-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TkmguZbEstVmX2lY4I+x67r+kbDuUXPki3RopkJ3Abs1A5eFmolPoG3DxAjpzLUE ljERBg5040/MU0QYQPpJnw== 0000020520-03-000003.txt : 20030324 0000020520-03-000003.hdr.sgml : 20030324 20030324172310 ACCESSION NUMBER: 0000020520-03-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS COMMUNICATIONS CO CENTRAL INDEX KEY: 0000020520 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 060619596 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11001 FILM NUMBER: 03614527 BUSINESS ADDRESS: STREET 1: HIGH RIDGE PK BLDG 3 CITY: STAMFORD STATE: CT ZIP: 06905 BUSINESS PHONE: 2036145600 MAIL ADDRESS: STREET 1: HIGH RIDGE PARK BLDG NO 3 CITY: STAMFORD STATE: CT ZIP: 06905 FORMER COMPANY: FORMER CONFORMED NAME: CITIZENS UTILITIES CO DATE OF NAME CHANGE: 19920703 10-K 1 form10k2002.txt 2002 FORM 10-K CITIZENS COMMUNICATIONS COMPANY ------------------------------- FORM 10-K --------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) --------------------------------------------- OF THE SECURITIES EXCHANGE ACT OF 1934 -------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2002 ------------------------------------
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 ------------------ OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to ___________ Commission file number 001-11001 --------- CITIZENS COMMUNICATIONS COMPANY ------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-0619596 ------------------------------------- --------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) Incorporation or organization) 3 High Ridge Park Stamford, Connecticut 06905 -------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 614-5600 --------------- Securities registered pursuant to Section 12(b) of the Act: (Title of each class) (Name of each exchange on which registered) - ----------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.25 per share New York Stock Exchange Guarantee of Convertible Preferred Securities of Citizens Utilities Trust New York Stock Exchange Equity Units New York Stock Exchange Citizens Convertible Debentures N/A Guarantee of Partnership Preferred Securities of Citizens Utilities Capital L.P. N/A Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes X No ----- ---- The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2002 was approximately $2,282,096,740, based on the closing price of $8.36. The number of shares outstanding of the registrant's Common Stock as of February 28, 2003 was 282,913,758. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the registrant's 2003 Annual Meeting of Stockholders to be held on May 13, 2003 are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS ----------------- Page ---- PART I - ------ Item 1. Business 2 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to Vote of Security Holders 11 Executive Officers 11 PART II - ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30 Item 8. Financial Statements and Supplementary Data 32 Item 9. Changes in and Disagreements with Accountants on Accounting 32 and Financial Disclosure PART III - -------- Item 10. Directors and Executive Officers of the Registrant 32 Item 11. Executive Compensation 32 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters 32 Item 13. Certain Relationships and Related Transactions 33 Item 14. Controls and Procedures 33 PART IV - ------- Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34 Signatures 38 Certifications 40 Index to Consolidated Financial Statements F-1
PART I ------ This annual report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements. Further discussion regarding forward-looking statements, including the factors which may cause actual results to differ from such statements, is located in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. Citizens Communications Company and its subsidiaries (Citizens) will be referred to as the "Company", "we", "us" or "our" throughout this report. Item 1. Business Overview ----------------- We are a telecommunications-focused company providing wireline communications services to rural areas and small and medium-sized towns and cities, including the Rochester, New York metropolitan area as an incumbent local exchange carrier, or ILEC. We offer our ILEC services under the "Frontier" name. In addition, we provide competitive local exchange carrier, or CLEC, services to business customers and to other communications carriers in certain metropolitan areas in the western United States through Electric Lightwave, Inc., or ELI, our wholly-owned subsidiary. We also provide public utility services including natural gas transmission and distribution and electric transmission and distribution services to primarily rural and suburban customers in Vermont, Hawaii and Arizona. We currently have contracts to sell all of our public utility operations in Hawaii and Arizona. These sales are expected to close during the second half of 2003. Revenue from our ILEC, CLEC and public utility operations was $2,062.9 million, $175.1 million, and $431.3 million, respectively, in 2002. Our ILEC segment has grown substantially over the last three years, primarily as a result of acquisitions. During 2001, we purchased from Global Crossing Ltd. (Global) the 1.1 million access lines of the Frontier local exchange business for approximately $3,373.0 million in cash. During 2000, we acquired approximately 334,500 telephone access lines for approximately $986.2 million in cash. In June 2002, we acquired all of the common stock of ELI that we did not previously own for $0.70 per share in cash. Total cost (including fees and expenses) of the acquisition was approximately $6.8 million. In 1999, we announced plans to divest our public utilities services segments. As a result, in 2001 we sold two of our four natural gas transmission and distribution businesses and during 2002 we sold our entire water distribution and wastewater treatment business and one of our three electric businesses. In October 2002, we entered into definitive agreements to sell our Arizona gas and electric divisions for $230.0 million in cash ($220.0 million if we close by July 28, 2003) subject to adjustments specified in the agreements. In December 2002, we entered into a definitive agreement to sell our Hawaiian gas division for $115.0 million in cash, subject to adjustments specified in the agreement. These transactions, which are subject to regulatory approvals, are expected to close during the second half of 2003. Currently, we do not have an agreement to sell our Vermont electric division, but we continue to actively pursue a buyer. All of our public utility assets have been written down to our best estimate of the net realizable value upon sale (see Note 4 to Consolidated Financial Statements). Pending these divestitures, we continue to provide gas and electric utility services. Telecommunications Services Our telecommunications services are principally ILEC services and also include CLEC services delivered through ELI. As of December 31, 2002, we operated ILECs in 24 states, serving approximately 2.4 million access lines and 71,000 digital subscriber line (DSL) customers. Our CLEC services are marketed under the Electric Lightwave name and consist of a variety of integrated telecommunications products. As an ILEC, we are typically the dominant incumbent carrier in the markets we serve and provide the "last mile" of telecommunications services to residential and business customers in these markets. As an ILEC, we compete with CLECs that may operate in our markets. As a CLEC, we provide telecommunications services to businesses and other carriers in competition with the incumbent ILEC. As a CLEC, we frequently obtain the "last mile" access to customers through arrangements with the applicable ILEC. ILECs and CLECs are subject to different regulatory frameworks of the Federal Communications Commission (FCC). ELI does not compete with our ILEC business. 2 The telecommunications industry in general, and the CLEC sector in particular, are undergoing significant changes and difficulties. Demand and pricing for CLEC services have decreased substantially, particularly for long haul services, and economic and competitive pressures are likely to cause these trends to continue. These factors result in a challenging environment with respect to revenues for our CLEC business and to a lesser extent our ILEC business. These factors could also result in more bankruptcies in the sector and therefore affect our ability to collect money owed to us by bankrupt carriers. We reserved approximately $10.9 million and $21.2 million of receivables owed to us from bankrupt telecom companies in 2002 and 2001, respectively. ILEC Services - ------------- Our ILEC services segment accounted for $2,062.9 million, or 77%, of our total Company revenues in 2002. Approximately 25% of our ILEC services segment revenues came from federal and state subsidies and regulated access charges. Our ILEC services business is primarily with residential customers and, to a lesser extent, non-residential customers. Our ILEC services segment provides: * local network services, * enhanced services, * network access services, * long distance and data services, and * directory services. Local network services. We provide telephone wireline access services to residential and non-residential customers in our service areas. Our service areas are largely residential and are generally less densely populated than what we believe to be the primary service areas of the five largest ILECs. Enhanced services. We provide our ILEC customers a number of calling features including call forwarding, conference calling, caller identification, voicemail and call waiting. We offer packages of telecommunications services. These packages permit customers to bundle their basic telephone line with their choice of enhanced services, or to customize a set of selected enhanced features that fit their specific needs. We intend to increase the penetration of existing enhanced services. We believe that increased sales of such services in our ILEC markets will produce revenue with higher operating margins due to the relatively low marginal operating costs necessary to offer such services. We believe that our ability to integrate these services with our core ILEC services will provide us with the opportunity to capture an increased percentage of our customers' telecommunications expenditures. Network access services. We provide network access services to long distance carriers and other carriers in connection with the use of our facilities to originate and terminate interstate and intrastate telephone calls. Such services are generally offered on a month-to-month basis and the service is billed on a minutes-of-use basis. Access charges to long distance carriers and other customers are based on access rates filed with the FCC for interstate services and with the respective state regulatory agency for intrastate services. Long distance and data services. Long distance network service to and from points outside of a telephone company's operating territories is provided by interconnection with the facilities of interexchange carriers, or IXCs. We offer long distance services in our territories to our ILEC customers. We believe that many customers prefer the convenience of obtaining their long distance service through their local telephone company and receiving a single bill. We also offer data services including Internet access via dial up or DSL access, frame relay and asynchronous transfer mode (ATM) switching in portions of our system. Directory services. Directory services involves the provision of white and yellow page listings of residential and business directories. We provide this service through a third party contractor who pays us a percentage of revenues realized from the sale of advertising in these directories. Our directory service also includes "Frontier Pages", an internet-based directory service which generates advertising revenue. 3 We have grown from approximately 1.0 million access lines in 1999 to approximately 2.4 million access lines primarily through acquisitions. From time to time we are offered the opportunity to evaluate the possibility of acquiring additional telecommunications assets. The following table sets forth certain information with respect to our telephone access lines as of December 31, 2002. With the exception of 547,900 access lines in the greater Rochester, New York area, our access lines are located in primarily rural areas. State ILEC Access ----- ------------------ Lines at 12/31/02 ------------------ New York............ 1,009,700 Minnesota........... 272,800 Arizona............. 167,100 West Virginia....... 158,600 California.......... 153,400 Illinois............ 131,600 Tennessee........... 97,600 Wisconsin........... 73,800 Iowa................ 62,800 All other states (15)... 317,000 ---------- Total 2,444,400 ========== CLEC Services - ------------- ELI provides a broad range of wireline communications products and services to businesses and other carriers in the western United States. ELI accounted for $175.1 million, or 7%, of our total Company revenue in 2002. ELI's facilities-based network consists of optical fiber and voice and data switches. ELI has a national Internet and data network with switches and routers in key cities, linked by leased transport facilities. In addition, ELI has a long-haul, fiber-optic network connecting the cities it serves in the Western United States which utilizes an optically self-healing Synchronous Optical Network (SONET) architecture. ELI currently provides the full range of its services in the following cities and their surrounding areas: Boise, Idaho; Portland, Oregon; Salt Lake City, Utah; Seattle, Washington; Spokane, Washington; Phoenix, Arizona; and Sacramento, California. ELI's primary focus in 2003 is obtaining new customers, increasing customer usage of ELI's existing products and services, focusing more on company end users and government entities and diversifying the customer mix to place less reliance on Internet Service Providers (ISPs), application service providers and other carriers. ELI expects to continue to emphasize increased penetration of existing on-net buildings, a focus on sales to customers that are connected to its network and an increase in market share in the cities in which it operates and surrounding areas. ELI will also continue to market its available dark fiber. Regulatory Environment ILEC Services Regulation - ------------------------ The Telecommunications Act of 1996, or the 1996 Act, dramatically changed the telecommunications industry. The main thrust of the 1996 Act was to open local telecommunications marketplaces to competition while enhancing universal service. The majority of our operations are regulated extensively by various state regulatory agencies, often called public service commissions, and the FCC. 4 The 1996 Act preempts state and local laws to the extent that they prevent competitive entry into the provision of any switched communications service. Under the 1996 Act, however, states retain authority to impose requirements on carriers necessary to preserve universal service, protect public safety and welfare, ensure quality of service and protect consumers. States are also responsible for mediating and arbitrating interconnection agreements between CLECs and ILECs if voluntary negotiations fail. In order to create an environment in which local competition is a practical possibility, the 1996 Act imposes a number of access to network facilities and interconnection requirements on all local communications providers. All local carriers must interconnect with other carriers, permit resale of their services, provide local telephone number portability and dialing parity, provide access to poles, ducts, conduits, and rights-of-way, and complete calls originated by competing carriers under termination arrangements. We are subject to incentive regulation plans under which prices are capped in return for the elimination or relaxation of earnings oversight. Some states also allow us flexibility in price changes for optional services and relaxed reporting requirements. The goal of these plans is to provide incentives to improve efficiencies and increased pricing flexibility for competitive services while ensuring that customers receive reasonable rates for basic services that continue to be deemed part of a monopoly while allowing us to continue to recover our costs. Our ILEC services segment revenue is subject to regulation by the FCC and various state regulatory agencies. We expect federal and state lawmakers to continue to review the statutes governing the level and type of regulation for telecommunications services. For interstate services regulated by the FCC, we have elected a form of incentive regulation known as price caps for most of our operations. Under price caps, interstate access rates are capped and adjusted annually by the difference between the level of inflation and a productivity factor. Most recently the productivity factor was set at 6.5%. Given the relatively low inflation rate in recent years, interstate access rates have been adjusted downward annually. In May 2000, the FCC adopted a revised methodology for regulating the interstate access rates of price cap companies through May 2005. The program, known as the Coalition for Affordable Local and Long Distance Services, or CALLS plan, establishes a price floor for interstate-switched access services and phases out many of the subsidies in interstate access rates. We believe we will be able to offset some of the reduction in interstate access rates through end-user charges and an expanded universal service program that benefits rural service providers such as our ILEC services segment. Annual adjustments based on the difference between inflation and the productivity factor will continue for several years until the price floor for interstate switched access services is reached. Another goal of the 1996 Act was to remove implicit subsidies from the rates charged by local telecommunications companies. The CALLS plan addressed this requirement for interstate services. State legislatures and regulatory agencies are beginning to reduce the implicit subsidies in intrastate rates. The most common subsidies are in access rates that historically have been priced above their costs to allow basic local rates to be priced below cost. Legislation has been considered in several states to require regulators to eliminate these subsidies and implement state universal service programs where necessary to maintain reasonable basic local rates. However, not all the reductions in access charges are fully offset. In Tennessee for example, as a result of such legislation, we are reducing intrastate access rates by $1.0 million per year through 2003. We anticipate additional state legislative and regulatory pressure to lower intrastate access rates in the near future. However, regulators are cognizant of the potential impact on basic local rates and are moving cautiously. Many states are embracing the need for state universal service funds to ensure protection for customers while ensuring that local telecommunications companies continue to have the incentive to recover in rates their investment in their networks and new services. State legislatures and regulators are also examining the provision of telecommunications services to previously unserved areas. Since many unserved areas are located in rural markets, we may be required to expand our service territory into some of these areas. Given the start-up costs involved with territory expansion, we expect legislatures and regulators to continue to move cautiously and provide some means of recovery for the costs associated with serving these new areas. ILEC Unbundling Obligations - --------------------------- The FCC recently completed its triennial review of the 1996 Act. Although the FCC's order describing its decisions in detail has not yet been published, the FCC has provided a summary of its findings and order. The summary essentially keeps in place the existing regulatory regime with respect to Unbundled Network Elements Platform (UNEP) competition, provides significant authority to state regulators to implement UNEP competition and pricing, and eliminated a previous requirement of ILECs to share their DSL lines with competitors. Because we do not currently have UNEP competition or competitors providing DSL service, the FCC's order is not expected to have a material affect on us in the near term. We will continue to evaluate the affect on us when the final order is published and as litigation with respect to the order occurs. 5 Some state regulators (including New York and Illinois) have recently considered imposing on regulated companies (including us) cash management practices that could limit the ability of companies to transfer cash between subsidiaries or to the parent company. None of the existing state requirements materially affect our cash management but future changes by state regulators could affect our ability to freely transfer cash within our consolidated companies. CLEC Services Regulation - ------------------------ A central focus of the sweeping federal policy reform under the 1996 Act was to open local communications markets to competition including the encouragement of the development of CLECs, which compete for business with the existing carriers. As a CLEC, ELI is subject to federal, state and local regulation. However, the level of regulation is typically less than that experienced by an ILEC. The FCC exercises jurisdiction over all interstate communications services. State commissions retain jurisdiction over all intrastate communications services. Local governments may require ELI to obtain licenses or franchises regulating the use of public rights-of-way necessary to install and operate its networks. ELI has various interconnection agreements in the states in which it operates. These agreements govern reciprocal compensation relating to the transport and termination of traffic between the ILEC's and ELI's networks. The FCC is significantly reducing intercarrier compensation for ISP traffic also known as "reciprocal compensation." Most state public service commissions require competitive communications providers, such as ELI, to obtain operating authority prior to initiating intrastate services. Most states also require the filing of tariffs or price lists and/or customer-specific contracts. ELI is not currently subject to rate-of-return or price regulation. However, ELI is subject to state-specific quality of service, universal service, periodic reporting and other regulatory requirements, although the extent of these requirements is generally less than those applicable to ILECs. Competition ILEC Services Competition - ------------------------- Competition in the telecommunications industry is increasing. Although we have not faced as much competition as larger, more urban telecom companies, we do experience competition from other wireline local carriers through Unbundled Network Elements (UNE) and potentially in the future through UNEP, from other long distance carriers (including Regional Bell Operating Companies), from cable companies and internet service providers with respect to internet access and potentially in the future cable telephony, and from wireless carriers. Competition may result in a greater loss of access lines and minutes of use and the conversion of retail lines to wholesale lines, which negatively affects revenues and margins from those lines. Competition also puts pressure on the prices we are able to charge for some services, particularly for some non-residential services. Most of the wireline competition we face is in our Rochester market, with limited competition in a few other areas. Competition from cable companies with respect to high-speed Internet access is intense in Rochester and a few of our more suburban markets such as Elk Grove, California (which is near Sacramento). Competition from wireless companies, other long distance companies and Internet service providers is present in varying degrees in all of our markets. The 1996 Act and subsequent FCC interconnection decisions have established the relationships between ILECs and CLECs and the mechanisms for competitive market entry. Though carriers like us, who serve rural markets, did receive a qualified exemption from some of the technical requirements imposed upon all ILECs for interconnection arrangements, we did not receive an exemption from interconnection or local exchange competition in general. The exemption, known as the rural telephone company exemption, continues until a bona fide request for interconnection is received from a CLEC and a state public services commission with jurisdiction determines that discontinuance of the exemption is warranted. The state commission must determine that discontinuing the exemption will not adversely impact the availability of universal service in the state nor impose an undue economic hardship on us and that the requested interconnection is technically feasible. As of December 31, 2002, we had entered into 334 interconnection agreements with CLECs. These agreements allow CLECs to connect with some of our ILEC networks and compete in our ILEC markets. In addition, in some markets, our ILEC services provide reciprocal compensation payments and local number portability. These competitors are mainly serving business customers and Internet service providers. 6 CLEC Services Competition - ------------------------- ELI faces significant competition from ILECs in each of its markets. Principal ILEC competitors include Qwest, SBC and Verizon. ELI also competes with all of the major Interexchange Carriers (IXCs), Internet access providers and other CLECs. CLEC service providers have generally encountered intense competitive pressures, the result of which is the failure of a number of CLECs and substantial financial pressures on others. Competitors in ELI's markets include, in addition to the incumbent providers: AT&T, Sprint, Time Warner Telecom, MCI WorldCom, Broadwing, Integra and XO Communications. In each of the markets in which ELI operates, at least one other CLEC, and in some cases several other CLECs, offer many of the same local communications services that ELI provides, generally at similar prices. Competition is based on price, quality, network reliability, customer service, service features and responsiveness to the customer's needs. The market for Internet access, long-haul and related services in the United States is extremely competitive, with substantial overcapacity in the market. We expect that competition will intensify. In addition, new enhanced Internet services such as managed router service and web hosting are constantly under development in the market and we expect additional innovation in this market by a range of competitors. Several IXC's have filed for bankruptcy protection, which will allow them to substantially reduce their cost structure and debt. This could enable such companies to further reduce prices and increase competition. Many of these competitors have greater market presence and greater financial, technical, marketing and human resources, more extensive infrastructure and stronger customer and strategic relationships than are available to us. Public Utilities Services We have historically provided public utilities services including natural gas transmission and distribution, electric transmission and distribution, water distribution and wastewater treatment services to primarily rural and suburban customers throughout the United States. In 1999, we announced a plan of divestiture for our public utilities services properties. Since then, we have divested or entered into contracts to divest almost all of our public utility operations for an aggregate of $1.9 billion. In 1999, we initially accounted for the planned divestiture of our public utilities services segments as discontinued operations. Because we had not yet entered into agreements to sell our entire gas and electric segments, we reclassified all our gas and electric assets and their related liabilities in the second half of 2000 as "net assets held for sale." As a result, our discontinued operations only reflected the assets and related liabilities of the water and wastewater businesses. In 2001, we sold our Louisiana gas operations for $363.4 million in cash and our Colorado gas division for $8.9 million in cash. In 2002, we sold our water and wastewater services operations for $859.1 million in cash and $122.5 million in assumed debt and other liabilities, and our Kauai electric division for $215.0 million in cash. These transactions are subject to routine purchase price adjustments. In October 2002, we entered into definitive agreements to sell our Arizona gas and electric operations for $230.0 million in cash ($220.0 million if we close by July 28, 2003) and in December 2002, we entered into a definitive agreement to sell our Hawaiian gas division for $115.0 million in cash, in each case subject to adjustments specified in the agreement. These transactions, which are subject to regulatory approvals, are expected to close during the second half of 2003. We intend to sell our one remaining public utility asset, which is an electric utility operation in Vermont. Natural Gas - ----------- Our natural gas segment provides natural gas transmission and distribution services in Arizona, as well as synthetic natural gas production and propane service in Hawaii to primarily residential customers. Our natural gas segment accounted for $216.5 million, or 8%, of our total Company revenues in 2002. At December 31, 2002, the number of customers by state is as follows: 7 State Customers ----- --------- Arizona......... 126,925 Hawaii........... 66,494 --------- Total 193,419 ========= Natural gas services and/or rates charged are subject to the jurisdiction of federal and state regulatory agencies, except for the non-regulated propane rates charged to customers in Hawaii. We purchase the gas supply we need, except for our production of synthetic natural gas in Hawaii. We entered into a firm supply contract with BP Energy for our Arizona gas division. We believe our natural gas supply is adequate to meet current demands and to provide for additional sales to new customers. The natural gas industry is subject to seasonal demand, except in Hawaii, with the peak demand occurring during the heating season of November 1 through March 31. Our natural gas segment experiences third-party competition from fuel oil, propane and other gas suppliers for most of our large consumption customers, of which there are few, and from electric suppliers for our entire customer base. The competitive position of gas at any given time depends primarily on the relative prices of gas and these other energy sources. Electric - -------- Our electric segment provides electric transmission and distribution services in Arizona and Vermont to primarily residential customers. Our electric segment accounted for $214.8 million, or 8%, of our total Company revenues in 2002. At December 31, 2002, the number of customers per state is as follows: State Customers ----- --------- Arizona ......... 77,818 Vermont.......... 20,603 -------- Total 98,421 ======== Electric services and/or rates charged are subject to the jurisdiction of federal and state regulatory agencies. We purchased approximately 99% of the electric energy needed to provide service to our customers in Vermont and Arizona. We believe our supply is adequate to meet current demands and to provide for additional sales to new customers. We have generating facilities in Arizona and Vermont, which are used mainly for back-up power supply. Generally, our electric segment does not experience material seasonal fluctuations. The electric utility industry in the United States is undergoing fundamental changes. For many years electric utilities have been vertically integrated entities with the responsibility for the generation, transmission and distribution of electric power in a franchise territory. In return for monopoly status, electric utilities have been subject to comprehensive regulation at the state and federal level. The industry continues its shift toward electric customers being able to choose their energy provider much like telephone customers are able to choose their long distance provider. Generally, this involves separating the generation and transmission of power from the remainder of the business, and having generators compete with one another in the sale of power directly to retail customers. The interconnected regional transmission grids will be operated independently, continuing as a federally regulated monopoly. Local transmission and distribution facilities would continue as state-regulated monopolies. This change in the industry is in various stages of development around the United States. The pace and degree of regulation vary from state to state. The bankruptcies in 2001 and financial difficulties in 2002 of major providers of electricity may alter the nature and level of regulation of electric utilities. Our Vermont Electric Division is a member of the Vermont Joint Owners, a consortium of 14 Vermont utilities that has entered into a purchase power agreement with a Canadian power generation facility. The agreement provides for up to 395 MW of power per annum and associated energy to be delivered to Vermont, in varying amounts, between 1990 and 2020. If any member of the consortium defaults on its share of power under the agreement, the remaining members of the consortium are required by "step-up" provisions of the agreement to assume responsibility for a defaulting member's share on a pro-rata basis. In July 2002, the Vermont Public Service Board approved a rate increase of 17.45% for services rendered on or after July 15, 2002. On November 1, 2002, we completed the sale of our Kauai electric division to Kauai Island Utility Cooperative (KIUC) for $215.0 million in cash. 8 Segment Information Note 23 to Consolidated Financial Statements provides financial information about our industry segments for the last three fiscal years. Financial Information about Foreign and Domestic Operations and Export Sales We have no foreign operations, although we have a 19% interest in Hungarian Telephone and Cable Company (See Note 8 to Consolidated Financial Statements), a company that provides wireline telephone service in Hungary. General Order backlog is not a significant consideration in our businesses. We have no contracts or subcontracts that may be subject to renegotiations of profits or termination at the election of the Federal government. We also hold certificates granted by various state commissions, which are generally of indefinite duration. We have no special working capital practices, and our research and development activities are not significant. We hold no patents, licenses or concessions that are material. As of December 31, 2002, we had approximately 7,684 employees, of whom 6,206 were associated with ILEC operations, 565 were associated with ELI and 750 were associated with public utilities services operations. We consider our relations with our employees to be good. Available Information We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Our Internet address is http://www.czn.net. Item 2. Properties ---------- Our principal corporate offices are located in leased premises at 3 High Ridge Park, Stamford, Connecticut. The operations support office for our ILEC segment is currently located in leased premises at 180 South Clinton Avenue, Rochester, New York. In conjunction with the Frontier acquisition, we evaluated our facilities to take advantage of operational and functional synergies between the two companies with the objective of concentrating our resources in the areas where we have the most customers, to better serve those customers. In connection with that objective, we closed our operations support center in Plano, Texas in April 2002 and sold the building at that location in 2003. In addition, our ILEC segment leases and owns office space in various markets throughout the United States. The operations support office for ELI is located in a building we own at 4400 NE 77th Avenue, Vancouver, Washington. In addition, our CLEC segment leases local office space in various markets throughout the United States, and also maintains a warehouse facility in Portland, Oregon. Our CLEC segment also leases network hub and network equipment installation sites in various locations throughout the areas in which it provides services. Our ILEC and CLEC services segments own telephone properties which include: connecting lines between customers' premises and the central offices; central office switching equipment; fiber-optic and microwave radio facilities; buildings and land; and customer premise equipment. The connecting lines, including aerial and underground cable, conduit, poles, wires and microwave equipment, are located on public streets and highways or on privately owned land. We have permission to use these lands pursuant to local governmental consent or lease, permit, franchise, easement or other agreement. Our public utilities services segments are administered locally in the states in which they operate. Pending the sale of our public utilities services segments, we own gas production, transmission and distribution facilities in Arizona and Hawaii and electric transmission and distribution facilities in Arizona and Vermont. 