner Participant in
determining Basic Rent and Termination Value, except as such
assumptions shall be varied to take into account such Loss and any
prior Loss. The computation of such adjustment to Basic Rent under this
paragraph (1) also shall take into account any past, current and
anticipated interest, penalties and additions to tax imposed by the IRS
or any state or local taxing authority and payable by the Owner
Participant as a result of such Loss (other than penalties or additions
to tax payable under the Code or applicable state or local tax law,
together with interest imposed thereon, caused by negligence or
disregard of rules or regulations by the Owner Participant (other than
negligence or disregard of rules or regulations based upon the Owner
Participant's compliance with its obligations under this Agreement,
including its obligations under Section 6 hereof)). Such computation
shall be made assuming that at all times (I) the Owner Participant has
sufficient taxable income to make full use of such Loss in the current
year in which all of the Tax Benefits that are the subject of such Loss
(or result from the Loss or the events giving rise thereto) were
assumed (or, in the case of benefits that result from
7
the Loss or the events giving rise thereto, are reasonably anticipated)
to be available, and (II) with respect to a Loss of Deductions, the
Owner Participant shall be deemed to pay income taxes at a combined
effective rate equal to the Effective Rate, and with respect to an
Income Inclusion, the Owner Participant shall be deemed to pay income
taxes at the highest combined effective marginal corporate federal
income tax rate and comparable state and local tax rates (calculated by
taking into account the deductibility of state and local tax for
federal income tax purposes) (the "Highest Rate"). Upon the occurrence
of a Event of Default or a termination of the Operating Lease prior to
the scheduled expiration of the Basic Term, there shall thereupon be
immediately due and payable by Old Dominion to the Owner Participant a
lump-sum amount equal to the amount that, after taking into account all
amounts theretofore paid with respect to such Loss pursuant to this
paragraph (1), preserves, on an After-Tax Basis, the Net Economic
Return of the Owner Participant.
(2) If Old Dominion has not elected to pay, or cannot elect to
pay, an indemnity pursuant to either paragraph (1) above or paragraph
(3) below by providing written notice of such election to the Owner
Participant prior to the date that Old Dominion's payment obligation
commences under Section 4(c) below, then Old Dominion shall pay to the
Owner Participant as an indemnity a lump-sum amount which, on an
After-Tax Basis, shall be sufficient to preserve the Net Economic
Return of the Owner Participant as if such Loss had not occurred. The
computation of such lump-sum amount shall be made by the Owner
Participant utilizing the methodology and assumptions, including the
Tax Assumptions, utilized by the Owner Participant in determining Basic
Rent and Termination Value, except as such assumptions shall be varied
to take into account such Loss and any prior Loss. For the purpose of
calculating the amount of income taxes presumed to be payable by the
Owner Participant as a result of such Loss, (I) the Owner Participant
shall be deemed to have sufficient taxable income to make full use of
such Loss in the current year in which all of the Tax Benefits that are
the subject of such Loss (or result from the Loss or the events giving
rise thereto) were assumed (or, in the case of benefits that result
from the Loss or the events giving rise thereto, are reasonably
anticipated) to be available, and (II) with respect to a Loss of
Deductions, the Owner Participant shall be deemed to pay income taxes
at a combined effective rate equal to the Effective Rate and with
respect to an Income Inclusion, the Owner Participant shall be deemed
to pay income taxes at a combined effective rate equal to the Highest
Rate. The computation of such lump-sum amount under this paragraph (2)
also shall take into account any past, current and anticipated
interest, penalties and additions to tax imposed by the IRS or any
state or local taxing authority and payable by the Owner Participant as
a result of such Loss (other than penalties or additions to tax payable
under the Code or applicable state or local tax law, together with
interest imposed thereon, caused by negligence or disregard of rules or
regulations by the Owner Participant (other than negligence or
disregard of rules or regulations based upon the Owner Participant's
compliance with its obligations under this Agreement, including its
obligations under Section 6 hereof)).