9 Item 3. Legal Proceedings ----------------- On July 20, 2001, we notified Qwest Corporation (Qwest) that we were terminating eight acquisition agreements. On July 23, 2001, Qwest filed a notice of claim for arbitration with respect to the terminated acquisition agreements. Qwest asserts that we wrongfully terminated theses agreements and is seeking approximately $64.0 million in damages, which is the aggregate of liquidated damages under letters of credit established in the terminated acquisition agreements. On September 7, 2001, we filed a response and counterclaims in the same arbitration proceedings, contesting Qwest's asserted claims and asserting substantial claims against Qwest for material breaches of representations, warranties, and covenants in the terminated acquisition agreements and in the acquisition agreement relating to North Dakota assets that we purchased from Qwest. The parties are currently engaged in discovery. An arbitration hearing has been scheduled to commence in the third quarter of 2003. On December 21, 2001, we entered into a settlement agreement resolving all claims in a class action lawsuit pending against the Company in Santa Cruz County, Arizona (Chilcote, et al. v. Citizens Utilities Company, No. CV 98-471). The lawsuit arose from claims by a class of plaintiffs that included all of our electric customers in Santa Cruz County for damages resulting from several power outages that occurred during the period January 1, 1997, through January 31, 1999. Under the terms of the settlement agreement, and without any admission of guilt or wrongdoing by us, we have paid the class members $5.5 million in satisfaction of all claims. The court approved the settlement agreement on March 29, 2002, and the lawsuit against us was dismissed with prejudice. We accrued the full settlement amount, plus an additional amount sufficient to cover legal fees and other related expenses, during the fourth quarter of 2001 and no accrual remains at December 31, 2002. As part of the Frontier acquisition, Global and we agreed to Global's transfer, effective as of July 1, 2001, of certain liabilities and assets under the Global pension plan for Frontier employees. Such transfer and assumption of liabilities was to be to a trustee of a trust established under our pension plan, and would exclude (1) those liabilities relating to certain current and former Frontier employees who were not considered part of the Frontier acquisition (calculated using the "safe harbor" methodology of the Pension Benefit Guaranty Corporation) and (2) those assets attributable to such excluded liabilities. After filing for bankruptcy on January 28, 2002, Global claimed that its obligation to transfer the Global pension plan's transferred assets and liabilities remained "executory" under the Bankruptcy Code, and refused to execute and deliver an authorization letter to the Frontier plan trustee (who was also the Global plan trustee) directing the trustee to transfer to our pension plan record ownership of such assets and liabilities. We initiated an adversary proceeding with the Bankruptcy Court supervising Global's bankruptcy proceeding to determine and declare that Global's obligation was not "executory," and to compel Global to execute and deliver such authorization letter. On December 18, 2002 we entered into a stipulation with Global and other parties, which was approved by the Bankruptcy Court, fully and finally settling the adversary proceeding. Pursuant to the stipulation and order, on February 3, 2003, among other things, Global instructed the Frontier plan trustee to transfer record ownership of the transferred assets and liabilities to our pension plan, and the transfer in fact took place on that date. The City of Bangor, Maine, filed suit against us on November 22, 2002, in the U.S. District Court for the District of Maine (City of Bangor v. Citizens Communications Company, Civ. Action No. 02-183-B-S). The City has alleged, among other things, that we are responsible for the costs of cleaning up environmental contamination alleged to have resulted from the operation of a manufactured gas plant by Bangor Gas Company, which we owned from 1948-1963. The City alleged the existence of extensive contamination of the Penobscot River and nearby land areas and has asserted that money damages and other relief at issue in the lawsuit could exceed $50.0 million. The City also requested that punitive damages be assessed against us. We have filed an answer denying liability to the City, and have asserted a number of counter claims against the City. We intend to defend ourselves vigorously against the City's lawsuit. In addition, we have identified a number of other potentially responsible parties that may be responsible for the damages alleged by the City. We expect to initiate legal action within the next few weeks to bring those parties into the lawsuit. We also have demanded that various of our insurance carriers defend and indemnify us with respect to the City's lawsuit. On or about December 26, 2002, we filed a declaratory judgment action against those insurance carriers in the Superior Court of Penobscot County, Maine, for the purpose of establishing their obligations to us with respect to the City's lawsuit. We intend to vigorously pursue insurance coverage for the City's lawsuit. On February 7, 2003, we received a letter from counsel representing Enron North America Corporation (formerly known as Enron Gas Marketing, Inc.) demanding payment of an "early termination liability" of approximately $12.5 million that Enron claims it is owed under a gas supply agreement that we lawfully terminated in November 2001. The demand was made in connection with Enron's ongoing bankruptcy proceeding in the United States Bankruptcy Court for the Southern District of New York. We believe Enron's claim lacks any merit and have so advised that company's counsel. Enron has threatened to initiate an adversary proceeding in the bankruptcy court to recover the amount of its demand plus applicable interest and attorney's fees. If that occurs, we will vigorously defend against any such action. 10 During the fourth quarter of 2002 we became aware of irregularities involving payments made by certain of our public utilities operations for services or benefits that we did not receive. The payments do not involve our current operations in Arizona, Vermont, or Hawaii. With the assistance of forensic specialists, outside auditors, and counsel, we investigated these irregularities and identified a total of $7.8 million that had been embezzled from the Company. These payments were reflected in our financial statements as charges to earnings (primarily during 2002). The U.S. Government has recovered approximately $6.0 million (which we believe will be turned over to us) and we believe that most of the remaining funds outstanding will be reimbursed by insurance. We have provided detailed information regarding the results of our investigation to federal prosecutors and the Securities and Exchange Commission, including the names of two of our former officers (Kenneth Cohen and Livingston Ross, who were the President and Chief Operating Officer of the Public Services Sector and the Vice President of Reporting and Audit, respectively) who approved the payments. We have been advised by federal prosecutors that these individuals have admitted their involvement in these schemes and we have terminated the employment of these individuals. In connection with an inquiry that we believe has arisen as a result of allegations made to federal authorities during their investigation of the embezzlement, we and our employees are cooperating fully with the Office of the U.S. Attorney for the Southern District of New York and with the New York office of the Securities and Exchange Commission. We have provided requested documents to the SEC and we have agreed to comply with an SEC request that, in connection with the informal inquiry that it has initiated, we preserve financial, audit, and accounting records. We are party to proceedings arising in the normal course of our business. The outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all such matters, after considering insurance coverage, will not have a material adverse effect on our financial position, results of operations, or our cash flows. Item 4. Submission of Matters to Vote of Security Holders ------------------------------------------------- None in fourth quarter 2002. Executive Officers of the Registrant - ------------------------------------ Information as to Executive Officers of the Company as of March 1, 2003 follows:
Name Age Current Position and Office ---- --- --------------------------- Leonard Tow 74 Chairman of the Board and Chief Executive Officer Scott N. Schneider 45 Vice Chairman of the Board, President and Chief Operating Officer Donald B. Armour 55 Senior Vice President, Finance and Treasurer Robert Braden 57 Executive Vice President, ILEC Sector John H. Casey, III 46 President and Chief Operating Officer of the ILEC Sector and Executive Vice President Jean M. DiSturco 39 Senior Vice President, Human Resources Jerry Elliott 43 Senior Vice President and Chief Financial Officer Michael G. Harris 56 Senior Vice President, Engineering and New Technology Edward O. Kipperman 51 Vice President, Tax Robert J. Larson 43 Senior Vice President and Chief Accounting Officer Daniel J. McCarthy 38 President and Chief Operating Officer, Public Services Sector and Vice President L. Russell Mitten 51 Senior Vice President, General Counsel and Secretary Michael A. Zarrella 43 Vice President, Strategic Planning and Development
There is no family relationship between any of the officers of Citizens. The term of office of each of the foregoing officers of Citizens will continue until the next annual meeting of the Board of Directors and until a successor has been elected and qualified. 11 LEONARD TOW has been associated with Citizens since April 1989 as a Director. In June 1990, he was elected Chairman of the Board and Chief Executive Officer. He was also Chief Financial Officer from October 1991 through November 1997. He is a Director of Hungarian Telephone and Cable Corp., and is a Director of the United States Telephone Association. SCOTT N. SCHNEIDER has been associated with Citizens since November 1999. In January 2001, he was elected Vice Chairman of the Board. In July 2000, he was elected a Director of Citizens. He has served as Vice Chairman of the Board, President and Chief Operating Officer of Citizens since July 2002. Previously he was Vice Chairman, Executive Vice President from May 2001 to July 2002 and Executive Vice President Strategic Planning and Development from May 2000 to May 2001 and Executive Vice President of Electric Lightwave, Inc. from October 1999 to May 2000. Prior to joining Citizens, he was Director from October 1994 to October 1999, Chief Financial Officer from December 1996 to October 1999, Senior Vice President and Treasurer from June 1991 to October 1999 of Century Communications Corp. He also served as Director, Chief Financial Officer, Senior Vice President and Treasurer of Centennial Cellular from August 1991 to October 1999. DONALD B. ARMOUR has been associated with Citizens since October 2000. He was elected Senior Vice President, Finance and Treasurer in December 2002. Previously, he was Vice President, Finance and Treasurer from October 2000 to December 2002. Prior to joining Citizens, he was the Treasurer of the cable television division of Time Warner Inc. from January 1994 to September 2000. ROBERT BRADEN has been associated with Citizens since December 1999. In January 2002, he became Executive Vice President, ILEC Sector. Previously he was Chief Executive Officer from January 2002 to November 2002, Director from May 2001 to November 2002, Vice President and Chief Operating Officer from February 2001 to January 2002 and Vice President, Business Development from February 2000 to February 2001 of Electric Lightwave, Inc. Prior to joining Citizens, he was Vice President, Business Development at Century Communications Corp. from January 1999 to October 1999. He was Senior Vice President, Business Development at Centennial Cellular Corp. from June 1996 to January 1999 and held other officer positions with Centennial since November 1993. JOHN H. CASEY, III has been associated with Citizens since November 1999. He is currently Executive Vice President of Citizens and President and Chief Operating Officer of our ILEC Sector. Previously he was Vice President of Citizens, President and Chief Operating Officer, ILEC Sector January 2002 to July 2002, Vice President and Chief Operating Officer, ILEC Sector February 2000 to January 2002 and Vice President, ILEC Sector December 1999 to February 2000. Prior to joining Citizens, he was Vice President, Operations from January 1995 to January 1997 and then Senior Vice President, Administration of Centennial Cellular until November 1999. JEAN M. DISTURCO has been associated with Citizens since 1987. She was elected Senior Vice President, Human Resources in December 2002. Previously, she was Vice President, Human Resources since October 2001, Vice President, Compensation and Benefits since March 2001 and Director of Compensation from 1996 to March 2001. JERRY ELLIOTT has been associated with Citizens since March 2002. He was elected Senior Vice President and Chief Financial Officer in December 2002. Previously, he was Vice President and Chief Financial Officer from March 2002 to December 2002. Prior to joining Citizens, he was Managing Director of Morgan Stanley's Communications Investment Banking Group from July 1998 to March 2002. Prior to joining Morgan Stanley, he was a partner with the law firm of Shearman & Sterling. MICHAEL G. HARRIS has been associated with Citizens since December 1999. He was elected Senior Vice President, Engineering and New Technology in December 2002. Previously, he was Vice President, Engineering and New Technology from December 1999 to December 2002. Prior to joining Citizens, he was Senior Vice President, Engineering of Centennial Cellular from August 1991 to December 1999. He was also Senior Vice President, Engineering of Century Communications Corp. from June 1991 to October 1999. EDWARD O. KIPPERMAN has been associated with Citizens since February 1985. He has served as Vice President, Tax since October 1991. ROBERT J. LARSON has been associated with Citizens since July 2000. He was elected Senior Vice President and Chief Accounting Officer of Citizens in December 2002. Previously, he was Vice President and Chief Accounting Officer from July 2000 to December 2002. Prior to joining Citizens, he was Vice President and Controller of Century Communications Corp. from October 1994 to October 1999. He was also Vice President, Accounting and Administration of Centennial Cellular from March 1995 to October 1999. 12 DANIEL McCARTHY has been associated with Citizens since December 1990. He was elected President and Chief Operating Officer, Electric Lightwave in January 2002. Previously, he was President and Chief Operating Officer, Public Services Sector from November 2001 to January 2002, Vice President and Chief Operating Officer, Public Services Sector from March 2001 to November 2001, Vice President, Citizens Arizona Energy from April 1998 to March 2001 and Vice President, Citizens Arizona Gas from February 1997 to April 1998. L. RUSSELL MITTEN has been associated with Citizens since June 1990. He was elected Senior Vice President, General Counsel and Secretary in December 2002. Previously, he was Vice President, General Counsel and Secretary from September 2000 to December 2002. He was also Vice President, General Counsel and Assistant Secretary from June 1991 to September 2000. He was General Counsel from June 1990 to June 1991. MICHAEL ZARRELLA has been associated with Citizens since December 1999. He was elected Vice President, Strategic Planning and Development in October 2000. Previously he was Director, Strategic Planning and Development from December 1999 to October 2000. Prior to joining Citizens, he was Group Vice President of Finance for Century Communications Corp. from June 1996 to December 1999 and Director, Financial Analysis from October 1990 to June 1996. 13 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters --------------------------------------------------------------------- PRICE RANGE OF COMMON STOCK Our Common Stock is traded on the New York Stock Exchange under the symbol CZN. The following table indicates the high and low prices per share during the periods indicated. 2002 2001 ------------------ ----------------- High Low High Low ---- --- ---- --- First Quarter $11.30 $8.91 $15.88 $12.05 Second Quarter $11.52 $8.22 $15.00 $11.28 Third Quarter $ 8.80 $2.51 $13.10 $ 8.95 Fourth Quarter $10.99 $5.44 $11.53 $ 8.20 As of February 28, 2003, the approximate number of security holders of record of our Common Stock was 31,752. This information was obtained from our transfer agent. DIVIDENDS The amount and timing of dividends payable on Common Stock are within the sole discretion of our Board of Directors. Our Board of Directors discontinued the payment of dividends after the payment of the December 1998 stock dividend. RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED SECURITIES None Item 6. Selected Financial Data -----------------------
($ in thousands, except per share amounts) Year Ended December 31, ---------------------------------------- --------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- ------------ ----------- ----------- ------------ Revenue (1) $2,669,332 $ 2,456,993 $1,802,358 $ 1,598,236 $ 1,448,588 Income (loss) from continuing operations before extraordinary expense and cumulative effect of $ (822,976) $ (63,926) $ (40,071) $ 136,599 $ 46,444 changes in accounting principle (2) Net income (loss) $ (682,897) $ (89,682) $ (28,394) $ 144,486 $ 57,060 Basic income (loss) per share of Common Stock from continuing operations before extraordinary expense and cumulative effect of changes in accounting principle (2) $ (2.93) $ (0.28) $ (0.15) $ 0.53 $ 0.18 Available for common shareholders per basic share $ (2.43) $ (0.38) $ (0.11) $ 0.56 $ 0.22 Available for common shareholders per diluted share $ (2.43) $ (0.38) $ (0.11) $ 0.55 $ 0.22 Stock dividends declared on Common Stock (3) - - - - 3.03% As of December 31, --------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- ------------ ----------- ----------- ------------ Total assets $8,146,742 $ 10,553,600 $6,955,006 $ 5,771,745 $ 5,292,932 Long-term debt $4,957,361 $ 5,534,906 $3,062,289 $ 2,107,460 $ 1,775,338 Equity units $ 460,000 $ 460,000 $ - $ - $ - Shareholders' equity $1,172,139 $ 1,946,142 $1,720,001 $ 1,919,935 $ 1,792,771
(1) Represents revenue from continuing operations. Revenue from acquisitions contributed $569.8 million and $49.5 million for the years ended December 31, 2001 and 2000, respectively. Revenue from gas operations sold represented $218.8 million, $232.3 million, $175.4 million and $173.1 million in 2001, 2000, 1999 and 1998, respectively. Revenue from an electric operation sold represented $76.6 million, $94.3 million, $95.1 million, $78.7 million and $72.6 million in 2002, 2001, 2000, 1999 and 1998, respectively. (2) Extraordinary expense represents an extraordinary after tax expense of $43.6 million related to the discontinuance of the application of Statement of Financial Accounting Standards No. 71 to our local exchange telephone operations in 2001. The cumulative effect of changes in accounting principle represents write-off of ELI's goodwill of $39.8 million resulting from the adoption of Statement of Financial Accounting Standards No. 142 in 2002 and an after tax charge of $2.3 million at ELI in 1998 resulting from the adoption of Statement of Position 98-5. (3) Compounded annual rate of quarterly stock dividends. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- This annual report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements. Statements that are not historical facts are forward-looking statements made pursuant to the Safe Harbor Provisions of the Litigation Reform Act of 1995. In addition, words such as "believes", "anticipates", "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements (including oral representations) are only predictions or statements of current plans, which we review continuously. Forward-looking statements may differ from actual future results due to, but not limited to, any of the following possibilities: * Changes in the number of our access lines; * The effects of competition from wireless, other wireline carriers (through Unbundled Network Elements (UNE), Unbundled Network Elements Platform (UNEP) or otherwise), high speed cable modems and cable telephony; * The effects of general and local economic conditions on our revenues; * Our ability to effectively manage and otherwise monitor our operations, costs, regulatory compliance and service quality; * Our ability to divest our remaining public utilities services businesses and the effect of the timing of the divestitures on the capital expenditures we make with respect to such businesses; * Our ability to successfully introduce new product offerings including our ability to offer bundled service packages on terms attractive to our customers, and our ability to sell enhanced and data services; * Our ability to manage our operating expenses, capital expenditures and reduce our debt; * The effects of greater than anticipated competition requiring new pricing, marketing strategies or new product offerings and the risk that we will not respond on a timely or profitable basis; * The effects of bankruptcies in the telecommunications industry which could result in higher network access costs and potential bad debts; * The effects of technological changes, including the lack of assurance that our ongoing network improvements will be sufficient to meet or exceed the capabilities and quality of competing networks; * The effects of increased pension and retiree medical expenses and related funding requirements; * The effects of changes in regulation in the telecommunications industry as a result of the Telecommunications Act of 1996 and other federal and state legislation and regulation, including changes in access charges and subsidy payments; * The effect of restructuring of portions of the telecommunications market; * The effects of possible state regulatory cash management policies on our ability to transfer cash among our subsidiaries and to the parent company; * Our ability to successfully renegotiate expiring union contracts, including the contract covering the Communications Workers of America members in Rochester that is scheduled to expire in January 2004; and 15 * The effects of more general factors, including changes in economic conditions; changes in the capital markets; changes in industry conditions; changes in our credit ratings; and changes in accounting policies or practices adopted voluntarily or as required by generally accepted accounting principles or regulators. You should consider these important factors in evaluating any statement in this Form 10-K or otherwise made by us or on our behalf. The following information should be read in conjunction with the consolidated financial statements and related notes included in this report. We have no obligation to update or revise these forward-looking statements. (a) Liquidity and Capital Resources ------------------------------- For the year ended December 31, 2002, we used cash flows from continuing operations, the proceeds from the sale of utility properties, cash and cash equivalents and investment balances to fund capital expenditures, interest payments and debt repayments. On January 15, 2002, we completed the sale of our water and wastewater operations for $859.1 million in cash plus the assumption by the buyer of $122.5 million of our debt and other liabilities. On November 1, 2002 we completed the sale of Kauai Electric division for $215.0 million in cash. The proceeds were used for general corporate purposes, including the repayment of outstanding indebtedness. As of December 31, 2002, we had cash and cash equivalents aggregating $393.2 million. For the year ended December 31, 2002, our actual capital expenditures were $468.7 million, including $288.8 million for the ILEC segment, $12.0 million for the ELI segment (excluding the purchase of equipment previously under lease for $110.0 million in cash), $39.7 million for the public utilities services segments and $18.2 million for general capital expenditures. We have budgeted approximately $333.6 million for our 2003 capital projects; including $275.0 million for the ILEC segment, $13.4 million for the ELI segment and $45.2 million for the public utilities segment. In the ordinary course of business, capital expenditures for the public utilities segment would increase the amount of assets that would be reflected on the balance sheet. However, most of the capital expenditures with respect to our public utilities segment during 2003 will be expensed as incurred instead of capitalized (see "Loss on Impairment" below and Note 28). During 1995, ELI entered into a construction agency agreement and an operating lease agreement in connection with the construction of certain network facilities. On April 30, 2002, ELI purchased the facilities at the lease termination for $110.0 million in cash. Citizens had guaranteed all of ELI's obligations under this operating lease and provided the funds for the purchase. We have an available shelf registration of $825.6 million and we have available lines of credit with financial institutions in the aggregate amount of $805.0 million. Associated facility fees vary, depending on our credit ratings, and are 0.25% per annum as of December 31, 2002. The expiration date for the facilities is October 24, 2006. During the term of the facilities we may borrow, repay and reborrow funds. As of December 31, 2002, there were no outstanding advances under these facilities. Tender Offer - ------------ On May 16, 2002, we commenced a tender offer, at $0.70 per share, for all of the publicly held Class A common shares of ELI that we did not already own. The tender offer expired on June 17, 2002, at which time the shares tendered, combined with the ELI shares already owned by us, represented approximately 95.5% of total outstanding ELI Class A shares. On June 20, 2002, we completed a short-form merger in which ELI became our wholly owned subsidiary and each share of common stock not tendered was converted into a right to receive $0.70 in cash without interest. The total cost (including fees and expenses) of the tender was approximately $6.8 million. Debt Reduction - -------------- For the year ended December 31, 2002, we retired an aggregate principal amount of $1.06 billion of debt. We intend to continue to reduce debt balances from the proceeds from the sale of our public service utilities and cash flows from continuing operations and may use current cash and cash equivalent balances. If the sale of our Arizona utility businesses to UniSource is completed, the sale agreement requires us to promptly redeem $111.8 million principal amount of industrial revenue bonds. On January 7, 2002, we redeemed at par two of our outstanding 1991 series of industrial development revenue bonds, the $20.0 million 7.15% Mohave series and the $10.1 million 7.15% Santa Cruz series. 16 On January 31, 2002, we repaid approximately $76.9 million principal amount of debt from the Rural Utilities Service, Rural Telephone Bank and the Federal Financing Bank. We paid a premium of $0.5 million on these redemptions. On March 27, 2002, we repaid $40.0 million of Frontier 7.51% Medium Term Notes at maturity. On May 1, 2002, we redeemed at par six of our outstanding variable rate industrial development revenue bond series aggregating approximately $20.3 million in principal amount. On June 27, 2002, we redeemed at par $24.8 million principal amount of our 7.05% Mohave Industrial Development Revenue Refunding Bonds due August 1, 2020. On July 15, 2002, we redeemed at par three of our outstanding fixed and variable rate industrial development revenue bond series aggregating approximately $14.9 million in principal amount. On August 7, 2002, we redeemed at par one of our outstanding variable rate industrial development revenue bond series totaling $5.5 million in principal amount. Following the completion of the merger with ELI, we repaid and terminated the entire $400.0 million outstanding under ELI's committed revolving line of credit with a syndicate of commercial banks. During the last three quarters of 2002, we executed a series of purchases in the open market of a number of our outstanding notes and debentures. The aggregate principal amount of notes and debentures purchased was $106.9 million and the purchases generated a pre-tax gain from the early extinguishment of debt at a discount of approximately $6.0 million. We may from time to time repurchase our debt in the open market. During December 2002, we completed a tender offer with respect to our 6.80% Debentures due 2026 (puttable at par in 2003) and ELI's 6.05% Guaranteed Notes due 2004. As a result of the tender, $82.3 million and $259.4 million, respectively, of these securities were purchased and retired at a premium of $12.8 million in excess of the principal amount of the securities purchased. Interest Rate Management - ------------------------ In order to manage our interest rate risk exposure, we entered into five interest swap agreements in 2001 and 2002 with investment grade financial institutions. Each agreement covered a notional amount of $50.0 million. Under the terms of the agreements, we make semi-annual, floating interest rate interest payments based on six month LIBOR and receive a fixed rate on the notional amount. There are two interest rate swap agreements that were executed in 2001 that receive a 6.375% fixed rate until the swaps' termination date of August 15, 2004, and there are three swaps executed in 2002 that receive an 8.500% fixed rate until their termination date of May 15, 2006. The underlying variable rate on the swaps is set either in advance, in arrears or, as in the case of one agreement, based on each period's daily average six-month LIBOR. In connection with these swaps, the Company entered into a series of supplemental rate agreements which had the effect of setting the floating rate portion of the swaps in advance of the contractually agreed upon rate determination date. The net effect of the two 2001 interest rate swaps and supplemental rate agreements was to reduce the effective interest rate on $100.0 million of fixed rate debt from 6.375% to 3.665% during 2002. The net effect of the three 2002 swaps and supplemental rate agreements was to reduce the effective interest rate on $150.0 million of fixed rate debt from 8.500% to 6.864% through November 15, 2002, the latest rate reset date. All swaps and associated supplemental rate agreements are accounted for under SFAS 133 as fair value hedges. 17 Future Commitments - ------------------ A summary of our future contractual obligations and commercial commitments as of December 31, 2002 is as follows:
Less than After ($ in thousands) Total 1 year(2) 2-3 years 4-5 years 5 years -------------- ---------- ---------- --------- --------- ---------- Long-term debt (See Note 10) (1) $5,476,272 $ 58,911 $392,390 $885,023 $4,139,948 Operating leases (See Note 28) 157,975 26,790 41,152 34,578 55,455 Long-term contracts (See Note 28) 388,752 100,812 117,591 44,599 125,750 Equity Providing Preferred Income Convertible Securities (EPPICS)(See Note 16) 201,250 - - - 201,250 ----------- --------- -------- -------- ---------- Total contractual cash obligations $6,224,249 $186,513 $551,133 $964,200 $4,522,403 =========== ========= ======== ======== ==========
(1) Includes the debt portion of the equity units ($460.0 million) and the net present value of payments under capital leases ($135.2 million). (2) If the sale of our Arizona utility business to UniSource is completed, we will redeem $111.8 million principal amount of long-term debt. Covenants - --------- The terms and conditions contained in our indentures and credit facility agreements are of a general nature, and do not currently impose significant financial performance criteria on us. These general covenants include the timely and punctual payment of principal and interest when due, the maintenance of our corporate existence, keeping proper books and records in accordance with Generally Accepted Accounting Principles (GAAP), restrictions on the allowance of liens on our assets, and restrictions on asset sales and transfers, mergers and other changes in corporate control. We currently have no restrictions on the payment of dividends by us either by contract, rule or regulation. The principal financial performance covenant under our $805.0 million credit facilities and our $200.0 million term loan facility with the Rural Telephone Finance Cooperative (RTFC) requires the maintenance of a minimum net worth of $1.5 billion. These facilities define "net worth" as shareholders' equity plus equity units plus mandatorily redeemable convertible preferred securities. Under the RTFC loan, in the event that our credit rating from either Moody's Investors Service or Standard & Poor's declines below investment grade (Baa3/BBB-, respectively), we would also be required to maintain an interest coverage ratio of 2.00 to 1 or greater and a leverage ratio of 6.00 to 1 or lower. We are in compliance with all of our debt covenants. At December 31, 2002 the amount of our net worth as calculated pursuant to the credit facilities and the RTFC loan facility was $1.83 billion. In future periods, we may incur a reduction in shareholders' equity as a result of certain pension matters described under "Critical Accounting Policies and Estimates" or for other reasons. Although the potential amount of future reductions cannot currently be determined with certainty and assessments of the potential amounts require considerable assumptions, we believe that we will remain in compliance with all of our debt covenants. Acquisitions - ------------ In 1999 and 2000 we entered into several agreements to acquire telephone access lines. These transactions have been accounted for using the purchase method of accounting. The results of operations of the acquired properties have been included in our consolidated financial statements from the dates of acquisition of each property. In 2000, we acquired from Verizon Communications Inc. approximately 317,500 telephone access lines for $948.2 million in cash, and we acquired from Qwest approximately 17,000 telephone access lines in North Dakota for approximately $38.0 million in cash. On June 29, 2001, we purchased Frontier for approximately $3,373.0 million in cash. Divestitures - ------------ On August 24, 1999, our Board of Directors approved a plan of divestiture for our public utilities services businesses, which included gas, electric and water and wastewater businesses. During 2001 we sold two of our natural gas operations and in 2002 we sold all of our water and wastewater treatment operations and one electric business (see Note 7 to Consolidated Financial Statements). 18 On January 15, 2002, we sold our water and wastewater services operations for $859.1 million in cash and $122.5 million in assumed debt and other liabilities. On October 29, 2002, we entered into definitive agreements to sell our Arizona gas and electric divisions to UniSource Energy Corporation for $230.0 million in cash ($220.0 million if we close by July 28, 2003) subject to adjustments specified in the agreements (see Note 7 to Consolidated Financial Statements). The transaction, which is subject to regulatory and other customary approvals, is expected to close during the second half of 2003. On October 31, 2002, we completed the sale of approximately 4,000 telephone access lines in North Dakota for approximately $9.7 million in cash. On November 1, 2002, we completed the sale of our Kauai electric division for $215.0 million in cash. On December 19, 2002, we entered into a definitive agreement to sell our Hawaiian gas division to K-1 USA Ventures, Inc. for $115.0 million in cash, subject to adjustments under the terms of the agreement. The transaction, which is subject to regulatory and other customary approvals, is expected to close during the fourth quarter of 2003. Currently, we do not have an agreement to sell our Vermont electric division, but we continue to actively pursue a buyer. All our gas and electric assets (including Arizona gas and electric and Hawaii gas) and their related liabilities are classified as "assets held for sale" and "liabilities related to assets held for sale," respectively. These assets have been written down to our best estimate of the net realizable value upon sale (see Note 4 to Consolidated Financial Statements). During the third quarter of 2002, we recognized a non-cash pre-tax impairment loss on these assets of $417.4 million. As discussed below under "Loss on Impairment" we will record additional impairment losses during 2003. Discontinued operations in the consolidated statements of operations reflect the results of operations and the gain on sale of the water/wastewater properties sold in January 2002 including allocated interest expense for the periods presented. Interest expense was allocated to the discontinued operations based on the outstanding debt specifically identified with this business. Discontinuation of SFAS 71 - -------------------------- Prior to the 2000 and 2001 acquisitions, our incumbent local exchange telephone properties had been predominantly regulated following a cost of service/rate of return approach. Accordingly, we applied the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 in the preparation of our consolidated financial statements. Currently, pricing for a majority of our revenues in our previously existing incumbent local exchange telephone properties is based upon price cap plans that limit prices to changes in general inflation and estimates of productivity for the industry at large or upon market pricing rather than on the specific costs of operating our business, a requirement for the application of SFAS 71. These trends in the deregulation of pricing and the introduction of competition are expected to continue. We intend to operate all of our properties as competitive enterprises, to meet competitive entry and maximize revenue by providing a broad range of products and services, such as data services. Many of these future services will not be regulated, further increasing the percentage of our revenue provided by our networks that is not based upon historical cost/rate of return regulation. In the third quarter of 2001, we concluded based on the factors mentioned above, that the provisions of SFAS 71 were no longer applicable to our incumbent local exchange telephone properties (properties we owned prior to the acquisitions in 2000 and 2001). As discussed further in Note 24 to Consolidated Financial Statements, in 2001 we recorded a non-cash extraordinary charge of $43.6 million net of tax in our statement of operations, to write-off regulatory assets and liabilities recorded on our balance sheet in the past. Based upon our evaluation of the pace of technological change that is estimated to occur in certain components of our rural telephone networks, we concluded that minor modifications in our asset lives were required for the major network technology assets. In accordance with the provisions of SFAS 101 and SFAS 121, we performed a test of the impairment of the property, plant and equipment accounts for our properties discontinuing SFAS 71 and based upon our expectations of future changes in sales volumes and prices and the anticipated rate of entry of additional competition into our markets, we concluded that an asset impairment was not warranted. 19 Critical Accounting Policies and Estimates - ------------------------------------------ We review all significant estimates affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustment prior to their publication. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, it is possible that actual results could differ from those estimates and changes to estimates could occur in the near term. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and judgments are used when accounting for allowance for doubtful accounts, impairment of long-lived assets, intangible assets, depreciation and amortization, employee benefit plans, income taxes and contingencies, among others. Our estimate of anticipated losses related to telecommunications bankruptcies is a "critical accounting estimate." We have significant on-going normal course business relationships with many telecom providers, some of which have filed for bankruptcy. We generally reserve approximately 95% of the net outstanding pre-bankruptcy balances owed to us and believe that our estimate of the net realizable value of the amounts owed to us by bankrupt entities is appropriate. We believe that the accounting estimate related to asset impairment is a "critical accounting estimate". With respect to ELI, the estimate is highly susceptible to change from period to period because it requires management to make significant judgments and assumptions about future revenue, operating costs and capital expenditures over the life of the property, plant and equipment (generally 5 to 15 years) as well as the probability of occurrence of the various scenarios and appropriate discount rates. Management's assumptions about ELI's future revenue, operating costs and capital expenditures as well as the probability of occurrence of these various scenarios require significant judgment because the CLEC industry is changing and because actual revenue, operating costs and capital expenditures have fluctuated dramatically in the past and may continue to do so in the future. The calculation of depreciation and amortization expense is based on the estimated economic useful lives of the underlying property, plant and equipment and identifiable intangible assets. Although we believe it is unlikely that any significant changes to the useful lives of our tangible or intangible assets will occur in the near term, rapid changes in technology or changes in market conditions could result in revisions to such estimates that could affect the carrying value of these assets and our future consolidated operating results. Our depreciation expense of the ELI segment will decrease substantially in future periods as a result of the impairment write down. With respect to our remaining gas and electric properties, our estimate is based upon expected future sales prices of these properties. (See Notes 4 and 7 to Consolidated Financial Statements). In the third quarter 2002, we recognized a non-cash pre-tax loss on impairment of $656.7 million for the impairment of long-lived assets in the ELI sector and a total of $417.4 million of non-cash pre-tax losses on impairment in the gas and electric sectors. We determined that we may not be able to recover the previously recorded carrying value of ELI's property, plant, and equipment and therefore recorded the impairment charge accordingly. The gas and electric impairment is associated with the proposed sales of our Arizona gas and electric and Hawaiian gas properties at a price that was less than the book carrying value. We have also written down the value of our remaining utility to our estimate of net realizable sale price. Our indefinite lived intangibles consist of goodwill and trade name, which resulted from the purchase of ILEC properties. We test for impairment of these assets annually, or more frequently, as circumstances warrant. All of our ILEC properties share similar economic characteristics and as a result, our reporting unit is the ILEC segment. In determining fair value during 2002 we utilized two tests. One test utilized recent trading prices for completed ILEC acquisitions of similarly situated properties. A second test utilized current trading values for the Company's publicly traded common stock. We reviewed the results of both tests for consistency to insure that our conclusions were appropriate. Additionally, we utilized a range of prices to gauge sensitivity. Our tests determined that fair values exceeded book value. Unless economic conditions change significantly (i.e. we experience unanticipated declines in revenue, and or declines in both our stock price and ILEC property values) we do not believe that a charge for impairment is reasonably likely to occur in the near future. Our estimates of pension expense, other post retirement benefits including retiree medical benefits and related liabilities are "critical accounting estimates". Our pension and other post retirement benefits expenses are based upon a set of assumptions that include projections of future interest rates and asset returns. Actual results may vary from these estimates. If future market conditions cause either a decline in interest rates used to value our pension plan liabilities or reductions to the value of our pension plan assets we potentially could incur additional charges to our shareholder's equity at the end of 2003. Based upon market conditions existing at the end of February 2003, an additional charge of approximately $30 - $35 million would be required at the end of 2003 should market conditions remain unchanged. 20 Management has discussed the development and selection of these critical accounting estimates with the audit committee of our board of directors and our audit committee has reviewed our disclosure relating to them. New Accounting Pronouncements - ----------------------------- In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." This statement requires that goodwill and other intangibles with indefinite useful lives no longer be amortized to earnings, but instead be reviewed for impairment. We have no intangibles with indefinite useful lives other than goodwill and trade name. The amortization of goodwill and trade name ceased upon adoption of the statement on January 1, 2002. We were required to test for impairment of goodwill and other intangibles with indefinite useful lives as of January 1, 2002 and at least annually thereafter. Any transitional impairment loss at January 1, 2002 is recognized as the cumulative effect of a change in accounting principle in our statement of operations. As a result of our adoption of SFAS 142, we recognized a transitional impairment loss related to ELI of $39.8 million as a cumulative effect of a change in accounting principle in our statement of operations in the first quarter of 2002. We annually examine the carrying value of our goodwill and other intangibles with estimated useful lives to determine whether there are any impairment losses and have determined for the year ended December 31, 2002 that there was no impairment. SFAS No. 142 also requires that intangible assets with estimated useful lives be amortized over those lives and be reviewed for impairment in accordance with SFAS No. 144, "Accounting for Impairment or Disposal or Long-Lived Assets." During the first quarter of 2002, we reassessed the useful life of our intangible assets with estimated useful lives and determined that no change was required. The impact of the adoption of SFAS No. 142 is discussed in Note 6 to Consolidated Financial Statements. In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement Obligations." This statement addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and reported as a liability. This statement is effective for fiscal years beginning after June 15, 2002. We are currently evaluating the impact of adoption of SFAS 143. In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement establishes a single accounting model, based on the framework established in SFAS 121, for impairment of long-lived assets held and used and for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. We adopted this statement on January 1, 2002. In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the requirement that gains and losses from extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. The statement requires gains and losses from extinguishment of debt to be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" which provides guidance for distinguishing transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. We adopted SFAS 145 in the second quarter of 2002. During the year ended December 31, 2002, we recognized $32.3 million of gains from early debt retirement as other income. There were no similar types of retirements in 2001. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullified Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than on the date of commitment to an exit plan. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. We are currently evaluating the impact of the adoption of SFAS 146. 21 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and amends the disclosure requirements of SFAS No. 123. This statement is effective for fiscal years ending after December 15, 2002. We have adopted the expanded disclosure requirements of SFAS No. 148. (b) Results of Operations --------------------- REVENUE ILEC revenue is generated primarily through the provision of local, network access, long distance and data services. Such services are provided under either a monthly recurring fee or based on usage at a tariffed rate and is not dependent upon significant judgments by management, with the exception of a determination of a provision for uncollectible amounts. CLEC revenue is generated through local, long distance, data and long haul services. These services are primarily provided under a monthly recurring fee or based on usage at agreed upon rates and are not dependent upon significant judgments by management with the exception of the determination of a provision for uncollectible amounts and realizability of reciprocal compensation. CLEC usage based revenue includes amounts determined under reciprocal compensation agreements. While this revenue is governed by specific contracts with the counterparty, management defers recognition of portions of such revenue until realizability is assured. Revenue earned from long-haul contracts is recognized over the term of the related agreement. Revenue from the provision of public utility services are recognized based on usage without significant judgments made by management with the exception of a provision for uncollectible accounts. Consolidated revenue increased $212.3 million, or 9%, in 2002 and $654.6 million, or 36%, in 2001. The increase in 2002 was primarily due to $420.5 million of increased telecommunications revenue, largely due to the impact of the Frontier acquisition on June 29, 2001, partially offset by $195.0 million of decreased gas revenue largely due to the disposition of the Louisiana and Colorado gas operations and the disposition of the Kauai electric division. The increase in 2001 was primarily due to the impact of acquisitions in the ILEC sector as well as the pass-through to customers of the increased cost of gas offset by the disposition of the Louisiana and Colorado gas operations.
TELECOMMUNICATIONS REVENUE ($ in thousands) 2002 2001 2000 -------------- --------------------------- ----------------------------- ---------- Amount $ Change % Change Amount $ Change % Change Amount --------- ------------------- --------- ------------------ ---------- Access services $ 673,456 $ 108,786 19% $ 564,670 $ 182,136 48% $ 382,534 Local services 869,907 196,587 29% 673,320 277,574 70% 395,746 Long distance and data service 305,455 97,181 47% 208,274 101,612 95% 106,662 Directory services 104,383 32,008 44% 72,375 34,951 93% 37,424 Other 109,704 34,290 45% 75,414 34,037 82% 41,377 --------- --------- ---------- ---------- ---------- ILEC revenue 2,062,905 468,852 29% 1,594,053 630,310 65% 963,743 ELI 175,079 (48,312) -22% 223,391 (17,401) -7% 240,792 --------- --------- ---------- ---------- ---------- $2,237,984 $ 420,540 23% $1,817,444 $ 612,909 51% $1,204,535 ========= ========= ========== ========== ==========
Changes in the number of our access lines is the most fundamental driver of changes in our telecommunications revenue. Historically, rural local telephone companies experienced steady growth in access lines because of positive demographic trends, steady rural local economies and little competition. In recent quarters many rural local telephone companies (including us) have experienced a loss of access lines primarily because of difficult economic conditions, increased competition from competitive wireline providers (including from Unbundled Network Elements), from wireless providers and from cable companies (currently with respect to broadband but which may in the future expand to cable telephony), and by some customers disconnecting second lines when they add DSL or cable modem service. We lost approximately 37,000 access lines during 2002 but added approximately 41,100 DSL subscribers during this period. The loss of lines during 2002 was equally weighted between residential and non-residential customers. The non-residential line losses were principally in Rochester, while the residential losses were throughout our markets. We expect to continue to lose access lines during 2003. A continued decrease in access lines, combined with continuing difficult economic conditions and increased competition, may cause our revenues to decrease in 2003. 22 Prior to 2002, we reported subscriber line charges (SLC) in both the access and local revenue categories. Beginning in the second quarter 2002, all SLC revenue is reported in the local services category. All prior periods have been conformed to this presentation. The average amount of SLC that was previously reported in access services is $22.9 million per quarter. Access services revenue for the year ended December 31, 2002 increased $108.8 million, or 19%, as compared with the prior year period primarily due to the full year impact of Frontier of $92.4 million. Increases in subsidies of $20.3 million and non-switched access revenue of $12.5 million due to higher circuit sales were partially offset by a decrease in switched access revenue of $16.5 million primarily from the effect of tariff rate reductions effective as of July 1, 2002. Our subsidy revenues in 2003 are expected to be slightly lower than 2002. Access services revenue for the year ended December 31, 2001 increased $182.1 million, or 48%, as compared with the prior year period primarily due to additional revenues of $159.1 million resulting from acquisitions. Growth in minutes of use, special access and subsidies revenue contributed $3.1 million, $17.9 million and $20.0 million, respectively. The increases were partially offset by $6.5 million from the effect of the FCC's CALLS mandate which reduced access charges paid by long distance companies and $7.3 million in rate decreases in effect as of July 1, 2001. Access services revenue in 2001 also includes a reclassification of $13.9 million in revenue that was classified as local services revenue in 2000. Local services revenue for the year ended December 31, 2002 increased $196.6 million, or 29%, as compared with the prior year period primarily due to the full year impact of Frontier of $184.8 million. Increases of $8.0 million in enhanced services for feature packages and $12.5 million from SLC were partially offset by an $8.6 million decrease resulting from rate changes and line losses. Although we continue to increase our penetration of enhanced services, in current economic conditions the rate of increase in sales is lower than in prior periods and we expect this trend to continue. Local services revenue for the year ended December 31, 2001 increased $277.6 million, or 70%, as compared with the prior year period primarily due to acquisitions, which contributed $260.9 million and growth in enhanced services of $8.1 million. Local services revenue in 2001 also reflects a reduction for the reclassification of $13.9 million in revenue that was classified as access revenue in 2000. Long distance and data services revenue for the year ended December 31, 2002 increased $97.2 million, or 47%, as compared with the prior year period primarily due to the full year impact of Frontier of $72.4 million, $13.7 million growth related to data and dedicated circuits and growth in long distance services of $11.0 million. The rate of increases in our data and long distance revenues has been slowing recently because of economic conditions and intense competition in some of our markets. We expect these factors will continue to affect our long distance and data services revenues during 2003. Long distance and data services revenue for the year ended December 31, 2001 increased $101.6 million, or 95%, as compared with the prior year period primarily due to the impact of acquisitions of $78.2 million, principally the long-distance and data revenue associated with Frontier, which contributed $74.1 million. Growth in data and dedicated circuits of $14.9 million and growth in long distance services of $7.7 million also contributed to the increase. Directory services revenue for the year ended December 31, 2002 increased $32.0 million, or 44%, as compared with the prior year period primarily due to the full year impact of Frontier of $30.0 million and growth in yellow pages advertising revenue of $2.0 million. Directory services revenue for the year ended December 31, 2001 increased $35.0 million, or 93%, as compared with the prior year period primarily due to the impact of acquisitions, which contributed $33.2 million, and growth of $1.8 million. Other revenue for the year ended December 31, 2002 increased $34.3 million, or 45%, as compared with the prior year period primarily due to the full year impact of Frontier of $32.8 million. Other revenue for the year ended December 31, 2001 increased $34.0 million, or 82%, as compared with the prior year period primarily due to the impact of acquisitions of $38.4 million, partially offset by a decrease in miscellaneous revenue categories. ELI revenue for the years ended December 31, 2002 and 2001 decreased $48.3 million, or 22% and $17.4 million, or 7%, respectively, primarily due to lower reciprocal compensation minutes and prices, a decline in Integrated Service Digital Network (ISDN) services due to less demand from internet service providers and lower demand and prices for long haul services. The decrease in 2001 was also attributable to the expiration of a material data services contract in February 2001. ELI has experienced eight consecutive quarters of declining revenue. 23
GAS AND ELECTRIC REVENUE ($ in thousands) -------------- 2002 2001 2000 ----------------------------- ------------------------------- ---------- Amount $ Change % Change Amount $ Change % Change Amount --------- ------------------- ---------- -------------------- ---------- Gas revenue $ 216,517 $ (195,017) -47% $ 411,534 $ 36,783 10% $ 374,751 Electric revene $ 214,831 $ (13,184) -6% $ 228,015 $ 4,943 2% $ 223,072
Gas revenue for the year ended December 31, 2002 decreased $195.0 million, or 47%, as compared with the prior year period primarily due to the sale of our Louisiana and Colorado gas operations partially offset by higher purchased gas costs passed on to consumers. Gas revenue for the year ended December 31, 2001 increased $36.8 million, or 10%, as compared with the prior year period primarily due to higher purchased gas costs passed on to customers and increased consumption partially offset by decreased revenue due to the sale of our Louisiana and Colorado gas operations. Included in gas revenue for 2001 and 2000 is approximately $218.8 million and $232.3 million, respectively, of revenue from our Louisiana and Colorado gas operations that ceased upon the sale of those operations on July 2, 2001 and November 30, 2001, respectively. Under tariff provisions, the cost of our gas purchases are primarily passed on to customers. Electric revenue for the year ended December 31, 2002 decreased $13.2 million, or 6%, as compared with the prior year period primarily due to the sale of our Kauai electric division partially offset by increased unit sales and the effect of a rate increase approved in Vermont on July 15, 2002. Electric revenue for the year ended December 31, 2001 increased $4.9 million, or 2%, as compared with the prior year period primarily due to customer growth and increased consumption due to warmer weather conditions. Included in electric revenue for 2002, 2001 and 2000 is approximately $76.2 million, $94.3 million and $95.1 million, respectively, of revenue for our Kauai electric operation that ceased upon its sale on November 1, 2002. Under tariff provisions, the cost of our electric energy and fuel oil purchases are primarily passed on to customers.
COST OF SERVICES ($ in thousands) 2002 2001 2000 -------------- ----------------------------- ----------------------------- --------- Amount $ Change % Change Amount $ Change % Change Amount --------- ------------------- ---------- ------------------ --------- Network access $ 235,462 $ 41,368 21% $ 194,094 $ 55,924 40% $ 138,170 Gas purchased 122,915 (159,146) -56% 282,061 52,523 23% 229,538 Electric energy and fuel oil purchased 118,543 (4,680) -4% 123,223 9,258 8% 113,965 --------- --------- ---------- ---------- --------- $ 476,920 $(122,458) -20% $ 599,378 $117,705 24% $ 481,673 ========= ========= ========== ========== =========
Network access expenses for the year ended December 31, 2002 increased $41.4 million, or 21%, as compared with the prior year period primarily due to the full year impact of Frontier of $41.3 million and increased costs of $16.6 million in the ILEC sector, partially offset by decreased costs of $16.5 million in ELI as a result of decreases in demand. Network access expenses for the year ended December 31, 2001 increased $55.9 million, or 40%, as compared with the prior year period primarily due to the impact of acquisitions and increased circuit expense associated with additional data product introductions partially offset by a reduction in long distance access expense related to rate changes in the ILEC sector and reduced network access expenses at ELI. Gas purchased for the year ended December 31, 2002 decreased $159.1 million, or 56%, as compared with the prior year period primarily due to the sale of our Louisiana and Colorado gas operations partially offset by an increase in the cost of gas due to higher commodity pricing. Gas purchased for the year ended December 31, 2001 increased $52.5 million, or 23%, as compared with the prior year period primarily due to higher purchased gas costs partially offset by decreased gas purchased due to the sale of our Louisiana and Colorado gas operations. Included in gas purchased for 2001 and 2000 is approximately $173.3 million and $151.4 million, respectively, of gas purchased by our Louisiana and Colorado gas operations that ceased upon the sale of those operations on July 2, 2001 and November 30, 2001, respectively. Electric energy and fuel oil purchased for the year ended December 31, 2002 decreased $4.7 million, or 4%, as compared with the prior year period primarily due to the sale on November 1, 2002 of Kauai electric partially offset by increased purchased power costs. Included in electric energy and fuel oil purchased for 2002, 2001 and 2000 is approximately $27.5 million, $37.9 million and $37.9 million, respectively, of electricity purchased by our Kauai electric operation that ceased upon its sale on November 1, 2002. 24 Electric energy and fuel oil purchased for the year ended December 31, 2001 increased $9.3 million, or 8%, as compared with prior year period primarily due to higher purchased power prices, customer growth and increased consumption due to warmer weather conditions. Gas, electric energy and fuel oil purchased excludes amounts deferred for future recovery in rates. In Arizona, power costs charged by our supplier were in excess of the rates we charged our customers by approximately $123.6 million through December 31, 2002. We believe that we are allowed to recover these charges from ratepayers through the Purchase Power Fuel Adjustment clause that was approved by the Arizona Corporation Commission and has been in place for several years. However, in an attempt to limit "rate shock" to our customers, we requested in September 2001 that our unrecovered power costs, plus interest, be recovered over a seven-year period. As a result, we deferred these costs on the balance sheet in anticipation of recovery through the regulatory process. This balance was effectively reduced by the public service impairment charge recorded during the third quarter of 2002 which reduced the net assets of these businesses to their estimated sale value (See Note 4 to Consolidated Financial Statements). In January 2003, the Commission agreed to consolidate this matter with the application for approval of the sale of our Arizona electric property.
OTHER OPERATING EXPENSES ($ in thousands) 2002 2001 2000 -------------- ------------------------------ ----------------------------- --------- Amount $ Change % Change Amount $ Change % Change Amount --------- ------------------- ---------- ------------------ ---------- Operating expenses $ 762,053 $ 22,931 3% $ 739,122 $ 101,919 16% $ 637,203 Taxes other than income taxes 131,258 15,448 13% 115,810 15,709 16% 100,101 Sales and marketing 109,044 12,266 13% 96,778 22,156 30% 74,622 ---------- --------- ---------- ---------- --------- $1,002,355 $ 50,645 5% $ 951,710 $ 139,784 17% $ 811,926 ========== ========= ========== ========== =========
Operating expenses for the year ended December 31, 2002 increased $22.9 million, or 3%, as compared with prior year period primarily due to increased operating expenses related to the full year impact of Frontier of $149.9 million partially offset by increased operating efficiencies and a reduction of personnel in the ILEC and ELI sectors, and decreased operating expenses in the gas sector due to the sale of our Louisiana and Colorado gas operations on July 2, 2001 and November 30, 2001, respectively. The increase was also offset by the fact that there were no acquisition assimilation costs in 2002 compared to $21.4 million of such costs in 2001. We routinely review our operations, personnel and facilities to achieve greater efficiencies. These reviews may result in reductions in personnel and an increase in severance costs. Included in operating expenses is pension expense. In future periods, if the value of our pension assets decline and/or projected benefit costs increase, we may have increased pension expenses. Based on current assumptions and plan asset values, we estimate that our pension expense will increase from $4.3 million in 2002 to approximately $13.0 - $15.0 million in 2003 and that a contribution to our pension plans will be required in 2003 in an amount currently estimated at $16.0 - $18.0 million. In addition, as medical costs increase the costs of our retiree medical obligations also increase. Our retiree medical costs for 2002 were $15.1 million and our current estimate for 2003 is approximately $15 - $16 million. Operating expenses for the year ended December 31, 2001 increased $101.9 million, or 16%, as compared with the prior year period primarily due to the impact of acquisitions. The increase was partially offset by decreased operating expenses at ELI primarily due to a reduction in personnel, decreased operating expenses in the gas sector primarily due to the sale of the Louisiana and Colorado gas operations and a decrease in compensation expense related to variable stock plans. In future periods, compensation expense related to variable stock plans may be materially affected by our stock price. A $1.00 change in our stock price impacts compensation expense by approximately $1.0 million. There was no material impact for the year ended December 31, 2002. Taxes other than income taxes for the year ended December 31, 2002 increased $15.4 million, or 13%, as compared to prior year period primarily due to the full year impact of Frontier of $25.6 million partially offset by decreased payroll taxes in the ILEC sector related to workforce reductions and decreased taxes in the gas sector due to the sale of our Louisiana and Colorado gas operations on July 2, 2001 and November 30, 2001, respectively. Taxes other than income for the year ended December 31, 2001 increased $15.7 million, or 16%, as compared to prior year period primarily due to the impact of acquisitions. 25 Sales and marketing expenses for the year ended December 31, 2002 increased $12.3 million, or 13%, as compared to prior year period primarily due to the full year impact of Frontier of $22.2 million, partially offset by decreased sales and marketing in the ELI sector of $10.0 million, primarily due to a reduction in personnel and related costs. Sales and marketing expenses for year ended December 31, 2001 increased $22.2 million, or 30%, as compared to prior year period primarily due to the impact of acquisitions and increased telemarketing costs in the telecommunications sector.