(3) So long as no Event of Default has occurred and is
continuing and Old Dominion's Bonds are rated at least BBB- by S&P or
Baa3 by ▇▇▇▇▇'▇, Old Dominion may elect to pay to the Owner Participant
as an indemnity from time to time on an After-Tax Basis such amount or
amounts as shall be equal to the additional income taxes assumed to
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be payable by the Owner Participant as a result of such Loss as
provided in this paragraph (3). For the purpose of calculating the
amount of income taxes presumed to be payable by the Owner Participant
as a result of such Loss, (I) the Owner Participant shall be deemed to
have sufficient taxable income to make full use of such Loss in the
current year in which all of the Tax Benefits that are the subject of
such Loss (or result from the Loss or the events giving rise thereto)
were assumed (or, in the case of benefits that result from the Loss or
the events giving rise thereto, are reasonably anticipated) to be
available, and (II) with respect to a Loss of Deductions, the Owner
Participant shall be deemed to pay income taxes at a combined effective
rate equal to the Effective Rate, and with respect to an Income
Inclusion, the Owner Participant shall be deemed to pay income taxes at
a combined effective rate equal to the Highest Rate. The computation of
such amount under this paragraph (3) also shall take into account any
past, current or anticipated interest, penalties and additions to tax
imposed by the IRS or any state or local taxing authority and payable
by the Owner Participant as a result of such Loss (other than penalties
or additions to tax payable under the Code or applicable state or local
tax law, together with interest imposed thereon, caused by negligence
or disregard of rules or regulations by the Owner Participant (other
than negligence or disregard of rules or regulations based upon the
Owner Participant's compliance with its obligations under this
Agreement, including its obligations under Section 6 hereof)).
(c) Any amount payable by Old Dominion to the Owner
Participant pursuant to Section 4(b) shall be paid not later than (or, in the
case of a Basic Rent increase under Section 4(b)(1) hereof, shall commence not
later the next Rent Payment Date after) the latest to occur of (i) 30 days
following Old Dominion's receipt of the Owner Participant's written notice to
Old Dominion pursuant to Section 6 hereof, (ii) if any such indemnity payment
relates to a Loss that is contested pursuant to Section 6 hereof, 30 days
following the date of a Final Determination with respect to such Loss, and (iii)
if Old Dominion shall elect to indemnify the Owner Participant pursuant to
paragraph (3) of Section 4(b) hereof, the date which is five Business Days prior
to the date on which the Owner Participant shall be required to pay the
additional federal income taxes in question (such date to be determined based on
the assumptions set forth in Section 4(b)(3) hereof); PROVIDED, HOWEVER, that
the date required for payment (or commencement of a Basic Rent increase under
Section 4(b)(1) hereof) shall not be earlier than 10 days following the delivery
to Old Dominion of the Officer's Certificate required pursuant to Section 4(d)
hereof, or, if Old Dominion shall seek verification pursuant to Section 4(d)
hereof, 10 days following the completion of such verification; and PROVIDED,
FURTHER, Old Dominion shall pay interest on the amount ultimately determined to
be due pursuant to such verification from the date such payment otherwise would
have been due at the rate applicable to underpayments of federal income taxes
for the period in question. If Old Dominion shall elect to pay such sum prior to
the later of the dates described in clauses (i), (ii) and (iii) of the preceding
sentence, then Old Dominion shall not be required to pay the Owner Participant
the amount of any interest, penalties or additions to tax that shall be
attributable to the period following such payment by Old Dominion if there is a
procedure whereby the Owner Participant can make a payment or deposit only with
respect to the Loss that will stop the accumulation of such interest, penalties
or additions to tax and that will not have any unindemnified or material adverse
financial effect on the Owner Participant or adversely affect the Owner
Participant's right to contest vigorously any claims the IRS may have with
respect to matters other than matters related to the transactions contemplated
by the Operative Documents for which Old
9
Dominion is providing full indemnification (and the Owner Participant will
promptly return any such sum to Old Dominion at its written request therefor if
no such procedure is available).