DEPRECIATION AND AMORTIZATION EXPENSE ($ in thousands) 2002 2001 2000 -------------- --------------------------- ----------------------------- --------- Amount $ Change % Change Amount $ Change % Change Amount --------- ----------------- ---------- ------------------ --------- Depreciation expense $ 630,113 $ 141,156 29% $ 488,957 $ 118,838 32% $ 370,119 Amortization expense 125,409 (17,970) -13% 143,379 125,891 720% 17,488 --------- --------- ---------- ---------- --------- $ 755,522 $ 123,186 19% $ 632,336 $ 244,729 63% $ 387,607 ========= ========= ========== ========== =========
Depreciation expense for the year ended December 31, 2002 increased $141.2 million, or 29%, as compared to prior year period primarily due to the full year impact of Frontier of $82.6 million and increased depreciation of $35.6 million at ELI. The increase at ELI was primarily due to the purchase of $110.0 million of previously leased facilities in April 2002 and changes in our estimates of the depreciable lives as of June 2002 offset by a decrease related to the ELI impairment charge recognized during the third quarter of 2002. As a result of the ELI impairment, we expect 2003 depreciation and amortization expense to decline 10% - 15%. Depreciation expense for the year ended December 31, 2001 increased $118.8 million, or 32%, as compared to prior year period primarily due to the impact of acquisitions of $119.1 million and $22.0 million of accelerated depreciation related to the change in useful lives of our accounting and human resource systems and our Plano, Texas office building, furniture and fixtures. Higher property, plant and equipment balances in the telecommunications and ELI sectors also contributed to the increase. The increases were partially offset by decreased depreciation expense related to our classifying our gas and electric sectors as "assets held for sale" which requires us to cease depreciating these assets. Such depreciation expense would have been an additional $50.8 million for the year ended December 31, 2001. The increase is also offset by $17.4 million in the prior year period of accelerated depreciation related to the change in useful life of an operating system in the telecommunications sector. Amortization expense for the year ended December 31, 2002 decreased $18.0 million, or 13%, as compared to the prior year period primarily due to the fact that we ceased amortization of goodwill and trade name related to our previous acquisitions as of January 1, 2002 in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." As a result of ELI's adoption of SFAS 142, we recognized a transitional impairment loss of $39.8 million as a cumulative effect of a change in accounting principle in our statement of operations in the first quarter of 2002. For the year ended December 31, 2001 amortization expense included $91.2 million of goodwill and trade name amortization. This decrease was offset by the impact of additional amortization of customer base of Frontier of $47.6 million and $24.1 million in 2002 and 2001, respectively. Amortization expense for the year ended December 31, 2001 increased $125.9 million as compared to prior year period primarily due to amortization of intangibles related to acquisitions.
RESERVE FOR TELECOMMUNICATIONS BANKRUPTCIES / RESTRUCTURING AND OTHER EXPENSES ($ in thousands) 2002 2001 2000 -------------- --------------------------- ----------------------------- --------- Amount $ Change % Change Amount $ Change % Change Amount --------- ----------------- ---------- ------------------ --------- Reserve for telecommunications bankruptcies $ 10,880 $ (10,320) -49% $ 21,200 $ 21,200 100% $ - Restructuring and other expenses $ 37,186 $ 17,859 92% $ 19,327 $ 19,976 3078% $ (649)
26 During the second quarter 2002, we reserved approximately $21.6 million of trade receivables with WorldCom as a result of WorldCom's filing for bankruptcy. These receivables were generated as a result of providing ordinary course telecommunications services. The $21.6 million charge was partially offset by reversals in our Global reserve as discussed below. Concurrent with the acquisition of Frontier, we entered into several operating agreements with Global. We have ongoing commercial relationships with Global affiliates. We reserved a total of $29.0 million of Global receivables to reflect our best estimate of the net realizable value of receivables incurred from these commercial relationships during 2001 and 2002 as a result of Global's filing for bankruptcy. We recorded a write-down of such receivables in the amount of $7.8 million in the first quarter 2002 and $21.2 million in the fourth quarter of 2001. In 2002, as the result of a settlement agreement with Global, we reversed $17.9 million of our previous reserve of the net realizable value of these receivables. Prior to the date of Global's bankruptcy filing, we provided ordinary course telecommunications services as well as transitional services to Global. Global has provided us certain customer billing and collection functions as well as other transitional services. Although some of these arrangements have continued after the bankruptcy filing, we are in the process of changing some services and functions to provide them ourselves. The Bankruptcy Court has granted relief to us and other telecommunications companies that provide service to Global by, among other things, directing a shortened payment period with respect to post-petition invoices, an expedited court process for post-petition defaults in payments by Global, and a priority for post-petition expense items over other unsecured debt. These procedures should minimize future economic loss to us although we cannot guarantee that additional losses will not occur. Restructuring and other expenses for the year ended December 31, 2002 primarily consist of $33.0 million related to reductions in personnel at our telecommunications operations, costs that were spent at both our Plano, Texas facility and at other locations as a result of transitioning functions and jobs, and $6.8 million related to our tender offer in June 2002 for all of the ELI common shares that we did not already own. These costs were partially offset by a $2.8 million reversal of a 2001 ELI accrual discussed below. Plano Restructuring Pursuant to a plan adopted in the third quarter of 2001, we closed our operations support center in Plano, Texas in August 2002. In connection with this plan, we recorded a pre-tax charge of $14.6 million in the second half of 2001, $0.8 million in the first quarter of 2002 and we adjusted our accrual down by $0.1 million and $0.6 million in the second and third quarter of 2002, respectively. Our objective is to concentrate our resources in areas where we have the most customers, to better serve those customers. We sold our Plano office building in 2003. The restructuring resulted in the termination of 750 employees. We communicated with all affected employees during July 2001. Certain employees were relocated whereas others were offered severance, job training and/or outplacement counseling. As of December 31, 2002, approximately $14.7 million had been paid and all affected employees had been terminated. The restructuring expenses primarily consist of severance benefits, retention payments earned through December 31, 2002, and other planning and communication costs. Sacramento Call Center Restructuring In April 2002, we closed our Sacramento Customer Care Center. In connection with this closing, we recorded a pre-tax charge of $0.7 million in the fourth quarter of 2001, and $0.1 million and $9,000 in the first and second quarters of 2002, respectively. We redirected the call traffic and other work activities to our Kingman, Arizona call center. This restructuring resulted in the elimination of 98 employees. We communicated with all affected employees during November 2001. As of December 31, 2002, approximately $0.8 million was paid, all affected employees were terminated and no accrual remained. ELI Restructuring In the first half of 2002, ELI redeployed the internet routers, frame relay switches and ATM switches from the Atlanta, Cleveland, Denver, Philadelphia and New York markets to other locations in ELI's network. ELI ceased leasing the collocation facilities and off-net circuits for the backbone and local loops supporting the service delivery in these markets. It was anticipated that this would lead to $4.2 million of termination fees which were accrued for but not paid at December 31, 2001. During 2002, ELI adjusted its original accrual down by $2.8 million due to the favorable settlements of termination charges for off-net circuit agreements. As of December 31, 2002, $1.4 million has been paid and no accrual remained. 27 LOSS ON IMPAIRMENT ($ in thousands) 2002 2001 2000 -------------- ---------- ------- -------- Amount Amount Amount ---------- ------- -------- Loss on impairment $1,074,058 $ - $ - In the third quarter 2002, we recognized non-cash pre-tax impairment losses of $656.7 million related to property, plant and equipment in the ELI sector and $417.4 million related to the gas and electric sector assets held for sale. Our assessment of impairment for ELI was a result of continued losses at ELI and continued actual revenue declines in excess of projected revenue declines. The gas and electric sector impairments are associated with the proposed sale of our Arizona and Hawaiian gas and electric properties at prices that are less than the previous carrying values and the write down of our remaining utility to our estimate of net realizable sales price. Previously, we believed that the net realizable value of these properties was equal to or above their carrying values. However, as a result of market conditions, and the desire to complete the divestiture process quickly in order to focus on our core telecommunications operations and raise money to further reduce debt, in the third quarter of 2002 we made a strategic decision to accept proceeds less than carrying values rather than continue to market these properties for higher prices (See Critical Accounting Policies and Estimates above). We expect to incur additional impairment losses during 2003 with respect to our public utility properties. These properties are carried at our estimates of net realizable values. Under the terms of the definitive agreements relating to the sale of our Arizona and Hawaiian properties, most of the capital expenditures we will make during 2003 for these properties will not be recovered. As a result, the amount of these expenditures (currently estimated at $28 million through the expected closing dates) will be expensed as incurred and not capitalized. These expenditures are of a normal recurring nature and are necessary to provide safe, reliable utility service to customers. We generally do not enter into firm, committed contracts for such activities. If the closing dates for the sales of our Arizona and Hawaiian properties actually occur later than the currently expected dates, the actual amount of capital expenditures expensed will exceed this estimate.
INVESTMENT AND OTHER INCOME (LOSS), NET / GAIN ON SALE OF ASSETS / MINORITY INTEREST / INTEREST EXPENSE / INCOME TAX BENEFIT ($ in thousands) 2002 2001 2000 -------------- ------------------------------ -------------------------------- --------- Amount $ Change % Change Amount $ Change % Change Amount --------- ------------------ ----------- ------------------- --------- Investment income (loss), net $ (98,359) $ (35,951) 58% $ (62,408) $ (67,144) -1418% $ 4,736 Other income (loss), net $ 15,806 $ 18,939 605% $ (3,133) $ (1,747) 126% $ (1,386) Gain on sale of assets $ 9,798 $(129,506) -93% $ 139,304 $ 139,304 100% $ - Minority interest $ - $ - 0% $ - $ (12,222) -100% $ 12,222 Interest expense $ 471,296 $ 91,970 24% $ 379,326 $ 191,960 102% $187,366 Income tax benefit $(414,874) $(400,069) 2702% $ (14,805) $ 1,327 -8% $(16,132)
Investment loss for the year ended December 31, 2002 increased $36.0 million, or 58%, as compared to prior year period primarily due to the recognition of a $95.3 million loss, resulting from an other than temporary decline in the value of our investment in Adelphia Communications Corp. (Adelphia), an increase of $16.3 million compared to the loss of $79.0 million recorded on our Adelphia investment in 2001. As of June 30, 2002, we had written this investment down to zero, and therefore we have no additional exposure related to the market value of Adelphia stock. We also recognized during 2002 a loss of $16.4 million resulting from an other than temporary decline in the value of our investment in D & E Communications, Inc. Investment income for the year ended December 31, 2001 decreased $67.1 million as compared to the prior year period primarily due to the recognition of a $79.0 million loss resulting from a decline in value of our Adelphia investment. The decrease was partially offset by increased income from higher money market balances resulting from the temporary investment of proceeds from debt issuances. 28 Other income, net for the year ended December 31, 2002 increased $18.9 million as compared to prior year period primarily due to $26.3 million of income from the settlement of certain retained liabilities at less than face value, which are associated with customer advances for construction from our disposed water properties. During 2002, we executed a series of purchases in the open market of our outstanding notes and debentures that generated a pre-tax gain from the early extinguishment of debt of approximately $6.0 million, which also contributed to the increase. The increase was partially offset by the $12.8 million cost for a tender offer completed in December 2002 with respect to our 6.80% Debentures due 2026 (puttable at par in 2003) and ELI's 6.05% Guaranteed Notes due 2004. Other loss, net increased $1.7 million in 2001 primarily due to a decrease in miscellaneous income and capitalized interest. Gain on sale of assets for the year ended December 31, 2002 represents the gain recognized from the sale of our Kauai electric division on November 1, 2002 as well as an adjustment of the gain on the 2001 sale of our Louisiana gas operation. Gain on sale of assets for the year ended December 31, 2001 represents the initial gain on the sale of the Louisiana gas operation to Atmos Energy Corporation on July 2, 2001. The gain recognized on our water sale is classified in discontinued operations. Minority interest represents the former minority shareholders' share of ELI's net loss. Subsequent to ELI's public offering, we recorded minority interest on our income statement and reduced minority interest on our balance sheet by the amount of the former minority interests' share of ELI's losses. As of June 30, 2000, the minority interest on the balance sheet had been reduced to zero, therefore, from that point going forward, we discontinued recording minority interest income on our statement of operations. Interest expense for 2002 increased compared to 2001 primarily because of the full year impact of $3.5 billion of notes, $460.0 million of equity units and $200.0 million of Rural Telephone Finance Cooperative notes issued during 2001 to refinance debt incurred in connection with our acquisitions, and higher amortization of debt issuance costs. These increases were partially offset by the repayment of bank debt and repurchases of debt described under "Liquidity and Capital Resources - Debt Reduction." During the year ended December 31, 2002, we had average long-term debt outstanding excluding our equity units of $5.2 billion compared to $4.3 billion during the year ended December 31, 2001. Our composite average borrowing rate for the year ended December 31, 2002 as compared with the year ended December 31, 2001 was 53 basis points higher, increasing from 7.34% to 7.87% due to the impact of higher interest rates as a result of our refinancing our variable rate debt with fixed rate long-term debt. Interest expense increased for 2001 compared to 2000 primarily because of the issuance of the securities described in the preceding paragraph, borrowings under bank facilities and higher amortization of debt issuance costs. During the year ended December 31, 2001, we had average long-term debt outstanding excluding our equity units of $4.3 billion compared to $2.6 billion during the year ended December 31, 2000. Our composite average borrowing rate paid for the year ended December 31, 2001 as compared with the year ended December 31, 2000 was 49 basis points higher, increasing from 6.85% to 7.34%, due to the impact of higher interest rates on our new borrowings. Income tax benefit for the year ended December 31, 2002 increased $400.1 million as compared with prior year period primarily due to changes in taxable income (loss). Income tax benefit for the year ended December 31, 2001 decreased $1.3 million, or 8%, as compared with prior year period primarily due to changes in taxable income (loss) and the write-off of regulatory assets related to our sale of our Louisiana gas operations. The estimated annual effective tax rate for 2002 is 33.7% as compared with an effective tax rate of 20.4% for 2001.
DISCONTINUED OPERATIONS ($ in thousands) 2002 2001 2000 -------------- ----------------------------- ------------------------------ --------- Amount $ Change % Change Amount $ Change % Change Amount --------- ------------------- ---------- ------------------- --------- Revenue $ 4,650 $ (112,218) -96% $ 116,868 $ 11,666 11% $ 105,202 Operating income (loss) $ (415) $ (37,626) -101% $ 37,211 $ 9,796 36% $ 27,415 Income (loss) from discontinued operations, net of tax $ (1,478) $ (19,353) -108% $ 17,875 $ 6,198 53% $ 11,677 Gain on disposal of water segment, net of tax $181,369 $ 181,369 100% $ - $ - 0% $ -
29 Revenue, operating income (loss) and income (loss) from discontinued operations, net of tax, for the year ended December 31, 2002 decreased as compared with the prior year period due to the sale of our water and wastewater businesses in January 2002. On January 15, 2002, we completed the sale of our water and wastewater operations to American Water Works, Inc. for $859.1 million in cash and $122.5 million of assumed debt and other liabilities. The gain on the disposal of the water segment, net of tax was $181.4 million. EXTRAORDINARY EXPENSE ($ in thousands) 2002 2001 2000 -------------- ---------------------------- Amount Amount Amount --------- -------- --------- Extraordinary expense - discontinuation of Statement of Financial Accounting Standards No. 71, net of tax $ - $ 43,631 $ - Extraordinary expense - discontinuation of Statement of Financial Accounting Standards No. 71, net of tax, of $43.6 million for the year ended December 31, 2001, relates to the write off of regulatory assets and liabilities previously recognized under SFAS 71. Deregulation of most of our local exchange telephone properties required us to cease application of SFAS 71 in the third quarter, resulting in a non-cash extraordinary charge of $43.6 million, net of tax, in our statement of operations. See discussion in Note 24 of Consolidated Financial Statements. Item 7A. Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- Disclosure of primary market risks and how they are managed We are exposed to market risk in the normal course of our business operations due to ongoing investing and funding activities. Market risk refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest rates and equity and commodity prices. We do not hold or issue derivative instruments, derivative commodity instruments or other financial instruments for trading purposes. As a result, we do not undertake any specific actions to cover our exposure to market risks and we are not party to any market risk management agreements other than in the normal course of business or to hedge long-term interest rate risk. Our primary market risk exposures are interest rate risk and equity and commodity price risk as follows: Interest Rate Exposure Our exposure to market risk for changes in interest rates relates primarily to the interest-bearing portion of our investment portfolio and interest on our long term debt and capital lease obligations. The long-term debt and capital lease obligations include various instruments with various maturities and weighted average interest rates. Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, a majority of our borrowings have fixed interest rates; variable rate debt is refinanced when advantageous. Consequently, we have limited material future earnings or cash flow exposures from changes in interest rates on our long-term debt and capital lease obligations. A hypothetical 10% adverse change in interest rates would increase the amount that we pay on our variable obligations and could result in fluctuations in the fair value of our fixed rate obligations. Based upon our overall interest rate exposure at December 31, 2002, a near-term change in interest rates would not materially affect our consolidated financial position, results of operations or cash flows. In order to manage our interest rate risk exposure, we entered into five interest swap agreements in 2001 and 2002 with investment grade financial institutions. Each agreement covered a notional amount of $50.0 million. Under the terms of the agreements, we make semi-annual, floating interest rate interest payments based on six month LIBOR and receive a fixed rate on the notional amount. There are two interest rate swap agreements that were executed in 2001 that receive a 6.375% fixed rate until the swaps' termination date of August 15, 2004, and there are three swaps executed in 2002 that receive an 8.500% fixed rate until their termination date of May 15, 2006. The underlying variable rate on the swaps is set either in advance, in arrears or, as in the case of one agreement, based on each period's daily average six-month LIBOR. In connection with these swaps, the Company entered into a series of supplemental rate agreements which had the effect of setting the floating rate portion of the swaps in advance of the contractually agreed upon rate determination date. The net effect of the two 2001 interest rate swaps and supplemental rate agreements was to reduce the effective interest rate on $100.0 million of fixed rate debt from 6.375% to 3.665% during 2002. The net effect of the three 2002 swaps and supplemental rate agreements was to reduce the effective interest rate on $150.0 million of fixed rate debt from 8.500% to 6.864% through November 15, 2002, the latest rate reset date. All swaps and associated supplemental rate agreements are accounted for under SFAS 133 as fair value hedges. 30 Sensitivity analysis of interest rate exposure At December 31, 2002, the fair value of our long-term debt and capital lease obligations excluding our equity units was estimated to be approximately $5.4 billion, based on our overall weighted average borrowing rate of 8.0% and our overall weighted maturity of 13 years. There has been no material change in the weighted average maturity since December 31, 2001. The overall weighted average interest rate has increased by approximately 37 basis points. A hypothetical increase of 80 basis points in our weighted average interest rate (10% of our overall weighted average borrowing rate) would result in an approximate $272.3 million decrease in the fair value of our fixed rate obligations. Equity Price Exposure Our exposure to market risk for changes in equity prices is minimal and relates primarily to the equity portion of our investment portfolio. The equity portion of our investment portfolio consists of equity securities (principally common stock) of D&E Communications, Inc. and Hungarian Telephone and Cable Corp. As of December 31, 2002, we owned 3,059,000 shares of Adelphia common stock. As a result of Adelphia's price declines and filing for bankruptcy, we recognized losses of $95.3 million and $79.0 million on our investment for the years ended December 31, 2002 and 2001, respectively, as the declines were determined to be other than temporary. As of June 30, 2002, we had written this investment down to zero, and therefore we have no additional exposure related to the market value of Adelphia stock. As of December 31, 2002, we owned 1,333,500 shares of D & E Communications common stock. As the result of an other than temporary decline in D & E's stock price, we recognized a loss of $16.4 million on our investment for the year ended December 31, 2002. Sensitivity analysis of equity price exposure At December 31, 2002, the fair value of the equity portion of our investment portfolio was estimated to be $29.8 million. A hypothetical 10% decrease in quoted market prices would result in an approximate $3.0 million decrease in the fair value of the equity portion of our investment portfolio. Commodity Price Exposure We purchase monthly gas future contracts, from time to time, to manage well-defined commodity price fluctuations, caused by weather and other unpredictable factors, associated with our commitments to deliver natural gas to customers at fixed prices. Customers pay for gas service based upon prices that are defined by a tariff. A tariff is an agreement between the public utility commission and us, which determines the price that will be charged to the customer. Fluctuations in gas prices are routinely handled through a pricing mechanism called the purchase gas adjustor (PGA). The PGA allows for a process whereby any price change from the agreed upon tariff will be settled as a pass through to the customer. As a result, if gas prices increase, the PGA will increase and pass more costs on to the customer. If gas prices decrease, the PGA will decrease and refunds will be provided to the customer. This commodity activity relates to our gas businesses and is not material to our consolidated financial position or results of operations. In all instances we take physical delivery of the gas supply purchased or contracted for. These gas future contracts and gas supply contracts are considered derivative instruments as defined by SFAS 133. However, such contracts are excluded from the provisions of SFAS 133 since they are purchases made in the normal course of business and not for speculative purposes. Based upon our overall commodity price exposure at December 31, 2002, a material near-term change in the quoted market price of gas would not materially affect our consolidated financial position or results of operations. Disclosure of limitations of sensitivity analysis Certain shortcomings are inherent in the method of analysis presented in the computation of fair value of financial instruments. Actual values may differ from those presented should market conditions vary from assumptions used in the calculation of the fair value. This analysis incorporates only those exposures that exist as of December 31, 2002. It does not consider those exposures or positions, which could arise after that date. As a result, our ultimate exposure with respect to our market risks will depend on the exposures that arise during the period and the fluctuation of interest rates and quoted market prices. 31 Item 8. Financial Statements and Supplementary Data ------------------------------------------- The following documents are filed as part of this Report: 1. Financial Statements, See Index on page F-1. 2. Supplementary Data, Quarterly Financial Data is included in the Financial Statements (see 1. above). Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- None PART III -------- Item 10. Directors and Executive Officers of the Registrant -------------------------------------------------- The information required by this Item is incorporated by reference from our definitive proxy statement for the 2003 Annual Meeting of Stockholders to be held May 13, 2003 to be filed with the Commission pursuant to Regulation 14A within 120 days after December 31, 2002. See "Executive Officer of the Registrant" in Part I of this Report following Item 4 for information relating to executive officers. Item 11. Executive Compensation ---------------------- The information required by this Item is incorporated by reference from our definitive proxy statement for the 2003 Annual Meeting of Stockholders to be held May 13, 2003. Item 12. Security Ownership of Certain Beneficial Owners and Management and ------------------------------------------------------------------ Related Stockholder Matters --------------------------- The following table provides information as of December 31, 2002 regarding compensation plans (including individual compensation arrangements) under which equity securities of Citizens Communications Company are authorized for issuance.
(a) (b) (c) Number of securities remaining Number of securities to Weighted-average available for future issuance be issued upon exercise exercise price of under equity compensation plans of outstanding options, outstanding options, (excluding securities reflected in Plan category warrants and rights warrants and rights column (a)) - ------------------------- -------------------------- ----------------------- ------------------------------------- Equity compensation plans approved by security holders 23,051,350 $ 11.80 7,515,751 Equity compensation plans not approved by security holders - - - -------------------------- ----------------------- ------------------------------------- Total 23,051,350 $ 11.80 7,515,751 ========================== ======================= =====================================
See Note 18 to Consolidated Financial Statements for information regarding the material features of the above plans. The other information required by this Item is incorporated by reference from our definitive proxy statement for the 2003 Annual Meeting of Stockholders to be held May 13, 2003. 32 Item 13. Certain Relationships and Related Transactions ---------------------------------------------- The information required by this Item is incorporated by reference from our definitive proxy statement for the 2003 Annual Meeting of Stockholders to be held May 13, 2003. Item 14. Controls and Procedures ----------------------- Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. During the fourth quarter of 2002 we became aware of irregularities involving payments made by certain of our public utilities operations for services or benefits that we did not receive. The payments do not involve our current operations in Arizona, Vermont, or Hawaii. With the assistance of forensic specialists, outside auditors, and counsel, we investigated these irregularities and identified a total of $7.8 million that had been embezzled from the Company. These payments were reflected in our financial statements as charges to earnings (primarily during 2002). The U.S. Government has recovered approximately $6.0 million (which we believe will be turned over to us) and we believe that most of the remaining funds outstanding will be reimbursed by insurance. We presented the results of our most recent evaluation to our independent auditors, KPMG LLP, and the Audit Committee of the Board of Directors. Based on such evaluation, our management, including the principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are adequate to insure the clarity and material completeness of our disclosure in our periodic reports required to be filed with the SEC and there are no significant deficiencies in the design or operation of internal controls, which could significantly affect our ability to record, process, summarize and report financial data. As a result of the matters described in the preceding paragraph, during 2002 we made changes to our internal controls, procedures and policies relating to our public services sector. 33 PART IV ------- Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K -------------------------------------------------------------- (a) List of Documents Filed as a Part of This Report: (1) Index to Consolidated Financial Statements: Independent Auditors' Report Consolidated balance sheets as of December 31, 2002 and 2001 Consolidated statements of operations for the years ended December 31, 2002, 2001 and 2000 Consolidated statements of shareholders' equity for the years ended December 31, 2002, 2001 and 2000 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2002, 2001 and 2000 Consolidated statements of cash flows for the years ended December 31, 2002, 2001 and 2000 Notes to consolidated financial statements (2) Index to Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts All other schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required. (3) Index to Exhibits: Exhibit No. Description - ------- ----------- 3.200.1 Restated Certificate of Incorporation of Citizens Communications Company, as restated May 19, 2000 (incorporated by reference to Exhibit 3.200.1 to the Registrant's Quarterly Report on Form 10-Q for the six months ended June 30, 2000, File No. 001-11001). 3.200.2 By-laws of Citizens Communications Company, with all amendments to March 22, 2002 (incorporated by reference to Exhibits 3.1 and 3.2 to the Registrants Form 8-K filed March 22, 2002, File No. 001-11001). 3.200.3 Amendment to the By-laws of Citizens Communications Company (effective July 30, 2002). 4.100.1 Certificate of Trust of Citizens Communications Trust dated as of April 27, 2001 (incorporated by reference to Exhibit 4.5 of the Registrant's Amendment No.1 to Form S-3 filed May 7, 2001 (Registration No. 333-58044). 4.100.2 Trust Agreement of Citizens Capital Trust I, dated as of April 27, 2001 (incorporated by reference to Exhibit 4.6 of the Registrant's Amendment No.1 to Form S-3 filed May 7, 2001 (Registration No. 333-58044). 4.100.3 Form of 2006 Note (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed on May 24, 2001, File No. 001-11001). 4.100.4 Form of 2011 Note (incorporated by reference to Exhibit 4.4 of the Registrant's Current Report on Form 8-K filed on May 24, 2001, File No. 001-11001). 4.100.5 Warrant Agreement, dated as of June 19, 2001, between Citizens Communications Company and The Chase Manhattan Bank, as Warrant Agent (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed on May 24, 2001, File No. 001-11001). 4.100.6 Form of Senior Note due 2006 (incorporated by reference to Exhibit 4.5 of the Registrant's Current Report on Form 8-K filed on June 21, 2001, File No. 001-11001). 34 4.100.7 Form of Equity Unit (included in the Warrant Agreement incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed on June 21, 2001, File No. 001-11001). 4.100.8 Form of Treasury Equity Unit (included in the Warrant Agreement incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed on June 21, 2001, File No. 001-11001). 4.100.9 Form of Senior Notes due 2004, due 2008 and due 2031 (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed on August 22, 2001, File No. 001-11001). 4.200.1 First Supplemental Indenture dated as of January 15, 1996, between Citizens Utilities Company and Chemical Bank, as indenture trustee (incorporated by reference to Exhibit 4.200.2 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.2 5% Convertible Subordinated Debenture due 2036 (contained as Exhibit A to Exhibit 4.200.2), (incorporated by reference to Exhibit 4.200.2 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.3 Amended and Restated Declaration of Trust dated as of January 15, 1996, of Citizens Utilities Trust (incorporated by reference to Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.4 Convertible Preferred Security Certificate (contained as Exhibit A-1 to Exhibit 4.200.4), (incorporated by reference to Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.5 Amended and Restated Limited Partnership Agreement dated as of January 15, 1996 of Citizens Utilities Capital L.P. (incorporated by reference to Exhibit 4.200.6 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.6 Partnership Preferred Security Certificate (contained as Annex A to Exhibit 4.200.6), (incorporated by reference to Exhibit 4.200.6 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.7 Convertible Preferred Securities Guarantee Agreement dated as of January 15, 1996 between Citizens Utilities Company and Chemical Bank, as guarantee trustee (incorporated by reference to Exhibit 4.200.8 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.8 Partnership Preferred Securities Guarantee Agreement dated as of January 15, 1996 between Citizens Utilities Company and Chemical Bank, as guarantee trustee (incorporated by reference to Exhibit 4.200.9 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.9 Letter of Representations dated January 18, 1996, from Citizens Utilities Company and Chemical Bank, as trustee, to DTC, for deposit of Convertible Preferred Securities with DTC (incorporated by reference to Exhibit 4.200.10 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.300 Indenture of Securities, dated as of August 15, 1991, to Chemical Bank, as Trustee (incorporated by reference to Exhibit 4.100.1 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1991, File No. 001-11001). 4.300.1 Second Supplemental Indenture, dated January 15, 1992, to Chemical Bank, as Trustee (incorporated by reference to Exhibit 4.100.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 001-11001). 4.300.2 Third Supplemental Indenture, dated April 15, 1994, to Chemical Bank, as Trustee (incorporated by reference to Exhibit 4.100.6 to the Registrant's Form 8-K Current Report filed July 5, 1994, File No. 001-11001). 4.300.3 Fourth Supplemental Indenture, dated October 1, 1994, to Chemical Bank, as Trustee (incorporated by reference to Exhibit 4.100.7 to Registrant's Form 8-K Current Report filed January 3, 1995, File No. 001-11001). 4.300.4 Fifth Supplemental Indenture, dated as of June 15, 1995, to Chemical Bank, as Trustee (incorporated by reference to Exhibit 4.100.8 to Registrant's Form 8-K Current Report filed March 29, 1996, File No. 001-11001). 4.300.5 Sixth Supplemental Indenture, dated as of October 15, 1995, to Chemical Bank, as Trustee (incorporated by reference to Exhibit 4.100.9 to Registrant's Form 8-K Current Report filed March 29, 1996, File No. 001-11001). 4.300.6 Seventh Supplemental Indenture, dated as of June 1, 1996 (incorporated by reference to Exhibit 4.100.11 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 001-11001). 4.300.7 Eighth Supplemental Indenture, dated as of December 1, 1996 (incorporated by reference to Exhibit 4.100.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 001-11001). 35 4.400 Senior Indenture, dated as of May 23, 2001, between Citizens Communications Company and The Chase Manhattan Bank, as trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed on May 24, 2001, File No. 001-11001). 4.400.1 First Supplemental Indenture to Senior Indenture, dated as of May 23, 2001 (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed on May 24, 2001, File No. 001-11001). 4.400.2 Second Supplemental Indenture, dated as of June 19, 2001, to Senior Indenture, dated as of May 23, 2001 (incorporated by reference to Exhibit 4.3 of the Registrant's Current Report on Form 8-K filed on June 21, 2001, File No. 001-11001). 4.400.3 Pledge Agreement, dated as of June 19, 2001, among Citizens Communications Company and The Bank of New York, as Collateral Agent, Securities Intermediary and Custodial Agent and The Chase Manhattan Bank, as Warrant Agent (incorporated by reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K filed on June 21, 2001, File No. 001-11001). 4.400.4 Remarketing Agreement dated June 19, 2001, among Citizens Communications Company, Morgan Stanley & Co. Incorporated, as Remarketing Agent, and The Chase Manhattan Bank, as Warrant Agent and attorney-in-fact for the Holders of the Equity Units (incorporated by reference to Exhibit 4.4 of the Registrant's Current Report on Form 8-K filed on June 21, 2001, File No. 001-11001). 4.400.5 Indenture, dated as of August 16, 2001, between Citizens Communications Company and The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 4.1 of the Registrant's Current Report on Form 8-K filed on August 22, 2001, File No. 001-11001). 10.1 Non-Employee Directors' Deferred Fee Equity Plan dated as of June 28, 1994, with all amendments to May 5, 1997 (incorporated by reference to Exhibit A to the Registrant's Proxy Statement dated April 4, 1995 and Exhibit A to the Registrant's Proxy Statement dated March 28, 1997, respectively, File No.001-11001). 10.2 Employment Agreement between Citizens Utilities Company and Leonard Tow, effective July 11, 1996 (incorporated by reference to Exhibit 10.16.1 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, File No. 001-11001). 10.2.1 Employment Agreement between Citizens Communications Company and Leonard Tow, effective October 1, 2000 (incorporated by reference to Exhibit 10.16.2 of the Registrants Annual Report on Form 10-K for the year ended December 31, 2000, File No. 001-11001). 10.2.2 Letter agreement, dated as of April 10, 2001, amending the employment agreement, effective October 1, 2000, between Citizens Communications Company and Leonard Tow (incorporated by reference to Exhibit 10 of the Registrants' Forms S-4/A filed February 4, 2002, Registration No. 333-69740). 10.2.3 Letter agreement, dated as of May 16, 2002, amending the employment agreement, effective October 1, 2000, between Citizens Communications Company and Leonard Tow (incorporated by reference to Exhibit 10.16.4 of the Registrants' Quarterly Report on Form 10-Q for the nine months ended September 30, 2002, File No. 001-11001). 10.4 Citizens Executive Deferred Savings Plan dated January 1, 1996 (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-11001). 10.5 Citizens Incentive Plan restated as of March 21, 2000 (incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 001-11001). 10.6 Indenture from ELI to Citibank, N.A., dated April 15, 1999, with respect to ELI's 6.05% Senior Unsecured Notes due 2004 (incorporated by reference to Exhibit 10.24.1 of ELI's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-23393). 10.6.1 First Supplemental Indenture from ELI, Citizens Utilities Company and Citizens Newco Company to Citibank, N.A. dated April 15, 1999, with respect to the 6.05% Senior Unsecured Notes due 2004 (incorporated by reference to Exhibit 10.24.2 of ELI's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-23393). 10.6.2 Form of ELI's 6.05% Senior Unsecured Notes due 2004 (incorporated by reference to Exhibit 10.24.3 of ELI's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-23393). 10.7 2000 Equity Incentive Plan dated May 18, 2000 (incorporated by reference to Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000, File No. 001-11001). 36 10.8 Citizens 401(K) Savings Plan effective as of January 1, 1997 reflecting amendments made through April 2001 (incorporated by reference to Exhibit 10.37 to the Registrant's Quarterly Report on Form 10-Q for the six months ended June 30, 2001, File No. 001-11001). 10.9 Competitive Advance and Revolving Credit Facility Agreement for $705,000,000 dated October 24, 2001 (incorporated by reference to Exhibit 10.38 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 2001, File No. 001-11001). 10.10 Loan Agreement between Citizens Communications Company and Rural Telephone Finance Cooperative for $200,000,000 dated October 24, 2001 (incorporated by reference to Exhibit 10.39 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 2001, File No. 001-11001). 10.11 Asset Purchase Agreement between Citizens Communications Company and Kauai Island Utility CO-OP dated March 5, 2002. 10.12 Asset Purchase Agreement between Citizens Communications Company and K-1 USA Ventures, Inc., dated December 19, 2002. 10.13 Asset Purchase Agreement between Citizens Communications Company and UniSource Energy Corporation dated October 29, 2002, relating to the sale of a gas utility business. 10.14 Asset Purchase Agreement between Citizens Communications Company and UniSource Energy Corporation dated October 29, 2002, relating to the sale of an electric utility buiness. 10.15 Sale agreement between Citizens Telecom Services Company LLC and Pepsico, Inc., dated January 31, 2003. 12 Computation of ratio of earnings to fixed charges (this item is included herein for the sole purpose of incorporation by reference). 21 Subsidiaries of the Registrant 23 Auditors' Consent 99 Certifications pursuant to 18 U.S.C Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibits 10.1, 10.2, 10.2.1, 10.2.2, 10.2.3, 10.4, 10.5, 10.7 and 10.8 are management contracts or compensatory plans or arrangements. We agree to furnish to the Commission upon request copies of the Realty and Chattel Mortgage, dated as of March 1, 1965, made by Citizens Utilities Rural Company, Inc., to the United States of America (the Rural Utilities Services and Rural Telephone Bank) and the Mortgage Notes which that mortgage secures; and the several subsequent supplemental Mortgages and Mortgage Notes; copies of separate loan agreements and indentures governing various Industrial Development Revenue Bonds; copies of documents relating to indebtedness of subsidiaries acquired during 1996, 1997 and 1998. We agree to furnish to the Commission upon request copies of schedules and exhibits to items 10.11, 10.12, 10.13, 10.14 and 10.15. (b) Reports on Form 8-K: We filed on Form 8-K on October 30, 2002 under Item 5 "Other Events", a press release announcing the definitive agreements to sell the Arizona Gas and Arizona Electric divisions to UniSource Energy Corporation for $230 million in cash, subject to adjustments under the term of the agreements. We filed on Form 8-K on November 6, 2002 under Item 5 "Other Events", a press release announcing the completion of the sale of the Kauai Electric division to the Kauai Island Utility Cooperative. We filed on Form 8-K on November 12, 2002 under Item 9 "Regulation FD Disclosure", information relating to the furnishing of certifications to the SEC pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. We filed on Form 8-K on November 25, 2002 under Item 5 "Other Events", information regarding the investigation of possible irregularities involving payments made by the Company's public utilities division for services or benefits that the Company did not receive. We filed on Form 8-K on December 20, 2002 under Item 5 "Other Events" and Item 7 "Financial Statements and Exhibits", a press release announcing the definitive agreement to sell the Hawaiian Gas division to K-1 USA Ventures, Inc. for $115 million in cash, subject to adjustments under the terms of the agreement and the conclusion of the internal investigation of a theft of $7.8 million by two former officers of the Company. 37 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CITIZENS COMMUNICATIONS COMPANY ------------------------------- (Registrant) By: /s/ Leonard Tow ----------------- Leonard Tow Chairman of the Board; Chief Executive Officer; Chairman of Executive Committee and Director March 24, 2003 38 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 24th day of March 2003.
Signature Title --------- ----- /s/ Robert J. Larson Senior Vice President and Chief Accounting Officer - ----------------------------------------- (Robert J. Larson) /s/ Jerry Elliott Senior Vice President and Chief Financial Officer - ----------------------------------------- (Jerry Elliott) /s/ Norman I. Botwinik Director - ----------------------------------------- (Norman I. Botwinik) /s/ Aaron I. Fleischman Member, Executive Committee and Director - ----------------------------------------- (Aaron I. Fleischman) /s/ Rudy J. Graf Member, Executive Committee and Director - ----------------------------------------- (Rudy J. Graf) /s/ Stanley Harfenist Member, Executive Committee and Director - ----------------------------------------- (Stanley Harfenist) /s/ Andrew N. Heine Director - ----------------------------------------- (Andrew N. Heine) /s/ William Kraus Director - ----------------------------------------- (William Kraus) /s/ Scott N. Schneider Vice Chairman of the Board, President and - ----------------------------------------- Chief Operating Officer, and Director (Scott N. Schneider) /s/ John L. Schroeder Director - ----------------------------------------- (John L. Schroeder) /s/ Robert A. Stanger Member, Executive Committee and Director - ----------------------------------------- (Robert A. Stanger) /s/ Edwin Tornberg Director - ----------------------------------------- (Edwin Tornberg) /s/ Claire L. Tow Director - ----------------------------------------- (Claire L. Tow)
39 CERTIFICATIONS -------------- I, Leonard Tow, certify that: 1. I have reviewed this annual report on Form 10-K of Citizens Communications Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003 By: /s/ Leonard Tow ------------------- Leonard Tow Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer) 40 CERTIFICATIONS (continued) -------------------------- I, Jerry Elliott, certify that: 1. I have reviewed this annual report on Form 10-K of Citizens Communications Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003 By: /s/ Jerry Elliott --------------------- Jerry Elliott Chief Financial Officer (Principal Financial Officer) 41
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES Index to Consolidated Financial Statements Item Page - ---- ---- Independent Auditors' Report F-2 Consolidated balance sheets as of December 31, 2002 and 2001 F-3 Consolidated statements of operations for the years ended December 31, 2002, 2001 and 2000 F-4 Consolidated statements of shareholders' equity for the years ended December 31, 2002, 2001 and 2000 F-5 Consolidated statements of comprehensive income (loss) for the years ended December 31, 2002, 2001 and 2000 F-5 Consolidated statements of cash flows for the years ended December 31, 2002, 2001 and 2000 F-6 Notes to consolidated financial statements F-7
F-1 Independent Auditors' Report The Board of Directors and Shareholders Citizens Communications Company: We have audited the accompanying consolidated balance sheets of Citizens Communications Company and subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of operations, shareholders' equity, comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens Communications Company and subsidiaries as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 13 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" as of January 1, 2002. KPMG LLP New York, New York March 4, 2003 F-2
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 ($ in thousands) 2002 2001 -------------- -------------- ASSETS - ------ Current assets: Cash and cash equivalents $ 393,177 $ 215,869 Accounts receivable, net 310,929 311,878 Other current assets 49,114 150,573 Assets held for sale 447,764 1,107,937 Assets of discontinued operations - 746,791 -------------- -------------- Total current assets 1,200,984 2,533,048 Property, plant and equipment, net 3,690,056 4,512,038 Goodwill, net 1,869,348 1,957,600 Other intangibles, net 942,970 1,021,342 Investments 29,846 141,208 Other assets 413,538 388,364 -------------- -------------- Total assets $ 8,146,742 $ 10,553,600 ============== ============== LIABILITIES AND EQUITY - ---------------------- Current liabilities: Long-term debt due within one year $ 58,911 $ 483,906 Accounts payable 195,278 239,676 Income taxes accrued 83,065 96,901 Other taxes accrued 41,068 33,637 Interest accrued 105,668 112,282 Customer deposits 2,632 18,246 Other current liabilities 134,191 124,833 Liabilities related to assets held for sale 150,053 218,775 Liabilities of discontinued operations - 228,337 -------------- -------------- Total current liabilities 770,866 1,556,593 Deferred income taxes 137,116 429,544 Customer advances for construction and contributions in aid of construction 146,661 183,319 Other liabilities 301,349 241,846 Equity units 460,000 460,000 Long-term debt 4,957,361 5,534,906 Company Obligated Mandatorily Redeemable Convertible Preferred Securities* 201,250 201,250 Shareholders' equity: Common stock, $0.25 par value (600,000,000 authorized shares; 282,482,000 and 281,289,000 outstanding and 294,080,000 and 292,840,000 issued at December 31, 2002 and 2001, respectively) 73,520 73,210 Additional paid-in capital 1,943,406 1,927,518 Retained earnings (accumulated deficit) (553,033) 129,864 Accumulated other comprehensive income (loss) (102,169) 4,907 Treasury stock (189,585) (189,357) -------------- -------------- Total shareholders' equity 1,172,139 1,946,142 -------------- -------------- Total liabilities and equity $ 8,146,742 $ 10,553,600 ============== ==============
* Represents securities of a subsidiary trust, the sole assets of which are securities of a subsidiary partnership, substantially all the assets of which are convertible debentures of the Company. The accompanying Notes are an integral part of these Consolidated Financial Statements. F-3
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000 ($ in thousands, except for per-share amounts) 2002 2001 2000 --------------- -------------- -------------- Revenue $ 2,669,332 $ 2,456,993 $ 1,802,358 Operating expenses: Cost of services 476,920 599,378 481,673 Other operating expenses 1,002,355 951,710 811,926 Depreciation and amortization 755,522 632,336 387,607 Reserve for telecommunications bankruptcies 10,880 21,200 - Restructuring and other expenses 37,186 19,327 (649) Loss on impairment 1,074,058 - - --------------- -------------- -------------- Total operating expenses 3,356,921 2,223,951 1,680,557 --------------- -------------- -------------- Operating income (loss) (687,589) 233,042 121,801 Investment income (loss), net (98,359) (62,408) 4,736 Gain on sale of assets 9,798 139,304 - Minority interest - - 12,222 Other income (loss), net 15,806 (3,133) (1,386) Interest expense 471,296 379,326 187,366 --------------- -------------- -------------- Loss from continuing operations before income taxes, dividends on convertible preferred securities, extraordinary expense and cumulative effect of change in accounting principle (1,231,640) (72,521) (49,993) Income tax benefit (414,874) (14,805) (16,132) --------------- -------------- -------------- Loss from continuing operations before dividends on convertible preferred securities, extraordinary expense and cumulative effect of change in accounting principle (816,766) (57,716) (33,861) Dividends on convertible preferred securities, net of income tax benefit of $(3,853) 6,210 6,210 6,210 --------------- -------------- -------------- Loss from continuing operations before extraordinary expense and cumulative effect of change in accounting principle (822,976) (63,926) (40,071) Income (loss) from discontinued operations, net of income tax (benefit) of $(554), $8,947 and $5,721, respectively (1,478) 17,875 11,677 Gain on disposal of water segment, net of income taxes of $135,303 181,369 - - --------------- -------------- -------------- Total income from discontinued operations, net of income taxes of $134,749, $8,947 and $5,721, respectively 179,891 17,875 11,677 --------------- -------------- -------------- Loss before extraordinary expense and cumulative effect of change in accounting principle (643,085) (46,051) (28,394) Extraordinary expense - discontinuation of Statement of Financial Accounting Standards No. 71, net of tax - 43,631 - Cumulative effect of change in accounting principle 39,812 - - --------------- -------------- -------------- Net loss $ (682,897) $ (89,682) $ (28,394) =============== ============== ============== Carrying cost of equity forward contracts - 13,650 - --------------- -------------- -------------- Available for common shareholders $ (682,897) $ (103,332) $ (28,394) =============== ============== ============== Basic income (loss) per common share: Loss from continuing operations before extraordinary expense and cumulative effect of change in accounting principle $ (2.93) $ (0.28) $ (0.15) Income from discontinued operations $ 0.64 $ 0.06 $ 0.04 Loss before extraordinary expense and cumulative effect of change in accounting principle $ (2.29) $ (0.22) $ (0.11) Extraordinary expense $ - $ (0.16) $ - Loss from cumulative effect of change in accounting principle $ (0.14) $ - $ - Available for common shareholders $ (2.43) $ (0.38) $ (0.11) Diluted income (loss) per common share: Loss from continuing operations before extraordinary expense and cumulative effect of change in accounting principle $ (2.93) $ (0.28) $ (0.15) Income from discontinued operations $ 0.64 $ 0.06 $ 0.04 Loss before extraordinary expense and cumulative effect of change in accounting principle $ (2.29) $ (0.22) $ (0.11) Extraordinary expense $ - $ (0.16) $ - Loss from cumulative effect of change in accounting principle $ (0.14) $ - $ - Available for common shareholders $ (2.43) $ (0.38) $ (0.11)
The accompanying Notes are an integral part of these Consolidated Financial Statements. F-4
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000 ($ in thousands, except for per-share amounts) Accumulated Common Stock Additional Retained Other Treasury Stock Total ----------------- Paid-In Earnings Comprehensive -------------- Shareholders' Shares Amount Capital (Deficit) Income (Loss) Shares Amount Equity -------- -------- ----------- ------------- --------------- --------------- ---------- Balance January 1, 2000 262,076 $65,519 $1,577,903 $ 261,590 $ 14,923 - $ - $1,919,935 -------- -------- ----------- ------------- ------------ -------- ---------- ---------- Acquisitions 112 28 1,770 - - 114 1,861 3,659 Treasury stock acquisitions - - - - - (2,952) (49,209) (49,209) Stock plans 3,580 895 42,156 - - (269) (4,523) 38,528 Equity forward contracts - - (150,013) - - - - (150,013) Net loss - - - (28,394) - - - (28,394) Other comprehensive loss, net of tax and reclassifications adjustments - - - - (14,505) - - (14,505) -------- -------- ----------- ------------- ------------ -------- ---------- ---------- Balance December 31, 2000 265,768 66,442 1,471,816 233,196 418 (3,107) (51,871) 1,720,001 -------- -------- ----------- ------------- ------------ -------- ---------- ---------- Stock plans 1,916 479 17,449 - - 696 12,527 30,455 Common stock offering 25,156 6,289 283,272 - - - - 289,561 Equity units offering - - 4,968 - - - - 4,968 Settlement of equity forward contracts - - 150,013 (13,650) - (9,140) (150,013) (13,650) Net loss - - - (89,682) - - - (89,682) Other comprehensive income, net of tax and reclassifications adjustments - - - - 4,489 - - 4,489 -------- -------- ----------- ------------- ------------ -------- ---------- ---------- Balance December 31, 2001 292,840 73,210 1,927,518 129,864 4,907 (11,551) (189,357) 1,946,142 -------- -------- ----------- ------------- ------------ -------- ---------- ---------- Stock plans 1,240 310 15,888 - - (47) (228) 15,970 Net loss - - - (682,897) - - - (682,897) Other comprehensive loss, net of tax and reclassifications adjustments - - - - (107,076) - - (107,076) -------- -------- ----------- ------------- ------------ -------- ---------- ---------- Balance December 31, 2002 294,080 $73,520 $1,943,406 $ (553,033) $ (102,169) (11,598) $(189,585) $1,172,139 ======== ======== =========== ============= ============ ======== ========== ========== CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000 ($ in thousands, except for per-share amounts) 2002 2001 2000 -------------- ------------- ------------- Net loss $ (682,897) $ (89,682) $ (28,394) Other comprehensive income (loss), net of tax and reclassifications adjustments* (107,076) 4,489 (14,505) -------------- ------------- ------------- Total comprehensive loss $ (789,973) $ (85,193) $ (42,899) ============== ============= =============
* Consists of unrealized holding (losses)/gains of marketable securities and minimum pension liability (see Note 22). The accompanying Notes are an integral part of these Consolidated Financial Statements. F-5
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000 ($ in thousands) 2002 2001 2000 -------------- -------------- -------------- Net cash provided by continuing operating activities $ 636,867 $ 476,936 $ 307,693 Cash flows from investing activities: Acquisitions - (3,373,214) (986,029) Proceeds from sale of assets 224,678 372,335 - Capital expenditures (468,742) (487,271) (544,829) Securities purchased (1,175) (1,391) (71,122) Securities sold 8,212 1,434 381,698 Securities matured 2,014 - 16,072 ELI share purchases (6,800) - (38,748) Other 727 639 104 -------------- -------------- -------------- Net cash used by investing activities (241,086) (3,487,468) (1,242,854) Cash flows from financing activities: Long-term debt borrowings - 3,703,483 1,063,158 Long-term debt principal payments (1,062,169) (1,077,931) (46,972) Issuance of equity units - 460,000 - Debt issuance cost - (67,657) - Common stock offering - 289,561 - Issuance of common stock for employee plans 14,943 25,411 19,773 Settlement of equity forward contracts - (163,662) - Common stock buybacks - - (49,209) Repayment of customer advances for construction and contributions in aid of construction (4,895) (27,816) 30,684 -------------- -------------- -------------- Net cash (used) provided by financing activities (1,052,121) 3,141,389 1,017,434 Cash provided (used) by discontinued operations Proceeds from the sale of discontinued operations 859,064 - - Net cash provided (used) by discontinued operations (25,416) 14,926 (49,328) Increase in cash and cash equivalents 177,308 145,783 32,945 Cash and cash equivalents at January 1, 215,869 70,086 37,141 -------------- -------------- -------------- Cash and cash equivalents at December 31, $ 393,177 $ 215,869 $ 70,086 ============== ============== ============== Supplemental cash flow information: Cash paid during the year for: Interest $ 470,175 $ 302,510 $ 188,955 Income taxes (refunds) (17,621) (41,126) 37,935 Non-cash investing and financing activities: Assets acquired under capital lease $ 38,000 $ 33,985 $ 102,192 Change in fair value of interest rate swaps 16,229 430 - Investment writedown 117,455 79,114 - Equity forward contracts - - 150,013 Issuance of shares for acquisitions - - 3,659 Debt assumed from acquisitions - 117,630 -