(d) When requesting payment by Old Dominion pursuant to this
Section 4, the Owner Participant shall, not less than 10 days prior to the
latest of the dates described in clauses (i), (ii) and (iii) of Section 4(c),
deliver to Old Dominion an Officer's Certificate setting forth the amount
payable by Old Dominion and computing in reasonable detail such amount under
Section 4(b). If Old Dominion shall disagree with the Owner Participant's
calculation of the amount to be paid by Old Dominion under Section 4(b), such
amount shall be verified by independent nationally recognized accountants
selected by the Owner Participant and reasonably acceptable to Old Dominion (the
"Independent Public Accountants"). The costs of such verification shall be borne
by Old Dominion unless such verification shall result in an adjustment in Old
Dominion's favor of ten percent or more of the net present value (using a
discount rate equal to the rate applicable to underpayments of federal income
taxes for the period in question and calculating such value as of the date such
payment becomes due and payable or commences under this Agreement) of the
indemnity payment or payments computed by the Owner Participant, in which case
such costs shall be borne by the Owner Participant. The Owner Participant agrees
to cooperate with such Independent Public Accountants and to supply them with
all information reasonably necessary to permit them to accomplish such review
and determination. Such information shall be for the confidential use of the
Independent Public Accountants and shall not be disclosed to Old Dominion or to
any other Person. Old Dominion and the Owner Participant agree that the sole
responsibility of the Independent Public Accountants shall be to verify the
calculation of payments pursuant to paragraphs (1), (2) or (3) of Section 4(b)
(setting forth fully the assumptions on which such verification is based) and
that matters of interpretation of this Agreement are not within the scope of the
Independent Public Accountants' responsibility. Neither the Independent Public
Accountants nor Old Dominion will have any right to examine the tax returns of
the Owner Participant in connection with the verification procedure described in
this Section 4(d) or otherwise.
(e) Notwithstanding the foregoing and any other provision of
this Agreement or the other Operative Documents, Old Dominion shall not have any
liability to the Owner Participant for indemnification under this Section 4 for
any Loss (or any interest, penalties or additions to tax with respect to such
Loss) if such Loss results from one or more of the following:
(i) any voluntary or involuntary sale, transfer or other
disposition by the Owner Trustee or the Owner Participant or an
Affiliate of either (each a "member of the Lessor Group", and
collectively, the "Lessor Group") of (x) any interest in or arising
under the Operative Documents, (y) the Undivided Interest or any
interest therein or (z) any interest in the Owner Participant, the
Owner Trustee or any Affiliate of the Owner Participant, unless in each
case, such sale, transfer or other disposition is in connection with
the pursuit of remedies upon the occurrence and continuance of an Event
of Default;
(ii) any Event of Loss or any other event whereby Old Dominion
is required to pay, and shall have paid in full, Termination Value or
an amount determined by reference thereto, except to the extent that
the Termination Value or such amount determined by reference thereto,
as the case may be, does not properly reflect the timing of the Loss
resulting from such event;
10
(iii) the failure of a member of the Lessor Group to have
sufficient taxable income to benefit from any of the benefits described
in the Tax Assumptions;
(iv) any amendment to or change in the Code, Treasury
Regulations, administrative pronouncements, executive order or judicial
decision (a "Tax Change") which shall occur after the Closing Date,
other than in respect of refinancings, or substitutions or improvements
which are not required substitutions or improvements;
(v) the failure for federal income tax purposes of (x) the
Head Lease to be treated as a sale of the Undivided Interest to the
Owner Trustee or the prepaid rent under the Head Lease to be treated as
the purchase price of such sale, (y) the Operating Lease to treated as
a "true lease" or (z) the Owner Trustee to be considered the borrower
under the Loans or the owner of the Undivided Interest, unless, in each
case, such failure is the result of any event described in clause (i)
or (ii) of Section 4(a)(1) hereof;
(vi) any fraud, willful misconduct or gross negligence of a
member of the Lessor Group;
(vii) the failure of a member of the Lessor Group to file any
tax return in accordance with the appropriate filing procedure and to
timely file such tax return, unless as the result of Old Dominion's
failure to provide the Owner Trustee with information which Old
Dominion is required to give to the Owner Trustee and which is
necessary to so timely file;
(viii) the failure of the appropriate member of the Lessor
Group to contest a proposed adjustment in accordance with, and to the
extent required by Section 6 of this Agreement, if such failure
precludes or materially adversely effects the initiation or
continuation of such contest;
(ix) the failure of the Trust to be treated as a grantor
trust for federal income tax purposes;
(x) any member of the Lessor Group being or becoming for
federal income tax purposes a charitable organization, a tax-exempt
entity within the meaning of section 168(h) of the Code, an agency or
instrumentality of the United States, a state or political subdivision
thereof or an international organization or the status of a member of
the Lessor Group as an entity subject to the provisions of sections 55,
56, 57, 58, 59, 59A, 291, 465, 469, 501, 542, 552, 851, 856 or 1361 of
the Code;
(xi) the application of section 467 of the Code or, except as
to substitutions, section 168(d)(3) of the Code;
(xii) a change in the Owner Participant's taxable year or the
Owner Participant having a short taxable year;
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(xiii) the inclusion in income by the Owner Participant upon
termination of the Operating Lease of amounts attributable to
improvements, modifications or additions to the Undivided Interest;
(xiv) the failure of the Owner Participant to have an initial
tax basis in the Undivided Interest equal to the Undivided Interest
Cost, other than as a result of an event described in clause (i) or
(ii) of Section 4(a)(1) hereof;
(xv) an amendment, supplement, modification or waiver to any
Operative Document to which any member of the Lessor Group is a party
and to which Old Dominion is not a party, which is not initiated or
requested by or consented to by Old Dominion in writing unless (x) it
may be necessary or appropriate to, and is in conformity with, any such
amendment, supplement, modification or waiver initiated or requested by
or consented to by Old Dominion in writing or (y) it is required by the
terms of the Operative Documents; and
(xvi) penalties or additions to tax under section 6662 or 6663
of the Code or relating to estimated tax, in either case to the extent
resulting from or measured by matters unrelated to the transactions
contemplated by the Operative Documents.