The accompanying Notes are an integral part of these Consolidated Financial Statements. F-6 CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Description of Business and Summary of Significant Accounting Policies: ----------------------------------------------------------------------- (a) Description of Business: ------------------------ Citizens Communications Company and its subsidiaries are referred to as "we", "us", the "Company" or "our" in this report. We are a telecommunications-focused company providing wireline communications services to rural areas and small and medium-sized towns and cities, including the Rochester, New York metropolitan area, as an incumbent local exchange carrier, or ILEC. In addition, we provide competitive local exchange carrier, or CLEC, services to business customers and to other communications carriers in certain metropolitan areas in the western United States through Electric Lightwave, Inc., or ELI, our wholly-owned subsidiary. We also provide public utility services including natural gas transmission and distribution and electric transmission and distribution services to primarily rural and suburban customers in Vermont, Hawaii and Arizona. Our ILEC segment has grown substantially over the last three years, primarily as a result of acquisitions. During 2001, we purchased from Global Crossing Ltd. (Global) the 1.1 million access lines of the Frontier local exchange carrier business for approximately $3.4 billion in cash (see Note 5). During 2000, we acquired approximately 334,500 telephone access lines for approximately $986,200,000 in cash. Of our 2.4 million telephone access lines as of December 31, 2002, approximately 41% are located in New York State, including the greater Rochester metropolitan area, another 11% are located in Minnesota. In 1999 we announced plans to divest our public utilities services segments. During 2001 we sold two of our four natural gas transmission and distribution businesses and during 2002 we sold our entire water distribution and wastewater treatment business and one of our three electric businesses. We have contracts to sell three of our four remaining properties. We are seeking a buyer for our one remaining utility property, which provides electricity to approximately 21,000 customers in Vermont. Pending these divestitures, we continue to provide gas and electric utility services (see Note 7). In June 2002, we acquired all the common stock of ELI that we did not previously own and as a result ELI became our wholly-owned subsidiary. (b) Principles of Consolidation and Use of Estimates: ------------------------------------------------- Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Certain reclassifications of balances previously reported have been made to conform to the current presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions which affect the amounts of assets, liabilities, revenue and expenses we have reported and our disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates. We believe that our critical estimates are depreciation rates, pension assumptions, calculations of impairment amounts and reserves established for telecommunication bankruptcies. (c) Cash Equivalents: ----------------- We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. (d) Revenue Recognition: -------------------- Incumbent Local Exchange Carrier (ILEC) - Revenue is recognized when services are provided or when products are delivered to customers. Revenue that is billed in advance includes: monthly recurring network access services, special access services and monthly recurring local line charges. The unearned portion of this revenue is initially deferred as a component of other current liabilities on our balance sheet and recognized in revenue over the period that the services are provided. Revenue that is billed in arrears includes: non-recurring network access services, switched access services, non-recurring local services and long-distance services. The earned but unbilled portion of this revenue is recognized in revenue in our statement of operations and accrued in accounts receivable in the period that the services are provided. Excise taxes are recognized as a liability when billed. Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average term of a customer relationship. We recognize as current period expense the portion of installation costs that exceeds installation fee revenue. F-7 ELI - Revenue is recognized when the services are provided. Revenue from long-term prepaid network services agreements including Indefeasible Rights to Use (IRU), are deferred and recognized on a straight-line basis over the terms of the related agreements. Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average term of a customer relationship. We recognize as current period expense the portion of installation costs that exceeds installation fee revenue. Public Utilities Services - Revenue is recognized when services are provided for public utilities services. Certain revenue is based upon consumption while other revenue is based upon a flat fee. Earned but unbilled public services revenue is accrued and included in accounts receivable and revenue. (e) Construction Costs and Maintenance Expense: ------------------------------------------- Property, plant and equipment are stated at original cost, including a portion of related overhead and an allowance for funds used during construction (AFUDC) for regulated businesses and capitalized interest for unregulated telecommunications businesses. Maintenance and repairs are charged to operating expenses as incurred. The book value, net of salvage, of routine property, plant and equipment dispositions is charged against accumulated depreciation for regulated operations. Capitalized interest for unregulated construction activities amounted to $7,390,000, $5,675,000 and $4,766,000 for 2002, 2001 and 2000, respectively. (f) Intangibles: ------------ Intangibles represent the excess of purchase price over the fair value of identifiable tangible assets acquired. We undertake studies to determine the fair values of assets acquired and allocate purchase prices to property, plant and equipment, goodwill and other identifiable intangibles. On January 1, 2002, we adopted SFAS 142, "Goodwill and Other Intangible Assets," which applies to all goodwill and other intangible assets recognized in the statement of financial position at that date, regardless of when the assets were initially recognized. This statement requires that goodwill and other intangibles with indefinite useful lives no longer be amortized to earnings, but instead be reviewed for impairment, at least annually. The amortization of goodwill and other intangibles with indefinite useful lives ceased upon adoption of the statement on January 1, 2002. We annually examine the carrying value of our goodwill and other intangibles with indefinite useful lives to determine whether there are any impairment losses and have determined for the year ended December 31, 2002 that there was no impairment except for ELI (see Notes 6, 13 and 19). (g) Impairment of Long-Lived Assets and Long-Lived Assets to Be -------------------------------------------------------------- Disposed Of: ------------ We adopted Statement of Financial Accounting Standard (SFAS) No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" as of January 1, 2002. In accordance with SFAS No. 144, we review long-lived assets to be held and used and long-lived assets to be disposed of, including intangible assets with estimated useful lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to the future undiscounted net cash flows expected to be generated by the asset. Recoverability of assets held for sale is measured by comparing the carrying amount of the assets to their estimated fair market value. If any assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value (see Note 4). (h) Derivative Instruments and Hedging Activities: ---------------------------------------------- Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS No. 133, as amended, requires that all derivative instruments, such as interest rate swaps, be recognized in the financial statements and measured at fair value regardless of the purpose or intent of holding them. On the date the derivative contract is entered into, we designate the derivative as either a fair value or cash flow hedge. A hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment is a fair value hedge. A hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability is a cash flow hedge. We formally document all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy F-8 for undertaking the hedge transaction. This process includes linking all derivatives that are designated as fair-value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. We also formally assess, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we would discontinue hedge accounting prospectively. All derivatives are recognized on the balance sheet at their fair value. Changes in the fair value of derivative financial instruments are either recognized in income or stockholders equity (as a component of other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. We entered into interest rate swap arrangements during 2001 and 2002 related to a portion of our fixed rate debt. These hedge strategies satisfy the fair value hedging requirements of SFAS 133. As a result, the fair value of the hedges is carried on the balance sheet in other current assets and the related underlying liabilities are also adjusted to fair value by the same amount. (i) Investments: ------------ We classify our investments at purchase as available-for-sale. We do not maintain a trading portfolio or held to maturity securities. Securities classified as available-for-sale are carried at estimated fair market value. These securities are held for an indefinite period of time, but might be sold in the future as changes in market conditions or economic factors occur. Net aggregate unrealized gains and losses related to such securities, net of taxes, are included as a separate component of shareholders' equity. Interest, dividends and gains and losses realized on sales of securities are reported in Investment income. We evaluate our investments periodically to determine whether any decline in fair value, below the cost basis, is other than temporary. If we determine that a decline in fair value is other than temporary, the cost basis of the individual investment is written down to fair value which becomes the new cost basis. The amount of the write down is transferred from other comprehensive income (loss) and included in the statement of operations as a loss. (j) Income Taxes, Deferred Income Taxes and Investment Tax Credits: --------------------------------------------------------------- We file a consolidated federal income tax return. We utilize the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recorded for the tax effect of temporary differences between the financial statement basis and the tax basis of assets and liabilities using tax rates expected to be in effect when the temporary differences are expected to reverse. The investment tax credits relating to regulated operations, as defined by applicable regulatory authorities, have been deferred and are being amortized to income over the lives of the related properties. (k) Employee Stock Plans: --------------------- We have various employee stock-based compensation plans. Awards under these plans are granted to eligible officers, management employees and non-management employees. Awards may be made in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock or other stock based awards. As permitted by current accounting rules, we recognize compensation expense in the financial statements only if the market price of the underlying stock exceeds the exercise price on the date of grant. We provide pro forma net income (loss) and pro forma net income (loss) per common share disclosures for employee stock option grants made in 1995 and thereafter based on the fair value of the options at the date of grant (see Note 18). Fair value of options granted is computed using the Black Scholes option-pricing model. (l) Minority Interest and Minority Interest in Subsidiary: ------------------------------------------------------ Minority interest represents the former minority's share of ELI's net loss. Subsequent to ELI's initial public offering in 1997, we recorded minority interest on our statement of operations and reduced minority interest on our balance sheet by the amount of the former minority interests' share of ELI's losses. As of June 30, 2000, the former minority interest on the balance sheet had been reduced to zero, therefore, from that date forward, we discontinued recording minority interest income on our statement of operations. F-9 (m) Net Income (loss) Per Common Share: ----------------------------------- Basic net income per common share is computed using the weighted average number of common shares outstanding during the period being reported on. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock that are in the money were exercised or converted into common stock at the beginning of the period being reported on. (2) Accounts Receivable: -------------------- The components of accounts receivable, net at December 31, 2002 and 2001 are as follows: ($ in thousands) 2002 2001 -------------- -------------- --------------- Customers $ 258,165 $ 292,345 Other 91,710 87,134 Less: Allowance for doubtful accounts (38,946) (67,601) -------------- --------------- Accounts receivable, net $ 310,929 $ 311,878 ============== =============== (3) Property, Plant and Equipment: ------------------------------ The components of property, plant and equipment at December 31, 2002 and 2001 are as follows:
Estimated ($ in thousands) Useful Lives 2002 2001 -------------- ------------------- ----------------- ----------------- Telephone outside plant 6 to 55 years $ 3,199,676 $ 3,280,542 Telephone central office equipment 7 to 11 years 1,893,169 2,135,992 Information systems and other administrative assets 5 to 17 years 762,709 777,351 Other 67,073 55,065 Construction work in progress 217,145 450,978 ----------------- ----------------- 6,139,772 6,699,928 Less: accumulated depreciation (2,449,716) (2,187,890) ----------------- ----------------- Property, plant and equipment, net $ 3,690,056 $ 4,512,038 ================= =================
Depreciation expense, calculated using the straight-line method, is based upon the estimated service lives of various classifications of property, plant and equipment. Depreciation expense was $630,113,000, $488,957,000 and $370,119,000 for the years ended December 31, 2002, 2001 and 2000, respectively. We ceased to record depreciation expense on the gas assets effective October 1, 2000 and on the electric assets effective January 1, 2001, both of which are included in assets held for sale (see Note 7). During 2002 and 2001, we recognized accelerated depreciation of $23,379,000 and $22,000,000 related to the change in useful lives of our accounting and human resource systems and our Plano, Texas office building, furniture and fixtures as a result of our restructuring (see Note 19). During 2000, we recognized $17,400,000 in accelerated depreciation related to the change in useful life of an operating system in the ILEC segment. (4) Losses on Impairment: --------------------- In the third quarter 2002, we recognized non-cash pre-tax impairment losses of $656,658,000 related to property, plant and equipment in the ELI sector and $417,400,000 related to the gas and electric sector assets held for sale, in each case in accordance with the provisions of SFAS 144. ELI --- Prior to the third quarter of 2002, we tested for impairment of ELI and determined that, based on our assumptions, the sum of the expected future cash flows, undiscounted and without interest charges, exceeded the carrying value of its long-lived assets and therefore we did not recognize an impairment. Because sales for the nine months ended September 30, 2002 were lower than those in 2001 and were significantly below our original 2002 budget (which was used in the test for impairment at December 31, 2001), we evaluated the long-lived assets of ELI as of September 30, 2002. At that date, we estimated that our undiscounted future cash flows were less than the carrying value of our long-lived assets. As a result we recognized a non-cash pre-tax impairment loss of $656,658,000, equal to the difference between the estimated fair value of the assets (which we determined by calculating the discounted value of the estimated future cash F-10 flows weighting various possible scenarios for management's assessment of probability of occurrence and discounting the probability-weighted cash flows at an appropriate rate) and the carrying amount of the assets. Making the determinations of impairment and the amount of impairment require significant judgment by management and assumptions with respect to the future cash flows of the ELI sector. The telecommunications industry in general and the CLEC sector in particular is undergoing significant change and disruption, which makes judgments and assumptions with respect to the future cash flows highly subjective. Gas and Electric Assets Held for Sale ------------------------------------- On October 29, 2002, our board approved the sale of our Arizona gas and electric utility properties for $230,000,000 in cash ($220,000,000 if we close by July 28, 2003), subject to adjustments under the terms of the agreements. On December 19, 2002, our board approved the sale of our Hawaii gas property for $115,000,000 in cash, subject to adjustments under the terms of the agreement. The board also approved, in principle, the sale of Vermont Electric, our only remaining utility property at currently offered prices, which were below their then book carrying value. This property is the only utility property that does not have a definitive sales contract. Previously, we believed that the net realizable value of these properties was equal to or above their carrying values. However, as a result of market conditions, and the desire to complete the divestiture process quickly in order to focus on our core telecommunications operations and raise money to further reduce debt, we made a strategic decision to accept proceeds less than carrying values. Our estimate of net realizable value with respect to Vermont is based on current negotiations and may be revised in future periods. As a result, for the four properties noted above we recorded a non-cash pre-tax charge of $417,400,000 in the third quarter of 2002 to reduce the carrying value of our assets held for sale to our best estimate of net realizable value upon sale (see Note 7). (5) Acquisitions: ------------- In 2000, we acquired from Verizon Communications Inc. (Verizon) approximately 317,500 telephone access lines for $948,200,000 in cash, and we acquired from Qwest Communications (Qwest) approximately 17,000 telephone access lines for approximately $38,000,000 in cash. On June 29, 2001, we purchased Frontier for approximately $3,373,000,000 in cash. These acquisitions have been accounted for using the purchase method of accounting. The results of operations of the acquired properties have been included in our financial statements from the date of acquisition. F-11 The following summarizes the allocation of purchase prices for our 2001 and 2000 acquisitions:
Total ($ in thousands) Qwest Verizon 2001 Acquisitions -------------- Verizon Verizon North Illinois/ Total 2000 Acquisition since Nebraska Minnesota Dakota Wisconsin Acquisitions of Frontier January 2000 ------------ ------------- ------------- ------------- -------------- --------------- --------------- Acquisition date 6/30/2000 8/31/2000 10/31/2000 11/30/2000 6/29/2001 Assets acquired: Property, plant and equipment $ 51,903 $ 137,391 $ 13,910 $ 105,446 $ 308,650 $ 1,108,514 $ 1,417,164 Current assets - 4,960 - - 4,960 119,016 123,976 Goodwill 108,175 174,247 16,619 163,906 462,947 1,506,647 1,969,594 Customer base 46,060 120,742 7,466 34,565 208,833 791,983 1,000,816 Trade name - - - - - 122,058 122,058 Other assets - 1,557 - - 1,557 151,172 152,729 ------------ ------------- ------------- ------------- -------------- --------------- --------------- Total assets acquired 206,138 438,897 37,995 303,917 986,947 3,799,390 4,786,337 ------------ ------------- ------------- ------------- -------------- --------------- --------------- Liabilities assumed: Debt - - - - - 146,920 146,920 Other liabilities 734 - - - 734 279,536 280,270 ------------ ------------- ------------- ------------- -------------- --------------- --------------- Total liabilities assumed 734 - - - 734 426,456 427,190 ------------ ------------- ------------- ------------- -------------- --------------- --------------- Cash paid $205,404 $ 438,897 $ 37,995 $ 303,917 $ 986,213 $ 3,372,934 $ 4,359,147 ============ ============= ============= ============= ============== =============== =============== Status of appraisal valuation Final Final Final Final Final Final Final
The following pro forma financial information for the years ended December 31, 2001 and 2000 represents the combined results of our operations and acquisitions as if the acquisition had occurred at the beginning of the year of its acquisition. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had we constituted a single entity during such periods. ($ in thousands, except per share amounts) ---------------------------------------- 2001 2000 --------------- ---------------- Revenue $ 2,844,789 $ 2,693,824 Net loss $ (161,619) $ (148,754) Net loss per share $ (0.64) $ (0.56) Included in revenue for the years ended December 31, 2001 and 2000 is approximately $313,070,000 and $327,300,000, respectively, of revenue from our Louisiana and Colorado gas operations sold during 2001, and our Kauai electric division sold during 2002 (see Note 7). (6) Intangibles: ------------ Intangibles at December 31, 2002 and 2001 are as follows: ($ in thousands) -------------- 2002 2001 --------------- ---------------- Customer base - amortizable $1,000,816 $ 970,925 Trade name - non-amortizable 122,058 106,473 --------------- ---------------- Other intangibles 1,122,874 1,077,398 Accumulated amortization (179,904) (56,056) --------------- ---------------- Total other intangibles, net $ 942,970 $ 1,021,342 =============== ================ Amortization expense was $125,409,000, $143,379,000 and $17,488,000 for the years ended December 31, 2002, 2001 and 2000, respectively. F-12 We have recorded assets acquired at estimates of fair market values as of the acquisition dates in accordance with SFAS No. 141, "Business Combinations". Our allocations of purchase prices are based upon independent appraisals of the respective properties acquired. Our acquisitions were made in order for us to execute upon our business strategy. Our strategy is to focus exclusively on providing telecommunications services, primarily in rural, small and medium-sized towns and cities where we believe we have a competitive advantage because of our relatively larger size, greater resources, local focus and lower levels of competition. Our ILEC operations are typically the dominant provider of independent local exchange carrier services in each of the markets in which we operate. We believe that our operations in these areas will provide us with steady revenue and margin enhancement opportunities. To reach our objectives, we intend to continue to achieve economies of scale through increasing operational efficiencies, among other strategies. In following our strategy, we selectively pursue acquisitions that we believe will enhance shareholder value through increased revenue growth and operational efficiencies consistent with our corporate strategy and objectives. We have paid more than the net book values (of the seller) of each of the businesses acquired in 2001 and 2000. We based our purchase prices on estimates of future earnings and future cash flows of the businesses acquired. The "premium" to book value paid, including the allocation to goodwill for each respective property, reflects the value created by all of the tangible and intangible operating assets (existing and acquired) of our businesses coming together to produce earnings, including without limitation, the fact that we were able to immediately commence operations as the dominant local exchange carrier in the applicable operating area. Additionally, the premiums paid were impacted by the fact that our purchase price was accepted by the sellers after a competitive bidding and negotiation process. We were willing to pay a premium (i.e., goodwill) over the fair value of the tangible and identifiable intangible assets acquired less liabilities assumed in order to obtain product cross-selling opportunities, economies of scale (e.g., cost savings opportunities) and the potential benefit resident in expected population/demographic trends. The following table presents a reconciliation between reported net loss and adjusted net loss. Adjusted net loss excludes amortization expense recognized in prior periods related to goodwill and trade name that are no longer being amortized as required by SFAS No. 142.
(In thousands, except per-share amounts) 2002 2001 2000 -------------------------------------- --------------- ---------------- --------------- Reported attributable to common shareholders $ (682,897) $ (103,332) $ (28,394) Add back: Goodwill and trade name amortization, net of tax - 61,938 9,202 --------------- ---------------- --------------- Adjusted attributable to common shareholders $ (682,897) $ (41,394) $ (19,192) =============== ================ =============== Basic earnings per share: - ------------------------- Reported attributable to common shareholders $ (2.43) $ (0.38) $ (0.11) Goodwill and trade name amortization, net of tax - 0.23 0.04 --------------- ---------------- --------------- Adjusted attributable to common shareholders $ (2.43) $ (0.15) $ (0.07) =============== ================ =============== Diluted earnings per share: - --------------------------- Reported attributable to common shareholders $ (2.43) $ (0.38) $ (0.11) Goodwill and trade name amortization, net of tax - 0.22 0.03 --------------- ---------------- --------------- Adjusted attributable to common shareholders $ (2.43) $ (0.16) $ (0.08) =============== ================ ===============
(7) Discontinued Operations and Net Assets Held for Sale: ----------------------------------------------------- On August 24, 1999, our Board of Directors approved a plan of divestiture for our public utilities services businesses, which included gas, electric and water and wastewater businesses. F-13 Water and Wastewater -------------------- On January 15, 2002, we completed the sale of our water and wastewater operations to American Water Works, Inc. for $859,100,000 in cash and $122,500,000 of assumed debt and other liabilities. The pre-tax gain on the sale recognized in 2002 was $316,672,000. Electric and Gas ---------------- On October 29, 2002, we entered into definitive agreements to sell our Arizona gas and electric divisions to UniSource Energy Corporation for $230,000,000 in cash ($220,000,000 if we close by July 28, 2003), subject to adjustments specified in the agreements (see Note 4). The transactions, which are subject to regulatory and other customary approvals, are expected to close during the second half of 2003. On November 1, 2002, we completed the sale of our Kauai electric division to Kauai Island Utility Cooperative (KIUC) for $215,000,000 in cash. The pre-tax gain on the sale recognized in 2002 was $8,273,000. On December 19, 2002, we entered into a definitive agreement to sell The Gas Company in Hawaii to K-1 USA Ventures, Inc for $115,000,000 in cash, subject to adjustments under the terms of the agreement. The transaction, which is subject to regulatory and other customary approvals, is expected to close during the fourth quarter of 2003. On July 2, 2001, we completed the sale of our Louisiana Gas operations to Atmos Energy Corporation for $363,436,000 in cash. The pre-tax gain on the sale recognized in 2001 was $139,304,000. On November 30, 2001, we sold our Colorado Gas division to Kinder Morgan for approximately $8,900,000 in cash after purchase price adjustments. Currently, we do not have an agreement to sell our remaining electric property, Vermont Electric. We continue to actively pursue a buyer for our remaining electric business. All of our gas and electric assets (including Arizona gas and electric and Hawaii gas) and their related liabilities are classified as "assets held for sale" and "liabilities related to assets held for sale," respectively. These assets have been written down to our best estimate of the net realizable value upon sale (see Note 4). Discontinued operations in the consolidated statements of operations reflect the results of operations of the water/wastewater properties sold in January 2002 including allocated interest expense for the periods presented. Interest expense was allocated to the discontinued operations based on the outstanding debt specifically identified with these businesses. We initially accounted for the planned divestiture of all the public utilities services properties as discontinued operations. Subsequently, we reclassified all of our gas (on September 30, 2000) and electric (on December 31, 2000) assets and their related liabilities to "assets held for sale" and "liabilities related to assets held for sale," respectively. We also reclassified the results of these operations from discontinued operations to their original income statement captions as part of continuing operations. Additionally, we ceased to record depreciation expense on the gas assets effective October 1, 2000 and on the electric assets effective January 1, 2001. Such depreciation expense would have been an additional $41,340,000 and $50,830,000 for the years ended December 31, 2002 and 2001, respectively. Summarized financial information for the water/wastewater operations (discontinued operations) is set forth below: ($ in thousands) For the years ended December 31, -------------- ---------------------------------- 2002 2001 2000 ---------- ---------- ---------- Revenue $ 4,650 $ 116,868 $ 105,202 Operating income (loss) (415) 37,211 27,415 Income taxes (benefit) (554) 8,947 5,721 Net income (loss) (1,478) 17,875 11,677 Gain on disposal of water segment, net of tax 181,369 - - F-14 Summarized balance sheet information for the gas and electric operations (assets held for sale) is set forth below:
($ in thousands) -------------- 2002 2001 -------------- --------------- Current assets $ 49,549 $ 66,511 Net property, plant and equipment 358,135 805,653 Other assets 40,080 235,773 -------------- --------------- Total assets held for sale $ 447,764 $ 1,107,937 ============== =============== Current liabilities $ 83,278 $ 71,259 Long-term debt - 43,400 Other liabilities 66,775 104,116 -------------- --------------- Total liabilities related to assets held for sale $ 150,053 $ 218,775 ============== ===============
(8) Investments: ------------ The components of investments at December 31, 2002 and 2001 are as follows: ($ in thousands) -------------- 2002 2001 ---------------- ---------------- Marketable equity securities $ 29,844 $ 139,188 Other fixed income securities 2 2,020 ---------------- ---------------- $ 29,846 $ 141,208 ================ ================ As of December 31, 2002, we owned 3,059,000 shares of Adelphia Communications Corp. (Adelphia) common stock. As a result of Adelphia's price declines and filing for bankruptcy, we recognized losses of $95,300,000 and $79,000,000 on our investment for the years ended December 31, 2002 and 2001, respectively, as the declines were determined to be other than temporary. As of June 30, 2002, we had written this investment down to zero, and therefore we have no additional exposure related to the market value of Adelphia stock. As of December 31, 2002, we owned 1,333,500 shares of D & E Communications common stock. As the result of an other than temporary decline in D & E's stock price, we recognized a loss of $16,400,000 on our investment for the year ended December 31, 2002. The following summarizes the adjusted cost, gross unrealized holding gains and losses and fair market value for investments.