SECTION 5. TAX SAVINGS.
If Old Dominion indemnifies the Owner Participant with respect
to any Loss pursuant to Section 4(a) hereof, and the Owner Participant shall
realize with respect to any year federal income tax savings that would not have
been realized but for such Loss or the events giving rise thereto and which tax
savings were not taken into account in calculating Old Dominion's indemnity
payment to the Owner Participant, then the Owner Participant shall pay to Old
Dominion an amount equal to the sum of (i) such federal income tax savings and
(ii), in the case of an Income Inclusion, the amount of any state and local
income tax savings and (iii) any tax benefit realized by the Owner Participant
from the payment contemplated by clauses (i) and (ii) above; PROVIDED, HOWEVER,
that for the purpose of calculating the amount of the federal, state and local
income tax savings realized by the Owner Participant, (A) the Owner Participant
shall be deemed to have sufficient federal, state and local taxable income to
make full use in the current year of all of the tax benefits that would not have
been realized but for such Loss or the events giving rise thereto, (B) the Owner
Participant shall be deemed to have state and local income tax consequences that
correspond to the Owner Participant's federal income tax consequences, and (C)
with respect to tax savings related to a Loss of Deductions, the Owner
Participant shall be deemed to have paid income taxes at the Effective Rate, and
with respect to tax savings related to an Income Inclusion or a tax benefit
realized from a payment hereunder, the Owner Participant shall be deemed to have
paid income taxes at the Highest Rate; and PROVIDED, FURTHER, that the amount
payable by the Owner Participant to Old Dominion pursuant to clauses (i) and
(ii) of this Section 5 shall not exceed the excess of the amount of all prior
payments made to the Owner Participant by Old Dominion pursuant to Section 4
hereof with respect to the Loss that gave rise to such tax savings (net of any
amount necessary to make such prior payments on an After-Tax Basis) over the
amounts previously paid by the Owner Participant to Old Dominion pursuant to
clauses (i) and (ii) of this Section 5 with respect to such Loss; and PROVIDED,
FURTHER, that any such excess shall be carried forward and shall offset, to the
12
extent thereof, any future liability of Old Dominion under Sections 4 and 8
hereof with respect to such Loss. The loss of any tax savings subsequent to the
year of realization by the Owner Participant shall be treated as a Loss that is
indemnifiable pursuant to the provisions of this Agreement other than Section
4(d) hereof, but only to the extent of any payment by the Owner Participant
pursuant to this Section 5 with respect to such tax savings. Any payment due to
Old Dominion pursuant to this Section 5 shall be paid promptly and in any event
within 30 days after the Owner Participant shall realize the tax savings as
determined in accordance with the calculation methods and assumptions set forth
in this Section 5; PROVIDED, HOWEVER, that such amount shall not be payable
during the continuation of a Event of Default or before such time as Old
Dominion shall have made all payments or indemnities then due pursuant to this
Agreement.
SECTION 6. CONTESTS.