($ in thousands) -------------- Adjusted Unrealized Holding Aggregate Fair --------------------------------- Investment Classification Cost Gains (Losses) Market Value ---------------- ---------------- ---------------- ---------------- As of December 31, 2002 - ----------------------- Available-for-Sale $ 14,452 $ 15,394 $ - $ 29,846 As of December 31, 2001 - ----------------------- Available-for-Sale $ 132,935 $ 11,896 $ (3,623) $ 141,208
Marketable equity securities for 2002 and 2001 include 2,305,908 common shares which represent an ownership of 19% of the equity in Hungarian Telephone and Cable Corp., a company of which our Chairman and Chief Executive Officer is a member of the Board of Directors. In addition, we hold 30,000 shares of non-voting convertible preferred stock, each share having a liquidation value of $70 per share and is convertible at our option into 10 shares of common stock. (9) Fair Value of Financial Instruments: ------------------------------------ The following table summarizes the carrying amounts and estimated fair values for certain of our financial instruments at December 31, 2002 and 2001. For the other financial instruments, representing cash, accounts receivables, long-term debt due within one year, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to the relatively short maturities of those instruments. F-15
($ in thousands) -------------- 2002 2001 ----------------------------------- --------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ---------------- ------------------ ---------------- ---------------- Investments $ 29,846 $ 29,846 $ 141,208 $ 141,208 Long-term debt (1) $ 4,957,361 $ 5,411,069 $ 5,534,906 $ 5,605,368 Equity Providing Preferred Income Convertible Securities (EPPICS) $ 201,250 $ 191,188 $ 201,250 $ 179,113
The fair value of the above financial instruments is based on quoted prices at the reporting date for those financial instruments. (1) Excludes the $460,000,000 debt portion of the equity units. (10) Long-term Debt: --------------- The activity in our long-term debt from December 31, 2001 to December 31, 2002 is summarized as follows:
Twelve Months Ended -------------------------------------------- Interest Rate* Interest at December 31, Rate Swap/ December 31, December 31, ($ in thousands) 2001 Borrowings Reclassification Payments*** 2002 2002 -------------- ------------ ---------- ---------------- ----------- ------------ ------------- FIXED RATE Rural Utilities Service Loan $ 110,860 $ - $ - $ (79,986) $ 30,874 6.210% Contracts Debentures 850,778 - - (103,881) 746,897 7.538% 2001 Notes 3,700,430 - 16,229 (25,676) 3,690,983 8.267% Equity Units 460,000 - - - 460,000 7.480% Senior Unsecured Notes 108,825 - - (37,825) 71,000 8.050% ELI Notes 325,000 - - (319,025) 5,975 6.232% ELI Capital Leases 137,382 1,512 - (3,694) 135,200 11.798% Industrial Development Revenue Bonds 249,205 - - (62,815) 186,390 6.091% Other 54 - - (14) 40 12.985% --------- ------- ------- --------- --------- TOTAL FIXED RATE 5,942,534 1,512 16,229 (632,916) 5,327,359 --------- ------- ------- --------- --------- VARIABLE RATE ELI Bank Credit Facility 400,000 - - (400,000) - 2.391% Industrial Development Revenue Bonds 136,278 - 43,400 ** (30,765) 148,913 3.563% --------- ------- ------- --------- --------- TOTAL VARIABLE RATE 536,278 - 43,400 (430,765) 148,913 --------- ------- ------- --------- --------- TOTAL LONG TERM DEBT $6,478,812 $ 1,512 $ 59,629 $(1,063,681) $5,476,272 ---------- ======= ========= ============ ---------- Less: Current Portion (483,906) (58,911) Less: Equity Units (460,000) (460,000) --------- --------- $5,534,906 $4,957,361 ========== ==========
* Interest rate includes amortization of debt issuance expenses, debt premiums or discounts. The interest rate for Rural Utilities Service Loan Contracts, Debentures, ILEC Senior Unsecured Notes, and Industrial Development Revenue Bonds represent a weighted average of multiple issuances. ** Reclassification from liabilities related to assets held for sale for liabilities retained after sale of certain public utilities operations. *** Includes purchases on the open market (see Note 13). Total future minimum cash payment commitments over the next 25 years under ELI's long-term capital leases amounted to $317,800,000 as of December 31, 2002. F-16 The total outstanding principal amounts of industrial development revenue bonds were $335,303,000 and $385,483,000 at December 31, 2002 and 2001, respectively. The earliest maturity date for these bonds is in August 2015. We have an available shelf registration of $825,600,000 and we have available lines of credit with financial institutions in the aggregate amount of $805,000,000. Associated facility fees vary, depending on our credit ratings, and are 0.25% per annum as of December 31, 2002. The expiration date for the facilities is October 24, 2006. During the term of the facilities we may borrow, repay and reborrow funds. As of December 31, 2002, there were no outstanding advances under these facilities. During the last three quarters of 2002, we executed a series of purchases in the open market of a number of our outstanding notes and debentures. The aggregate principal amount of notes and debentures purchased was $106,906,000 and they generated a pre-tax gain from the early extinguishment of debt at a discount of approximately $6,000,000 recorded in other income (loss), net. During December 2002, we completed a tender offer with respect to our 6.80% Debentures due 2026 (puttable at par in 2003) and ELI's 6.05% Guaranteed Notes due 2004. As a result of the tender, $82,286,000 and $259,389,000, respectively, of these securities were purchased and retired at a pretax cost of $12,800,000 in excess of the principal amount of the securities purchased. For the year ended December 31, 2002, we retired an aggregate principal amount of $1,063,681,000 of debt. In May 2001, we issued an aggregate of $1.75 billion of notes consisting of $700,000,000 principal amount of 8.50% notes due May 15, 2006 and $1.05 billion principal amount of 9.25% notes due May 15, 2011. On June 13, 2001, we issued 18,400,000 equity units at $25 per unit for net proceeds of $446,200,000 (after underwriting discounts and commissions and before offering expenses). Each equity unit initially consists of a 6.75% senior note due 2006 and a purchase contract (warrant) for our common stock. The purchase contract obligates the holder to purchase from us, no later than August 17, 2004 for a purchase price of $25, the following number of shares of our common stock: * 1.7218 shares, if the average closing price of our common stock over the 20-day trading period ending on the third trading day prior to August 17, 2004 equals or exceeds $14.52; * A number of shares having a value, based on the average closing price over that period, equal to $25, if the average closing price of our common stock over the same period is less than $14.25, but greater than $12.10; and * 2.0661 shares, if the average closing price of our common stock over the same period is less than or equal to $12.10. The fair market value of the warrants at the date of issuance was $4,968,000. This amount was recorded as debt discount and additional paid-in capital. The equity units trade on The New York Stock Exchange under the symbol "CZB." In August 2001, we issued an aggregate of $1.75 billion of notes consisting of $300,000,000 of 6.375% notes due 2004, $750,000,000 principal amount of 7.625% notes due 2008 and $700,000,000 principal amount of 9.000% notes due 2031. In October 2001, we borrowed $200,000,000 on an unsecured basis from the Rural Telephone Finance Cooperative (RTFC). This note is due on October 24, 2011 and has a fixed 6.27% rate of interest, payable quarterly. F-17 Our principal payments and capital lease payments (principal only) for the next five years are as follows: ($ in thousands) -------------- Principal Capital --------- -------------- Payments Lease Payments --------- -------------- 2003 $ 50,939 $ 7,972 2004 385,005 3,061 2005 933 3,391 2006 875,992 3,772 2007 1,056 4,203 Holders of certain industrial development revenue bonds may tender at par prior to maturity. The next tender date is August 1, 2007 for $30,350,000 of principal amount of bonds. We expect to remarket all such bonds which are tendered. If the proposed sale of our Arizona electric and gas properties to UniSource is completed we will be required to redeem $111,760,000 of industrial development revenue bonds promptly after the sale is completed. (11) Derivative Instruments and Hedging Activities: ---------------------------------------------- Interest rate swap agreements are used to hedge a portion of our debt that is subject to fixed interest rates. Under our interest rate swap agreements, we agree to pay an amount equal to a specified variable rate of interest times a notional principal amount, and to receive in return an amount equal to a specified fixed rate of interest times the same notional principal amount. The notional amounts of the contracts are not exchanged. No other cash payments are made unless the agreement is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination and represents the market value, at the then current rate of interest, of the remaining obligations to exchange payments under the terms of the contracts. The interest rate swap contracts are reflected at fair value in our consolidated balance sheet and the related portion of fixed-rate debt being hedged is reflected at an amount equal to the sum of its book value and an amount representing the change in fair value of the debt obligations attributable to the interest rate risk being hedged. Changes in the fair value of interest rate swap contracts, and the offsetting changes in the adjusted carrying value of the related portion of the fixed-rate debt being hedged, are recognized in the consolidated statements of operations in interest expense. The notional amounts of fixed-rate indebtedness hedged as of December 31, 2002 and December 31, 2001 was $250,000,000 and $100,000,000, respectively. Such contracts require us to pay variable rates of interest (average pay rate of approximately 4.85% as of December 31, 2002) and receive fixed rates of interest (average receive rate of 7.65% as of December 31, 2002). The fair value of these derivatives is reflected in other assets as of December 31, 2002, in the amount of $16,658,000 and the related underlying debt has been increased by a like amount. The amounts received during the year ended December 31, 2002 as a result of these contracts amounted to $3,820,000 and are included as a reduction of interest expense. We do not anticipate any nonperformance by counter parties to our derivative contracts as all counter parties have investment grade credit ratings. (12) Shareholder Rights Plan: ------------------------ On March 6, 2002, our Board of Directors adopted a Shareholder Rights Plan. The purpose of the Shareholder Rights Plan is to deter coercive takeover tactics and to encourage third parties interested in acquiring us to negotiate with our Board of Directors. It is intended to strengthen the ability of our Board of Directors to fulfill its fiduciary duties to take actions which are in the best interest of our shareholders. The rights were distributed to shareholders as a dividend at the rate of one right for each share of our common stock held by shareholders of record as of the close of business on March 26, 2002. Initially, the rights generally were exercisable only if a person or group acquired beneficial ownership of 15 percent or more of our common stock (the "Acquiror") without the consent of our independent directors. On January 21, 2003, our Board of Directors amended the terms of our Rights agreement increasing the level at which these rights will become exercisable to 20 percent of our common stock. Each right not owned by an Acquiror becomes the right to purchase our common stock at a 50 percent discount. F-18 (13) Changes in Accounting Principles: --------------------------------- In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141, "Business Combinations." This statement requires that all business combinations be accounted for under the purchase method of accounting. SFAS 141 requires that the purchase method of accounting be used for business combinations initiated after June 30, 2001 and prohibits the use of the pooling-of-interests method of accounting. We adopted SFAS No. 141 on July 1, 2001. The adoption of SFAS 141 did not have any impact on our financial position or results of operations. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement requires that goodwill and other intangibles with indefinite useful lives no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill and other intangibles with indefinite useful lives ceased upon adoption of the statement on January 1, 2002. We have no other intangibles with indefinite lives other than goodwill and trade name. We were required to test for impairment of goodwill and trade name as of January 1, 2002 and at least annually thereafter. Any transitional impairment loss at January 1, 2002 was recognized as the cumulative effect of a change in accounting principle in our statement of operations. During the first quarter of 2002, we reassessed the useful lives of our intangible assets with estimated useful lives and determined no change was required. We annually examine the carrying value of our goodwill and other identifiable intangibles (customer base and trade name) to determine whether there are any impairment losses and have determined for the year ended December 31, 2002 that there was no impairment except for goodwill related to ELI. SFAS No. 142 also requires that intangible assets with estimated useful lives be amortized over those lives and be reviewed for impairment in accordance with SFAS No. 144, "Accounting for Impairment or Disposal or Long-Lived Assets." The impact of the adoption of SFAS 142 is discussed in Note 6 to Consolidated Financial Statements. As a result of our adoption of SFAS 142, we recognized a transitional impairment loss of $39,800,000 on ELI as a cumulative effect of a change in accounting principle in our statement of operations in the first quarter of 2002. In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-lived Assets" (see Notes 1(g) and 4). In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the requirement that gains and losses from extinguishment of debt be required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. The statement requires gains and losses from extinguishment of debt to be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" which provides guidance for distinguishing transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. We adopted SFAS 145 in the second quarter of 2002. For the year ended December 31, 2002, we recognized $32,330,000 of gains from early debt retirement as well as a $12,800,000 loss due to a tender offer related to certain debt securities. There were no similar types of retirements in 2001. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and amends the disclosure requirements of SFAS No. 123. This statement is effective for fiscal years ending after December 15, 2002. We adopted the expanded disclosure requirements of SFAS No. 148. (14) Settlement of Retained Liabilities: ----------------------------------- We were actively pursuing the settlement of certain retained liabilities at less than face value, which are associated with customer advances for construction from our disposed water properties. For the year ended December 31, 2002, we recognized $26,330,000 in other income (loss), net, as a result of these settlements. (15) Global /WorldCom Receivables: ----------------------------- During the second quarter 2002, we reserved approximately $21,600,000 of trade receivables with WorldCom as a result of WorldCom's filing for bankruptcy. These receivables were generated as a result of providing ordinary course telecommunications services. The $21,600,000 charge was partially offset by reversals in our Global reserve as discussed below. F-19 Concurrent with the acquisition of Frontier, we entered into several operating agreements with Global. We have ongoing commercial relationships with Global affiliates. We reserved a total of $29,000,000 of Global receivables to reflect our best estimate of the net realizable value of receivables incurred from these commercial relationships during 2001 and 2002 as a result of Global's filing for bankruptcy. We recorded a write-down of such receivables in the amount of $7,800,000 in the first quarter 2002 and $21,200,000 in the fourth quarter of 2001. In 2002, as the result of a settlement agreement with Global, we reversed $17,900,000 of our previous reserve of the net realizable value of these receivables. Prior to the date of Global's bankruptcy filing, we provided ordinary course telecommunications services as well as transitional services to Global. Global has provided us certain customer billing and collection functions as well as other transitional services. Although some of these arrangements have continued after the bankruptcy filing, we are in the process of changing some services and functions to provide them ourselves. The Bankruptcy Court has granted relief to us and other telecommunications companies that provide service to Global by, among other things, directing a shortened payment period with respect to post-petition invoices, an expedited court process for post-petition defaults in payments by Global, and a priority for post-petition expense items over other unsecured debt. These procedures should minimize future economic loss to us although we cannot guarantee that additional losses will not occur. (16) Company Obligated Mandatorily Redeemable Convertible Preferred -------------------------------------------------------------- Securities: ----------- In 1996, our consolidated wholly-owned subsidiary, Citizens Utilities Trust (the Trust), issued, in an underwritten public offering, 4,025,000 shares of 5% Company Obligated Mandatorily Redeemable Convertible Preferred Securities due 2036 (Trust Convertible Preferred Securities or EPPICS), representing preferred undivided interests in the assets of the Trust, with a liquidation preference of $50 per security (for a total liquidation amount of $201,250,000). The proceeds from the issuance of the Trust Convertible Preferred Securities and a Company capital contribution were used to purchase $207,475,000 aggregate liquidation amount of 5% Partnership Convertible Preferred Securities due 2036 from another wholly owned consolidated subsidiary, Citizens Utilities Capital L.P. (the Partnership). The proceeds from the issuance of the Partnership Convertible Preferred Securities and a Company capital contribution were used to purchase from us $211,756,000 aggregate principal amount of 5% Convertible Subordinated Debentures due 2036. The sole assets of the Trust are the Partnership Convertible Preferred Securities and our Convertible Subordinated Debentures are substantially all the assets of the Partnership. Our obligations under the agreements related to the issuances of such securities, taken together, constitute a full and unconditional guarantee by us of the Trust's obligations relating to the Trust Convertible Preferred Securities and the Partnership's obligations relating to the Partnership Convertible Preferred Securities. In accordance with the terms of the issuances, we paid the 5% interest on the Convertible Subordinated Debentures in 2002, 2001 and 2000. During 2002 and 2001, only cash was paid to the Partnership in payment of the interest on the Convertible Subordinated Debentures. The cash was then distributed by the Partnership to the Trust and then by the Trust to the holders of the EPPICS. (17) Capital Stock: -------------- We are authorized to issue up to 600,000,000 shares of Common Stock. The amount and timing of dividends payable on Common Stock are within the sole discretion of our Board of Directors. Between December 1999 and April 2000, our Board of Directors authorized the purchase of up to $200,000,000 worth of shares of our common stock. This share purchase program was completed in July 2000 and resulted in the acquisition or contract to acquire approximately 12,092,000 shares of our common stock. Of those shares, 2,952,000 shares were purchased for approximately $49,209,000 in cash and we entered into an equity forward contract for the acquisition of the remaining 9,140,000 shares. During 2000, we entered into a forward contract to purchase 9,140,000 shares of our common stock with Citibank, N.A. These purchases and others made by us for cash during 2000 were made in open-market transactions. The forward amount to be paid in the future included a carrying cost, based on LIBOR plus a spread, and the dollar amount paid for the shares purchased. Our equity forward contract was a temporary financing arrangement that gave us the flexibility to purchase our stock and pay for those purchases in future periods. Pursuant to transition accounting rules, commencing December 31, 2000 through June 30, 2001 we were required to report our equity forward contract as a reduction to shareholders' equity and as a component of temporary equity for the gross settlement amount of the contract ($150,013,000). On June 28, 2001, we entered into a master confirmation agreement that amended the equity forward contract to no longer permit share settlement of the contract. In 2001, we settled the contract by paying the redemption amount of $150,013,000 plus $13,650,000 in associated carrying costs and took possession of our shares. F-20 In addition to our share purchase programs described above, in April 2000, our Board of Directors authorized the purchase, from time to time, of up to $25,000,000 worth of shares of Class A common stock of ELI, in the open market or in negotiated transactions. This ELI share purchase program was completed in August 2000 and resulted in the acquisition of approximately 1,288,000 shares of ELI common stock for approximately $25,000,000 in cash. In August 2000, our Board of Directors authorized the purchase, from time to time, of up to an additional 1,000,000 shares of ELI on the open market or in negotiated transactions. The second ELI share purchase program was completed in September 2000 and resulted in the acquisition of approximately 1,000,000 shares of ELI common stock for approximately $13,748,000 in cash. (18) Stock Plans: ------------ At December 31, 2002, we have four stock based compensation plans which are described below. We apply APB Opinion No. 25 and related interpretations in accounting for the employee stock plans resulting in the use of the intrinsic value to value the stock option. Compensation cost has not generally been recognized in the financial statements for options issued pursuant to the Management Equity Incentive Plan (MEIP), or Equity Incentive Plan (EIP), as the exercise price for such options was equal to the market price of the stock at the time of grant. However, during 2002 the expiration date of approximately 79,000 options was extended and compensation cost of approximately $219,700 was recognized. No compensation cost has been recognized in the financial statements related to the Employee Stock Purchase Plan (ESPP) because the purchase price is 85% of the fair value. Compensation cost, recognized in operating expense, for our Directors' Deferred Fee Equity Plan was $607,151, $741,438 and $691,956 in 2002, 2001 and 2000, respectively. We have granted restricted stock awards to key employees in the form of our Common Stock. The number of shares issued as restricted stock awards during 2002, 2001 and 2000 were 538,000, 100,000 and 3,120,000, respectively. None of the restricted stock awards may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employees until the restrictions lapse. The restrictions are both time and performance based. At December 31, 2002, 3,171,000 shares of restricted stock were outstanding. Compensation expense, recognized in operating expense, of $7,029,000, $8,967,000 and $9,084,000 for the years ended December 31, 2002, 2001 and 2000, respectively, has been recorded in connection with these grants. Had we determined compensation cost based on the fair value at the grant date for the MEIP, EIP and ESPP, our pro forma net loss and net loss per common share would have been as follows:
2002 2001 2000 ($ in thousands) --------------- --------------- -------------- -------------- Net loss As reported $ (682,897) $ (89,682) $ (28,394) Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 4,660 7,136 6,150 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (16,665) (35,971) (29,026) ----------- ---------- ---------- Pro forma (694,902) (118,517) (51,270) =========== ========== ========== Net loss per common share As reported: Basic $ (2.43) $ (0.38) $ (0.11) Diluted (2.43) (0.38) (0.11) Pro forma: Basic $ (2.48) $ (0.48) $ (0.20) Diluted (2.48) (0.48) (0.20)
F-21 The full impact of calculating compensation cost for stock options is not reflected in the pro forma amounts above because pro forma compensation cost only includes costs associated with the vested portion of options granted pursuant to the MEIP, EIP and ESPP on or after January 1, 1995. Management Equity Incentive Plan -------------------------------- Under the MEIP, awards of our Common Stock may be granted to eligible officers, management employees and non-management employees in the form of incentive stock options, non-qualified stock options, stock appreciation rights (SARs), restricted stock or other stock-based awards. The Compensation Committee of the Board of Directors administers the MEIP. Since the expiration date of the MEIP plan on June 21, 2000, no awards can be granted under the MEIP. The exercise price of stock options issued were equal to or greater than the fair market value of the underlying common stock on the date of grant. Stock options are generally not exercisable on the date of grant but vest over a period of time. Under the terms of the MEIP, subsequent stock dividends and stock splits have the effect of increasing the option shares outstanding, which correspondingly decreases the average exercise price of outstanding options. F-22 Equity Incentive Plan --------------------- In May 1996, our shareholders approved the 1996 EIP and in May 2001, our shareholders approved the 2001 EIP. Under the EIP plans, awards of our Common Stock may be granted to eligible officers, management employees and non-management employees in the form of incentive stock options, non-qualified stock options, SARs, restricted stock or other stock-based awards. The Compensation Committee of the Board of Directors administers the EIP. The maximum number of shares of common stock which may be issued pursuant to awards at any time for both plans is 25,358,000 shares, which has been adjusted for subsequent stock dividends. No awards will be granted more than 10 years after the effective dates (May 23, 1996 and May 17, 2001) of the EIP plans. The exercise price of stock options and SARs shall be equal to or greater than the fair market value of the underlying common stock on the date of grant. Stock options are generally not exercisable on the date of grant but vest over a period of time. Under the terms of the EIP, subsequent stock dividends and stock splits have the effect of increasing the option shares outstanding, which correspondingly decrease the average exercise price of outstanding options. The following is a summary of share activity subject to option under the MEIP and EIP.
Weighted Shares Average Subject to Option Price Option Per Share ------------------------------------------------------------ ------------------- ----------------- Balance at January 1, 2000 16,860,000 $ 9.29 Options granted 5,784,000 13.32 Options exercised (4,126,000) 9.53 Options canceled, forfeited or lapsed (897,000) 9.49 ------------------------------------------------------------ ------------------- Balance at December 31, 2000 17,621,000 10.72 Options granted 3,969,000 13.62 Options exercised (1,728,000) 8.25 Options canceled, forfeited or lapsed (805,000) 11.45 ------------------------------------------------------------ ------------------- Balance at December 31, 2001 19,057,000 11.87 Options granted 3,065,000 9.53 Options exercised (812,000) 7.90 Options canceled, forfeited or lapsed (2,178,000) 11.94 ------------------------------------------------------------ ------------------- Balance at December 31, 2002 19,132,000 $ 11.66 ============================================================ ===================
The following table summarizes information about shares subject to options under the MEIP and EIP at December 31, 2002. Options Outstanding Options Exercisable --------------------------------------------------------------------------------- --------------------------------- Weighted Average Weighted Number Range of Weighted Average Remaining Number Average Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise price ------------------ -------------------- -------------------- -------------------- ----------------- --------------- 14,000 $ 4.00 - 5.00 $ 4.29 1.73 14,000 $ 4.29 1,479,000 6.00 - 7.50 7.50 6.25 1,464,000 7.50 3,248,000 7.72 - 8.53 8.09 4.25 3,227,000 8.09 110,000 9.18 - 9.38 9.26 6.29 70,000 9.31 2,834,000 9.52 - 9.52 9.52 9.37 503,000 9.52 2,182,000 10.24 - 11.41 10.79 4.11 2,182,000 10.79 1,451,000 12.37 - 12.91 12.62 4.29 1,138,000 12.61 2,069,000 12.97 - 12.97 12.97 7.09 1,514,000 12.97 545,000 13.06 - 13.47 13.44 7.77 524,000 13.45 2,408,000 13.71 - 13.71 13.71 8.33 621,000 13.71 2,792,000 13.75 - 21.47 17.42 6.51 941,000 14.92 ------------------ ----------------- 19,132,000 $ 4.00 - 21.47 $ 11.66 6.00 12,198,000 $ 10.63 ================== ================= The number of options exercisable at December 31, 2001 and 2000 were 10,676,342 and 8,839,000, respectively.
F-23 The weighted average fair value of options granted during 2002, 2001 and 2000 were $4.98, $6.00 and $6.31, respectively. For purposes of the pro forma calculation, the fair value of each option grant is estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000: 2002 2001 2000 --------------------------- --------------- -------------- -------------- Dividend yield - - - Expected volatility 44% 36% 30% Risk-free interest rate 4.94% 5.10% 5.82% Expected life 7 years 6 years 6 years --------------------------- --------------- -------------- -------------- Employee Stock Purchase Plan ---------------------------- Our ESPP was approved by shareholders on June 12, 1992 and amended on May 22, 1997. Under the ESPP, eligible employees have the right to subscribe to purchase shares of our Common Stock at 85% of the average of the high and low market prices on the last day of the purchase period. An employee may elect to have up to 50% of annual base pay withheld in equal installments throughout the designated payroll-deduction period for the purchase of shares. The value of an employee's subscription may not exceed $25,000 in any one calendar year and the minimum contribution each purchase period is $50.00. Active employees are required to hold their shares for three years from the date of each purchase period. An employee may not participate in the ESPP if such employee owns stock possessing 5% or more of the total combined voting power or value of our capital stock. As of December 31, 2002, there were 6,407,000 shares of Common Stock reserved for issuance under the ESPP. These shares may be adjusted for any future stock dividends or stock splits. The ESPP will terminate when all shares reserved have been subscribed for and purchased, unless terminated earlier or extended by the Board of Directors. The Compensation Committee of the Board of Directors administers the ESPP. Effective November 30, 2002, the employee stock purchase plan was temporarily suspended for future purchase periods. In 2002, 146,406 shares were purchased under the ESPP and 4,072,647 shares were outstanding as of date of suspension. For purposes of the pro forma calculation, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black Scholes option pricing model with the following assumptions for subscription periods beginning in 2002, 2001 and 2000: 2002 2001 2000 ------------- ------------- ------------- Dividend yield - - - Expected volatility 44% 36% 30% Risk-free interest rate 1.93% 2.71% 6.23% Expected life 6 months 6 months 6 months The weighted average fair value of those purchase rights granted in 2002, 2001 and 2000 was $2.57, $2.39, and $3.26, respectively. Directors' Deferred Fee Equity Plan ----------------------------------- Effective June 30, 2000, the annual cash retainer paid to non-employee directors was eliminated. Instead, each non-employee director was required to elect, by August 1, 2000, to receive as an annual retainer either 2,500 stock units or 10,000 stock options. Starting in July 2001, the Board of Directors restored the ability of the non-employee directors to receive the annual retainer in cash. Each non-employee director must now elect, by December 1 of the prior year, to receive either $30,000 cash, 5,000 stock units or 20,000 stock options as an annual retainer. Directors making a stock unit election must also elect to receive payment in either stock or cash upon retirement from the Board of Directors. Stock options have an exercise price of the fair market value on the date of grant, are exercisable six months after the date of grant and have a 10-year term. The Formula Plan described below also remains in effect until its expiration in 2012. For 2002, each non-employee director received fees of $2,000 for each Board of Directors and committee meeting attended. In addition, committee chairs receive an additional fee of $5,000 per annum, paid quarterly. From January 1, 2000 through June 30, 2000, the non-employee directors could choose to receive their fees in either stock or stock units or a combination of those two options. Effective July 2001, non-employee directors have the choice to receive their fees paid in cash, stock, or stock units or a combination of two of those three options. If stock was elected, the stock was granted at the average of the high and low on the first trading date of the year (Initial Market Value). If stock units were elected, they were purchased at 85% of the Initial Market Value. Stock units (except in an event of hardship) are held by us until retirement or death. If Final Market Value (the average of the high and low prices of the stock on the last trading day of November) is less than Initial Market Value, the number of shares of stock or stock units will be adjusted based on Final Market Value. F-24 The Formula Plan, which commenced in 1997 and continues through 2012, provides each Director options to purchase 5,000 shares of common stock. The exercise price of the options granted under the Formula Plan is 100% of the average of the fair market values on the third, fourth, fifth, and sixth trading days of the year in which the options are granted. The options are exercisable six months after the grant date and remain exercisable for ten years after the grant date. In addition, on September 1, 1996, each non-employee director was granted options to purchase 2,500 shares of common stock. As of any date, the maximum number of shares of common stock which the Plan was obligated to deliver pursuant to the Directors' Plan shall not be more than one percent (1%) of the total outstanding shares of our common stock as of such date, subject to adjustment in the event of changes in our corporate structure affecting capital stock. There were 11 directors participating in the Directors' Plan during all or part of 2002. In 2002, the total options, plan units and stock earned were 99,583, 43,031 and 1,514, respectively. In 2001, the total options, plan units and stock earned were 90,000, 55,285 and 1,321, respectively. In 2000, the total Options, Plan Units and stock earned were 100,000, 42,017 and 2,860, respectively. At December 31, 2002, 1,538,868 options were exercisable at a weighted average exercise price of $10.70. We had also maintained a Non-Employee Directors' Retirement Plan providing for the payment of specified sums annually to our non-employee directors, or their designated beneficiaries, starting at the director's retirement, death or termination of directorship. In 1999, we terminated this Plan. The vested benefit of each non-employee director, as of May 31, 1999, was credited in the form of stock units. Such benefit will be payable to each director upon retirement, death or termination of directorship. Each participant had until July 15, 1999 to elect whether the value of the stock units awarded would be payable in our common stock (convertible on a one for one basis) or in cash. As of December 31, 2002, the liability for such payments was $2,425,000 of which $1,294,000 will be payable in stock (based on the July 15, 1999 stock price) and $1,131,000 will be payable in cash. While the number of shares of stock payable to those directors electing to be paid in stock is fixed, the amount of cash payable to those directors electing to be paid in cash will be based on the number of stock units awarded multiplied by the stock price on the payment date. (19) Restructuring and Other Expenses: --------------------------------- 2002 ---- Restructuring and other expenses primarily consist of expenses related to our various restructurings, $32,985,000 related to reductions in personnel at our telecommunications operations, costs that were spent at our Plano, Texas facility and at other locations as a result of transitioning functions and jobs, and $6,800,000 related to our tender offer in June 2002 for all of the publicly held ELI common shares that we did not already own. These costs were partially offset by a $2,825,000 reversal of a 2001 ELI accrual discussed below. 