(a) If an adjustment shall be proposed by the IRS in writing
that, if sustained, would result in a Loss for which Old Dominion could be
required to indemnify the Owner Participant under this Agreement, the Owner
Participant agrees promptly to notify Old Dominion in writing of such proposed
adjustment; PROVIDED, HOWEVER, that any failure to provide such notice shall not
relieve Old Dominion of any obligation to indemnify the Owner Participant
hereunder unless such failure precludes or materially adversely effects the
initiation or continuation of the contest of such adjustment. If (i) within 90
days after receipt of such notice Old Dominion shall request in writing that the
Owner Participant contest such proposed adjustment and (ii) the Owner
Participant shall have received, at the commencement of the contest and before
each level of judicial proceeding, an opinion of Independent Tax Counsel, to the
effect that there is a Reasonable Basis for contesting the proposed adjustment
(and, in the case of an appeal from an adverse judicial determination, an
opinion from such counsel to the effect that there is a substantial possibility
(which is a higher standard than Reasonable Basis, although it is not
necessarily more likely than not) that such adverse determination will be
reversed or substantially modified upon appeal in a manner favorable to the
taxpayer) (which opinions (a) will be furnished at Old Dominion's expense, and
(b) the Owner Participant will assist in good faith and with diligence in
promptly procuring), the Owner Participant shall contest such proposed
adjustment; PROVIDED, HOWEVER, that the Owner Participant may, in its sole
discretion, either pay the tax proposed and ▇▇▇ for a refund or contest the
proposed adjustment in any permissible forum considering, however, in good faith
such requests as Old Dominion may make concerning the most appropriate forum in
which to proceed. Notwithstanding the foregoing, the Owner Participant shall not
be required to pursue any such contest unless (v) Old Dominion shall have agreed
in writing to pay and shall pay on demand all reasonable costs and expenses that
the Owner Participant shall incur in connection with contesting such proposed
adjustment, including, without limitation, reasonable attorneys', accountants'
and investigatory fees and disbursements; (w) the proposed adjustment that could
result in a payment by Old Dominion (if a lump-sum amount were to be paid
pursuant to Section 4(b)(2) hereof) in connection with such proposed adjustment,
taking into account the amount of all similar and logically related adjustments
with respect to the transactions contemplated by the Operative Documents that
could be raised in an audit of any other taxable year of the Owner Participant
(including any future taxable year) not barred by the statute of limitations
shall be at least $100,000 and at least $250,000 with respect to any judicial
appeal; (x) no Payment Default or Event of Default shall have occurred and be
continuing; and (y) if the Owner Participant shall determine to pay the tax
proposed and ▇▇▇ for a
13
refund, Old Dominion shall advance to the Owner Participant on an interest-free
basis and with no additional net after-tax cost to the Owner Participant
sufficient funds to pay the tax and interest, penalties and additions to tax
payable with respect thereto (to the extent such amount is indemnified against
pursuant to Section 4 hereof (an "Advance")); and PROVIDED, HOWEVER, that the
Owner Participant shall not be required to pursue any appeal to the United
States Supreme Court.
(b) The Owner Participant also shall not be required to
contest any proposed adjustment if the subject matter thereof shall be of a
continuing nature and there shall have been a Final Determination with respect
thereto, unless there shall have been a change in facts or law (including,
without limitation, amendments to statutes or Treasury Regulations,
administrative rulings and court decisions), and the Owner Participant shall
have received an opinion of Independent Tax Counsel (which opinion (i) will be
furnished at Old Dominion's expense, and (ii) the Owner Participant will assist
in good faith and with diligence in promptly procuring) to the effect that as
the result of such change in facts or law there is a substantial possibility
(which is a higher standard than Reasonable Basis, although it is not
necessarily more likely than not) that the Owner Participant will prevail in the
contest of such proposed adjustment.
(c) In connection with any proposed adjustment described in
Section 6(a) hereof, the Owner Participant shall not make payment of such
proposed adjustment for at least 30 days after the giving of written notice of
such proposed adjustment to Old Dominion (except that if the Owner Participant
shall be required by law or regulation to take action with respect to any such
adjustment prior to the end of such 30-day period, the Owner Participant shall,
in such notice to Old Dominion, so inform Old Dominion, and the Owner
Participant shall not take any action with respect to such adjustment without
the consent of Old Dominion (not unreasonably to be withheld) before the date on
which the Owner Participant shall be required to take action). Notwithstanding
anything herein to the contrary, the Owner Participant shall have full control
over any contest pursuant to this Section 6 and shall determine in its sole
discretion the nature of all actions to be taken in connection with any contest
including the right to pursue or forego any administrative proceedings;
PROVIDED, HOWEVER, that the Owner Participant shall contest such claim at the
administrative level if such action shall be necessary to preserve available
judicial remedies; and PROVIDED, FURTHER, the Owner Participant shall consult in
good faith with Old Dominion and its counsel in the contest of any claim and
shall keep such counsel reasonably informed regarding such contest. Nothing
contained in this Section 6 shall require the Owner Participant to contest a
proposed adjustment that it would otherwise be required to contest pursuant to
this Section 6 if the Owner Participant (i) waives the payment by Old Dominion
of any amount that might otherwise be payable by Old Dominion under this
Agreement by way of indemnity in respect of such proposed adjustment and (ii)
pays to Old Dominion any amount of taxes, interest, penalties and additions to
tax previously paid or advanced by Old Dominion pursuant to this Agreement with
respect to such proposed adjustment, plus interest on such amounts at the IRS
rate for refunds, payable from the date of payment by Old Dominion to the Owner
Participant of such amounts to (but excluding) the date of repayment of such
amounts by the Owner Participant to Old Dominion; PROVIDED, HOWEVER, that if the
Owner Participant settles a proposed adjustment such that Old Dominion is
precluded as a matter of law from initiating or continuing a contest hereunder
of any adjustment for any other taxable period, the Owner Participant shall be
deemed to have waived the payment by Old Dominion under this Agreement of any
indemnity amounts in respect of such other adjustment.
14
(d) If Old Dominion shall have requested the Owner Participant
to contest a proposed adjustment as above provided and shall have duly complied
with all the terms of this Section 6, Old Dominion's liability for
indemnification due under Section 4 hereof shall, at Old Dominion's election
(except for amounts provided for under Section 6(a) hereof), be deferred until
Final Determination of the liability of the Owner Participant. At such time, Old
Dominion shall become obligated for the payment of any indemnification due under
Section 4 hereof resulting from the outcome of such contest. Upon payment in
full by Old Dominion of any indemnity amounts due under this Agreement, the
Owner Participant shall become obligated to refund to Old Dominion an amount
equal to any amount received as a refund of income taxes by the Owner
Participant or credited to the Owner Participant (including any refund or credit
that would have been received but for a counterclaim or other claim not
indemnified by Old Dominion hereunder) that is fairly attributable to advances
or indemnity payments made by Old Dominion under this Agreement, together with
any interest received (or that would have been received) by the Owner
Participant on such refund, plus an amount equal to any tax benefit realized by
the Owner Participant as the result of the payment contemplated by this
sentence. Such obligations of the Owner Participant and Old Dominion will first
be set off against each other, and any difference owing by either party shall be
paid within 30 days after such Final Determination but not prior to the date
determined in accordance with Section 4(b) hereof.
SECTION 7. CERTAIN ADJUSTMENTS.
If Old Dominion shall become obligated to make payments under
this Agreement, the Owner Participant shall, if appropriate, make adjustments to
the schedules of Termination Value and the Purchase Option Price to preserve its
Net Economic Return and to prevent any duplication of payments or any payment
for Losses previously paid. If an event giving rise to the payment of an amount
determined by reference to a schedule of Termination Values shall occur and the
date as of which the Owner Participant shall be affected for tax purposes shall
be earlier than the date taken into account in computing such schedule, such
values shall be appropriately adjusted based otherwise on the same methodology
and assumptions previously used by the Owner Participant in calculating such
schedule.
SECTION 8. MISCELLANEOUS.
(a) PAYMENTS. Any payments to be made to the Owner Participant
pursuant to this Agreement shall constitute Supplemental Rent and shall be made
directly to the Owner Participant. All payments to be made hereunder shall be
made by wire transfer of immediately available funds to a bank account of the
Owner Participant or Old Dominion, as the case may be, in the continental United
States as specified by the recipient thereof in written directions to the payor,
or if no such direction shall have been given, by check of the payor or any
Affiliate thereof payable to the order of the recipient thereof and mailed to
the recipient thereof by certified mail, postage prepaid, at its address as set
forth in the Participation Agreement.
15
(b) LATE PAYMENTS. Any late payment by either party of any
of its obligations under this Agreement shall result in the obligation on the
part of such party promptly to pay an amount equal to interest at the Overdue
Rate.
(c) EFFECT OF OTHER INDEMNITIES. Old Dominion's obligations
under the indemnities provided for in this Agreement shall be those of a primary
obligor whether or not the Owner Participant shall also be indemnified with
respect to the same matter under the terms of the Participation Agreement, the
Trust Agreement or any other document or instrument, and the Owner Participant
may in seeking indemnification from Old Dominion pursuant to any provisions of
this Agreement proceed directly against Old Dominion without first seeking to
enforce any other right of indemnification.
(d) SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
Applicable Law, but if any provision of this Agreement shall be prohibited by or
invalid under Applicable Law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
(e) SURVIVAL. All warranties, representations and covenants
made by either party hereto, herein or in any certificate or other instrument
delivered by either such party or on the behalf of either such party under this
Agreement, shall be considered to have been relied upon by the other party
hereto and shall survive the consummation of the transactions contemplated
hereby on the Closing Date regardless of any investigation made by either party
or on behalf of either party. The obligations and liabilities of the parties
arising under this Agreement shall continue in full force and effect,
notwithstanding the assignment, expiration or other termination of the Operating
Lease, until all such obligations have been met and such liabilities have been
paid in full, whether by expiration of time, by operation of law or otherwise.
(f) AMENDMENTS AND WAIVERS. No term, covenant, agreement or
condition of this Agreement may be terminated, amended or compliance therewith
waived (either generally or in a particular instance, retroactively or
prospectively) except by an instrument or instruments in writing executed by
each party hereto.
(g) COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each executed counterpart constituting an original but
all together only one instrument.
(h) SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and shall inure to the benefit of, and shall be enforceable by, the parties
hereto and their respective successors and assigns as permitted by and in
accordance with the terms hereof, including each successive holder of the
Beneficial Interest permitted under Section 5.1 of the Participation Agreement.
Except as expressly provided herein or in the other Operative Documents, neither
party hereto may assign its interests herein without the consent of the other
party hereto.
(i) HEADINGS AND TABLE OF CONTENTS. The headings of the
sections of this Agreement and the Table of Contents are inserted for purposes
of convenience only and shall not be construed to affect the meaning or
construction of any of the provisions hereof.
16
(j) GOVERNING LAW. THIS AGREEMENT SHALL BE IN ALL RESPECTS
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE.
(k) NOTICES. Unless otherwise expressly specified or permitted
by the terms of this Tax Indemnity Agreement, all communications and notices
provided for herein to a party hereto shall be in writing or by a
telecommunications device capable of creating a written record, and any such
notice shall become effective (i) upon personal delivery thereof, including,
without limitation, by overnight mail or courier service, (ii) in the case of
notice by United States mail, certified or registered, postage prepaid, return
receipt requested, upon receipt thereof, or (iii) in the case of notice by such
a telecommunications device, upon transmission thereof, PROVIDED such
transmission is promptly confirmed by either of the methods set forth in clauses
(i) or (ii) above, in each case addressed to such party at its address set forth
in the Participation Agreement or at such other address as such party may from
time to time designate by written notice to the other party hereto.
(l) RECORDS. Old Dominion covenants that it will maintain or
cause to be maintained and retain sufficient factual records (to the extent such
records are maintained by Old Dominion, any sublessee, or any trustee for or
Affiliate of any thereof, in the ordinary course of their respective businesses)
to enable the Owner Participant to prepare required United States federal, state
and local income tax returns. Upon the request of the Owner Participant, Old
Dominion shall deliver such records to the Owner Participant at the expense of
Old Dominion. In addition, as soon as practicable, Old Dominion shall provide or
cause to be provided (at the expense of Old Dominion) to the Owner Participant
such information (in form and substance reasonably satisfactory to the Owner
Participant) as the Owner Participant may reasonably request from and as shall
be reasonably available to Old Dominion or any sublessee, trustee or Affiliate
to enable the Owner Participant to fulfill its tax return filing obligations, to
respond to requests for information, to verify information in connection with
any income tax audit and to participate effectively in any tax contest.
(m) EFFECTIVENESS OF AGREEMENT. This Agreement has been dated
as of the date first above written for convenience only. This Agreement shall be
effective on the date of execution and delivery by each of Old Dominion and the
Owner Participant.
17
IN WITNESS WHEREOF, the parties hereto have caused this Tax
Indemnity Agreement to be duly executed and delivered by their respective
officers thereunto duly authorized.
OLD DOMINION ELECTRIC COOPERATIVE
By: /s/ ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
-----------------------------------------
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Vice President of Accounting and Finance
Date: March 1, ▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇ ▇▇▇▇▇▇▇,
as Owner Participant
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
-----------------------------------------
Name: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Senior Vice President
Date: March 1, 1996