2001 ---- During 2001, we examined all aspects of our business operations and our facilities to take advantage of operational and functional synergies between Frontier and the original Citizens businesses. We continue to review our operations, personnel and facilities to achieve greater efficiency. Plano Restructuring Pursuant to a plan adopted in the third quarter of 2001, we closed our operations support center in Plano, Texas in August 2002. In connection with this plan, we recorded a pre-tax charge of $14,557,000 in the second half of 2001, $839,000 in the first quarter of 2002 and we adjusted our accrual down by $92,000 and $561,000 in the second and third quarter of 2002, respectively. Our objective is to concentrate our resources in areas where we have the most customers, to better serve those customers. We sold our Plano office building in 2003. The restructuring resulted in the termination of 750 employees. We communicated with all affected employees during July 2001. Certain employees were relocated, others were offered severance, job training and/or outplacement counseling. As of December 31, 2002, approximately $14,730,000 was paid and all affected employees were terminated. The restructuring expenses primarily consist of severance benefits, retention earned through December 31, 2002, and other planning and communication costs. F-25 Sacramento Call Center Restructuring In April 2002, we closed our Sacramento Customer Care Center pursuant to a plan adopted in the fourth quarter of 2001. In connection with this closing, we recorded a pre-tax charge of $731,000 in the fourth quarter of 2001, $62,000 and $9,000 in the first and second quarter of 2002, respectively. We redirected the call traffic and other work activities to our Kingman, Arizona call center. This restructuring resulted in the elimination of 98 employees. We communicated with all affected employees during November 2001. As of December 31, 2002, approximately $802,000 was paid and all affected employees were terminated and no accrual remained. ELI Restructuring In the first half of 2002, ELI redeployed the Internet routers, frame relay switches and ATM switches from the Atlanta, Cleveland, Denver, Philadelphia and New York markets to other locations in ELI's network pursuant to a plan adopted in the fourth quarter of 2001. ELI ceased leasing the collocation facilities and off-net circuits for the backbone and local loops supporting the service delivery in these markets. It was anticipated that this would lead to $4,179,000 of termination fees which were accrued for but not paid at December 31, 2001. During 2002, ELI adjusted its original accrual down by $2,825,000 due to the favorable settlements of termination charges for off-net circuit agreements. As of December 31, 2002, $1,354,000 has been paid and no accrual remained. Tender Offer During May 2002, we announced a tender offer for all of the shares of ELI that we did not already own for a price of $0.70 per share. We completed the tender offer in June 2002. As a result, ELI became a wholly-owned subsidiary, for total costs and expenses of approximately $6,800,000. We accounted for this transaction as a purchase and allocated the entire amount to goodwill. We evaluated the recoverability of this goodwill in accordance with SFAS No. 142 and determined that a write-off was necessary based on fair market value as determined by discounted cash flows and other valuation methodologies. This charge is included in restructuring and other expenses. 1999 ---- In the fourth quarter of 1999, we adopted a plan to restructure our corporate office activities. In connection with this plan, we recorded a pre-tax charge of $5,760,000 in the fourth quarter of 1999. The restructuring resulted in the reduction of 49 corporate employees. All affected employees were communicated with in the early part of November 1999. As of June 30, 2002, approximately $4,602,000 has been paid, 43 employees were terminated and 6 employees who were expected to be terminated took other positions within the Company. At June 30, 2002, December 31, 2001 and December 31, 2000, we adjusted our original accrual down by $11,000, $139,000 and $1,008,000, respectively, and no accrual remained as of June 30, 2002. F-26 The following tables display rollforwards of the accruals established for restructuring expenses by plan:
($ in thousands) -------------- 2001 Severance Benefits Retention Other Total ----------------- ------------ ------------------------ ------------- 2001 Plano Restructuring Original accrued amount $ 9,353 $ 1,535 $ 1,178 $ 936 $ 13,002 Amount paid (1,386) (35) (80) (177) (1,678) Additional accrual 551 - 1,793 27 2,371 Adjustments (325) (104) (64) (323) (816) ----------------- ------------ ------------------------ ------------- Accrued @ 12/31/2001 8,193 1,396 2,827 463 12,879 ----------------- ------------ ------------------------ ------------- Amount paid (7,599) (1,355) (3,752) (346) (13,052) Additional accrual 65 - 1,150 - 1,215 Adjustments (659) (28) (225) (117) (1,029) ----------------- ------------ ------------------------ ------------- Accrued @ 12/31/2002 $ - $ 13 $ - $ - $ 13 ================= ============ ======================== ============= 2001 Sacramento Call Center Restructuring Accrued @ 12/31/2001 $ 552 $ 94 $ 85 $ - $ 731 Amount paid (529) (83) (190) - (802) Additional accrual 45 - 116 - 161 Adjustments (68) (11) (11) - (90) ----------------- ------------ ------------------------ ------------- Accrued @ 12/31/2002 $ - $ - $ - $ - $ - ================= ============ ======================== ============= ELI 2001 Restructuring Accrued @ 12/31/2001 $ - $ - $ - $ 4,179 $ 4,179 Amount paid - - - (1,354) (1,354) Additional accrual - - - - - Adjustments - - - (2,825) (2,825) ----------------- ------------ ------------------------ ------------- Accrued @ 12/31/2002 $ - $ - $ - $ - $ - ================= ============ ======================== ============= Original Accrued Amount Accrual Remaining 1999 Amount Paid to Date Adjustments Accrual ----------------- ------------- ------------ ------------ 1999 Corporate Office Restructuring For the year ended December 31, 2000 5,539 (3,993) (1,008) 538 For the year ended December 31, 2001 538 (199) (139) 200 For the year ended December 31, 2002 200 (189) (11) -
(20) Income Taxes: ------------- The following is a reconciliation of the provision for income taxes for continuing operations computed at federal statutory rates to the effective rates:
2002 2001 2000 ------------- ------------ ------------ Consolidated tax provision at federal statutory rate 35.0% 35.0% 35.0% State income tax (provisions) benefit, net of federal income tax benefit 1.3% -10.8% -6.4% Write-off of regulatory assets -2.6% -11.7% 0.0% Nontaxable investment income 0.0% 2.6% 5.4% Flow through depreciation -0.1% -0.5% -8.5% Tax reserve adjustment 0.0% 1.0% -5.6% Minority interest 0.0% 0.0% 8.7% All other, net 0.1% 4.8% 3.7% ------------- ------------ ------------ 33.7% 20.4% 32.3% ============= ============ ============
As of December 31, 2002 and 2001, accumulated deferred income taxes amounted to $136,356,000 and $423,486,000, respectively, and the unamortized deferred investment tax credits amounted to $760,000 and $6,058,000, respectively. F-27 The components of the net deferred income tax liability (asset) at December 31 are as follows:
($ in thousands) 2002 2001 -------------- ------------- ------------ Deferred income tax liabilities: Property, plant and equipment basis differences $ 229,135 $ 492,712 Deferred energy commodity charges 51,633 30,421 Gain on subsidiary stock IPO - 30,246 Other, net 50,055 97,087 ------------- ------------ 330,823 650,466 ------------- ------------ Deferred income tax assets: Minimum pension liability 69,209 - Tax operating loss carryforward 193,329 126,597 Alternate minimum tax credit carryforward 49,864 69,836 Other, net 57,242 82,167 ------------- ------------ 369,644 278,600 ------------- ------------ Net deferred income tax liability (asset) $ (38,821) $ 371,866 ============= ============ Deferred tax assets and liabilities are reflected in the following captions on the balance sheet: Income taxes accrued $ (8,708) $ 46,186 Deferred income taxes 137,116 429,544 Other current assets - (103,864) Other assets (167,229) - ------------- ------------ Net deferred income tax liability (asset) $ (38,821) $ 371,866 ============= ============
Our federal and state tax operating loss carryforwards as of December 31, 2002 are $477,798,000 and $344,194,000, respectively. Our federal loss carryforward will begin to expire in the year 2020. A portion of our state loss carryforward will begin to expire in 2006. Our alternative minimum tax credit as of December 31, 2002 can be carried forward indefinitely to reduce future regular tax liability. This benefit is presented as a reduction of accrued income taxes. F-28 The provision (benefit) for federal and state income taxes, as well as the taxes charged or credited to shareholders' equity, includes amounts both payable currently and deferred for payment in future periods as indicated below:
($ in thousands) -------------- 2002 2001 2000 ------------- ------------ ------------ Income taxes charged (credited) to the income statement for continuing operations: Current: Federal $ (159,844) $ (37,003) $ (66,759) State (2,562) 5,168 (2,588) ------------- ------------ ------------ Total current (162,406) (31,835) (69,347) Deferred: Federal (230,388) 10,791 46,647 Investment tax credits (352) (649) (931) State (21,728) 6,888 7,499 ------------- ------------ ------------ Total deferred (252,468) 17,030 53,215 ------------- ------------ ------------ Subtotal (414,874) (14,805) (16,132) Income taxes charged (credited) to the income statement for discontinued operations: Current: Federal 169,246 5,093 2,749 State 11,328 774 418 ------------- ------------ ------------ Total current 180,574 5,867 3,167 Deferred: Federal (39,904) 2,726 2,260 Investment tax credits - (332) (326) State (5,921) 686 620 ------------- ------------ ------------ Total deferred (45,825) 3,080 2,554 ------------- ------------ ------------ Subtotal 134,749 8,947 5,721 Income tax benefit on dividends on convertible preferred securities: Current: Federal (3,344) (3,344) (3,344) State (508) (508) (508) ------------- ------------ ------------ Subtotal (3,852) (3,852) (3,852) Income taxes charged (credited) to the income statement for extraordinary expense - Discontinuation of Statement of Financial Accounting Standards No. 71: Deferred: Federal - 15,500 - State - 6,157 - ------------- ------------ ------------ Subtotal - 21,657 - ------------- ------------ ------------ Total income taxes charged to the income statement (a) (283,977) 11,947 (14,263) Income taxes charged (credited) to shareholders' equity: Deferred income taxes (benefits) on unrealized gains or losses on securities classified as available-for-sale 2,726 2,908 (8,997) Current benefit arising from stock options exercised (720) (3,001) (7,392) Deferred income taxes (benefits) arising from recognition of a minimum pension liability (69,209) - - ------------- ------------ ------------ Income taxes charged (credited) to shareholders' equity (b) (67,203) (93) (16,389) ------------- ------------ ------------ Total income taxes: (a) plus (b) $ (351,180) $ 11,854 $ (30,652) ============= ============ ============
F-29 (21) Net Income (Loss) Per Common Share: ----------------------------------- The reconciliation of the net income (loss) per common share calculation for the years ended December 31, 2002, 2001 and 2000 is as follows:
(In thousands, except per-share amounts) -------------------------------------- 2002 2001 ------------------------------------- ------------------------------------- Weighted Weighted Average Average Loss Shares Per Share Loss Shares Per Share ------------------------------------- ------------- ----------- ----------- Net loss per common share: Basic $(682,897) 280,686 $ (89,682) 273,721 Carrying cost of equity forward contracts - - 13,650 - -------------------------- ------------- ----------- Available for common shareholders $(682,897) 280,686 $ (2.43) $(103,332) 273,721 $ (0.38) Effect of dilutive shares - 3,887 - 5,859 -------------------------- ------------- ----------- Diluted $(682,897) 284,573 $ (2.43) $(103,332) 279,580 $ (0.38) ========================== ============= =========== 2000 ----------------------------------- Weighted Average Loss Shares Per Share ----------------------------------- Net loss per common share: Basic $(28,394) 260,767 Carrying cost of equity forward contracts - - ---------------------- Available for common shareholders $(28,394) 260,767 $ (0.11) Effect of dilutive shares - 10,149 ---------------------- Diluted $(28,394) 270,916 $ (0.11) ========================
All share amounts represent weighted average shares outstanding for each respective period. The diluted net income (loss) per common share calculation excludes the effect of potentially dilutive shares when their exercise price exceeds the average market price over the period. We have 4,025,000 shares of potentially dilutive Mandatorily Redeemable Convertible Preferred Securities which are convertible into common stock at a 3.76 to 1 ratio at an exercise price of $13.30 per share and 14,391,000 potentially dilutive stock options at a range of $9.18 to $21.47 per share. We also have 18,400,000 potentially dilutive equity units. Each equity unit initially consists of a 6.75% senior note due 2006 and a purchase contract (warrant) for our common stock. These items were not included in the diluted net income (loss) per common share calculation for any of the above periods as their effect was antidilutive. Restricted stock awards of 1,004,000, 1,232,000 and 829,000 shares at December 31, 2002, 2001 and 2000 respectively, are excluded from our basic weighted average shares outstanding and included in our dilutive shares until the shares are no longer contingent upon the satisfaction of all specified conditions. (22) Comprehensive Income (Loss): ---------------------------- Comprehensive income consists of net income and other gains and losses affecting shareowners' investment and minimum pension liability that, under GAAP, are excluded from net income. F-30 Our other comprehensive income (loss) for the years ended December 31, 2002, 2001 and 2000 is as follows:
2002 -------------------------------------------- Before-Tax Tax Expense/ Net-of-Tax ($ in thousands) Amount (Benefit) Amount -------------- ------------- -------------- ------------- Net unrealized losses on securities: Net unrealized holding losses arising during period $(101,137) $ (38,078) $ (63,059) Minimum pension liability (180,799) (69,210) (111,589) Add: Reclassification adjustments for net gain/ losses realized in net loss 108,376 40,804 67,572 ------------- -------------- ------------- Other comprehensive loss $(173,560) $ (66,484) $(107,076) ============= ============== ============= 2001 -------------------------------------------- Before-Tax Tax Expense/ Net-of-Tax ($ in thousands) Amount (Benefit) Amount -------------- ------------- -------------- ------------- Net unrealized losses on securities: Net unrealized holding losses arising during period $ (70,771) $ (27,015) $ (43,756) Add: Reclassification adjustments for net losses realized in net loss 78,168 29,923 48,245 ------------- -------------- ------------- Other comprehensive income $ 7,397 $ 2,908 $ 4,489 ============= ============== ============= 2000 -------------------------------------------- Before-Tax Tax Expense/ Net-of-Tax ($ in thousands) Amount (Benefit) Amount -------------- ------------- -------------- ------------- Net unrealized gains on securities: Net unrealized holding gains arising during period $ (40,377) $ (15,457) $ (24,920) Less: Reclassification adjustments for net gains realized in net income 16,875 6,460 10,415 ------------- -------------- ------------- Other comprehensive loss $ (23,502) $ (8,997) $ (14,505) ============= ============== =============
(23) Segment Information: -------------------- We operate in four segments, ILEC, ELI (a CLEC), gas and electric. The ILEC segment provides both regulated and unregulated communications services to residential, business and wholesale customers and is typically the incumbent provider in its service areas. Our gas and electric segments are intended to be sold and are classified as "assets held for sale" and "liabilities related to assets held for sale." As an ILEC, we compete with CLECs that may operate in our markets. As a CLEC, we provide telecommunications services, principally to businesses, in competition with the incumbent ILEC. As a CLEC, we frequently obtain the "last mile" access to customers through arrangements with the applicable ILEC. ILECs and CLECs are subject to different regulatory frameworks of the Federal Communications Commission (FCC). Our ILEC operations and ELI do not compete with each other in any individual market. F-31
($ in thousands) For the year ended December 31, 2002 -------------- -------------------------------------------------------- Total ILEC ELI Gas Electric Segments --------- --------- --------- --------- --------- Revenue $2,062,905 $ 175,079 $ 216,517 $ 214,831 $ 2,669,332 Depreciation and Amortization 643,123 112,035 148 216 755,522 Reserve for Telecommunications Bankruptcies 10,446 434 - - 10,880 Restructuring and Other Expenses 30,054 7,132 - - 37,186 Loss on Impairment - 656,658 152,300 265,100 1,074,058 Operating Income (Loss) 413,241 (759,161) (119,579) (222,090) (687,589) Capital Expenditures, net 288,823 122,003 (1) 21,035 18,625 (3) 450,486 Assets 6,675,928 214,252 389,737 58,027 7,337,944 ($ in thousands) For the year ended December 31, 2001 -------------- -------------------------------------------------------- Total ILEC ELI Gas Electric Segments --------- --------- --------- ---------- ---------- Revenue $1,594,053 $ 223,391 $ 411,534 $ 228,015 $ 2,456,993 Depreciation and Amortization 545,273 80,020 609 6,434 632,336 Reserve for Telecommunications Bankruptcies 21,200 - - - 21,200 Restructuring and Other Expenses 15,148 4,179 - - 19,327 Operating Income (Loss) 220,956 (71,165) 47,916 35,335 233,042 Capital Expenditures, net 391,377 28,233 (2) 34,138 32,706 486,454 Assets 7,072,288 902,348 441,654 666,283 9,082,573 ($ in thousands) For the year ended December 31, 2000 -------------- --------------------------------------------------------- Total ILEC ELI Gas Electric Segments --------- --------- --------- ---------- ------------ Revenue $ 963,743 $ 240,792 $ 374,751 $ 223,072 $ 1,802,358 Depreciation and Amortization 276,250 63,500 19,228 28,629 387,607 Restructuring and Other Expenses (649) - - - (649) Operating Income (Loss) 157,896 (59,589) 8,268 15,226 121,801 Capital Expenditures, net 350,209 112,285 (2) 51,457 29,482 543,433 Assets 3,558,562 949,774 692,351 589,801 5,790,488
(1) Includes $110,000,000 of previously leased facilities purchased by ELI in April 2002. (2) Does not include approximately $33,985,000 and $102,192,000 of non-cash ELI capital lease additions in 2001 and 2000, respectively. (3) Does not include approximately $38,000,000 of non-cash capital lease additions. F-32 The following tables are reconciliations of certain sector items to the total consolidated amount. ($ in thousands) For the years ended December 31, -------------- 2002 2001 2000 --------- --------- --------- Capital expenditures Total segment capital expenditures $ 450,486 $ 486,454 $ 543,433 General capital expenditures 18,256 817 1,396 --------- --------- --------- Consolidated reported capital expenditures $ 468,742 $ 487,271 $ 544,829 ========= ========= ========= Assets 2002 2001 ----------- ----------- Total segment assets $ 7,337,944 $ 9,082,573 General assets 808,798 724,236 Discontinued operations assets - 746,791 ----------- ------------ Consolidated reported assets $ 8,146,742 $10,553,600 =========== ============ (24) Discontinuation of SFAS 71: --------------------------- We historically applied SFAS 71 in the preparation of our financial statements because our incumbent local exchange telephone properties (properties we owned prior to the 2000 and 2001 acquisitions of the Verizon, Qwest and Frontier properties) were predominantly regulated in the past following a cost of service/rate of return approach. Beginning in the third quarter of 2001, these properties no longer met the criteria for application of SFAS 71 due to the continuing process of deregulation and the introduction of competition to our existing rural local exchange telephone properties, and our expectation that these trends will continue for all our properties. F-33 Currently, pricing for a majority of our revenues is based upon price cap plans that limit prices to changes in general inflation and estimates of productivity for the industry at large, or upon market pricing, rather than on the specific costs of operating our business, a requirement for the application of SFAS 71. These trends in the deregulation of pricing and the introduction of competition are expected to continue in the near future as additional states adopt price cap forms of regulation. Discontinued application of SFAS 71 required us to write off all of the regulatory assets and liabilities of our incumbent local exchange telephone operations. As a result we recognized a non-cash extraordinary charge in our financial statements in the third quarter of 2001 as follows: ($ in thousands) -------------- Assets: Deferred income tax assets $31,480 Deferred cost of extraordinary plant retirements 25,348 Deferred charges 6,885 Liabilities: Plant related (10,259) Deferred income tax liabilities (2,531) ----------- Pre-tax charge 50,923 Income tax benefit 7,292 ----------- Extraordinary expense $43,631 =========== Under SFAS 71, we depreciated our telephone plant for financial reporting purposes over asset lives approved by the regulatory agencies setting regulated rates. As part of the discontinuance of SFAS 71, we revised the depreciation lives of our core technology assets to reflect their estimated economic useful lives. Based upon our evaluation of the pace of technology change that is estimated to occur in certain components of our rural telephone networks, we concluded that minor modifications as of the date of discontinuance were required in our asset lives for the major network technology assets as follows: Average Remaining Life in Years ------------------------------- Regulated Economic Life Life ---- ---- Switching Equipment 6.4 5.6 Circuit Equipment 4.3 4.9 Copper Cable 8.5 7.7 Upon discontinuation of SFAS 71, we tested the balances of property, plant and equipment associated with the incumbent local exchange telephone properties for impairment under SFAS 121 (as required by SFAS 101). No impairment charge was required. To reflect the expectation that competitive entry will occur over time for certain of our properties acquired in prior purchase business combinations, we have shortened the amortization life for previously acquired franchise rights related to these properties to 20 years. This action was taken to reflect the fact that our dominant position in the market related to the existence of the prior monopoly in incumbent local exchange telephone service may be reduced over time as competitors enter our markets. F-34 (25) Quarterly Financial Data (unaudited): -------------------------------------
($ in thousands, except per share amounts) ---------------------------------------- First quarter Second quarter Third quarter Fourth quarter 2002 ------------- -------------- ------------- -------------- Revenue $ 679,334 $ 662,439 $ 668,831 $ 658,728 Income (loss) before cumulative effect of changes in accounting principle 123,038 (41,559) (700,104) (24,460) Net income (loss) 83,226 (41,559) (700,104) (24,460) Income (loss) before cumulative effect of changes in accounting principle available for common shareholders per basic share $ 0.44 $ (0.15) $ (2.49) $ (0.09) Income (loss) before cumulative effect of changes in accounting principle available for common shareholders per diluted share $ 0.43 $ (0.15) $ (2.49) $ (0.09) Net income (loss) available for common shareholders per basic share $ 0.30 $ (0.15) $ (2.49) $ (0.09) Net income (loss) available for common shareholders per diluted share $ 0.29 $ (0.15) $ (2.49) $ (0.09) 2001 Revenue $ 624,281 $ 505,741 $ 661,121 $ 665,850 Net income (loss) 19,723 (649) (441) (108,315) Net income (loss) per basic share $ 0.08 $ (0.05) $ (0.01) $ (0.39) Net income (loss) per diluted share $ 0.07 $ (0.05) $ (0.01) $ (0.39)
The quarterly net income (loss) per common share amounts are rounded to the nearest cent. Annual net income (loss) per common share may vary depending on the effect of such rounding. Quarterly revenue has been retroactively revised from their original presentations to conform to current presentation. On January 15, 2002, we completed the sale of our water and wastewater operations to American Water Works, Inc. for $859,100,000 in cash and $122,500,000 of assumed debt and other liabilities. The pre-tax gain on the sale recognized in 2002 was $316,672,000. In the third quarter 2002, we recognized non-cash pre-tax impairment losses of $656,658,000 related to property, plant and equipment in the ELI sector and $417,400,000 related to the gas and electric sector assets held for sale, in each case in accordance with the provisions of SFAS 144. In the third quarter of 2002, we recognized an additional $1,525,000 pre-tax gain on the 2001 sale of our Louisiana gas operation to Atmos Energy Corporation. The initial gain was recognized at the close of the sale in the third quarter of 2001. On October 31, 2002, we completed the sale of approximately 4,000 telephone access lines in North Dakota for $9,700,000 in cash. The pre-tax loss on the sale recognized in the fourth quarter of 2002 was $2,803,000. On November 1, 2002, we completed the sale of our Kauai electric division to KIUC for $215,000,000 in cash. The pre-tax gain on the sale recognized in the fourth quarter of 2002 was $8,273,000. Restructuring and other expenses are primarily related to various restructurings, $32,985,000 of pre-tax expenses related to reductions in personnel at our telecommunications operations, cost that were spent at our Plano, Texas facility and at other locations as a result of transitioning functions and jobs and $6,800,000 of pre-tax costs and expenses related to our tender offer in the second quarter of 2002 for all of the ELI common shares that we did not already own. These costs were partially offset by a $2,825,000 pre-tax reversal of an ELI accrual. As a result of Adelphia's price declines and filing for bankruptcy, we recognized pre-tax losses of $95,300,000 to be other than temporary. As of June 30, 2002, we had written this investment down to zero, and therefore we have no additional exposure related to the market value of Adelphia stock. As of December 31, 2002, we owned 1,333,500 shares of D & E Communications common stock. As the result of an other than temporary decline in D & E's stock price, we recognized a pre-tax loss of $16,400,000 on our investment during the quarter ended December 31, 2002. F-35 Concurrent with the acquisition of Frontier, we entered into several operating agreements with Global. We have ongoing commercial relationships with Global affiliates. We reserved a total of $29,000,000 of Global receivables to reflect our best estimate of the net realizable value of receivables incurred from these commercial relationships during 2001 and 2002 as a result of Global's filing for bankruptcy. We recorded a pre-tax write-down of such receivables in the amount of $7,800,000 in the first quarter 2002 and $21,200,000 in the fourth quarter of 2001. In 2002, as the result of a settlement agreement with Global, we reversed $17,900,000 of our previous reserve of the net realizable value of these receivables. Prior to the date of Global's bankruptcy filing, we provided ordinary course telecommunications services as well as transitional services to Global. Global has provided us certain customer billing and collection functions as well as other transitional services. Although some of these arrangements have continued after the bankruptcy filing, we are in the process of changing some services and functions to provide them ourselves. The Bankruptcy Court has granted relief to us and other telecommunications companies that provide service to Global by, among other things, directing a shortened payment period with respect to post-petition invoices, an expedited court process for post-petition defaults in payments by Global, and a priority for post-petition expense items over other unsecured debt. These procedures should minimize future economic loss to us although we cannot guarantee that additional losses will not occur. On July 2, 2001, we completed the sale of our Louisiana Gas operations to Atmos Energy Corporation for $363,400,000 in cash. The pre-tax gain on the sale recognized in the third quarter was $139,300,000. Pre-tax restructuring expenses of $13,000,000 for the third quarter and $6,300,000 for the fourth quarter of 2001 are primarily related to the closing of our operations support center in Plano, Texas and our Sacramento, California call center and ELI's decision to exit certain long haul markets. These restructurings are a result of our evaluation of our facilities to take advantage of operational and functional synergies. We recognized a pre-tax loss of $79,000,000 in the Adelphia investment as a reduction to investment income in the fourth quarter of 2001. Deregulation of most of our local exchange telephone properties required us to cease application of SFAS 71 in the third quarter of 2001, resulting in a non-cash extraordinary charge of $43,600,000, net of tax, in our statement of operations. (26) Supplemental Cash Flow Information: ----------------------------------- The following is a schedule of net cash provided by operating activities for the years ended December 31, 2002, 2001 and 2000:
($ in thousands) 2002 2001 2000 -------------- --------------- -------------- ------------- Loss from continuing operations before extraordinary expense and cumulative effect of change in accounting principle $ (822,976) $ (63,926) $ (40,071) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization expense 755,522 632,336 387,607 Investment write-down 117,455 79,114 - Gain on extinguishment of debt (26,330) - - Investment (gains)/losses (3,363) 660 18,314 Gain on sale of assets (9,798) (139,304) - Loss on impairment 1,074,058 - - Allowance for equity funds used during construction (1,346) (2,811) (3,257) Deferred income tax and investment tax credit (387,771) 17,030 53,215 Change in operating accounts receivable 1,373 57,145 (11,685) Change in accounts payable and other (152,358) (198,848) (24,261) Change in accrued taxes and interest (8,975) 166,815 (28,944) Change in other current assets 101,376 (71,275) (43,225) --------------- -------------- ------------- Net cash provided by continuing operating activities $ 636,867 $ 476,936 $ 307,693 =============== ============== =============
F-36 (27) Retirement Plans: ----------------- Pension Plan ------------ We have a noncontributory pension plan covering all employees who have met certain service and age requirements. The benefits are based on years of service and final average pay or career average pay. Contributions are made in amounts sufficient to meet ERISA funding requirements while considering tax deductibility. Plan assets are invested in a diversified portfolio of equity and fixed-income securities. Effective February 1, 2003, the pension plan was frozen for all non-union plan participants. The vested benefit earned through that date is protected by law and will be available upon retirement. No additional benefit accruals for service will occur after February 1, 2003 for those participants. The following tables set forth the plan's benefit obligations and fair values of plan assets as of December 31, 2002 and 2001 and net periodic benefit cost for the years ended December 31, 2002, 2001 and 2000. F-37
($ in thousands) 2002 2001 -------------- ------------- -------------- Change in benefit obligation - ---------------------------- Benefit obligation at beginning of year $ 759,927 $ 282,024 Service cost 12,159 14,065 Interest cost 53,320 37,680 Amendments - (3,679) Actuarial loss 28,948 16,771 Acquisitions/Divestitures (6,239) 447,279 Plant closings/Reduction in force (5,609) - Benefits paid (62,269) (34,213) ------------- -------------- Benefit obligation at end of year $ 780,237 $ 759,927 ============= ============== Change in plan assets - --------------------- Fair value of plan assets at beginning of year $ 798,293 $ 249,400 Actual return on plan assets (60,026) (13,337) Acquisitions - 583,190 Employer contribution 16,363 13,253 Benefits paid (62,269) (34,213) ------------- -------------- Fair value of plan assets at end of year $ 692,361 $ 798,293 ============= ============== (Accrued)/Prepaid benefit cost - ------------------------------ Funded status $ (87,876) $ 38,366 Unrecognized net liability 17 60 Unrecognized prior service cost (1,450) (1,599) Unrecognized net actuarial loss 235,107 96,860 ------------- -------------- Prepaid benefit cost $ 145,798 $ 133,687 ============= ============== Amounts recognized in the statement of financial position - --------------------------------------------------------- Prepaid benefit cost $ 6,874 $ 133,687 Accrued benefit liability (41,874) - Other comprehesive income 180,798 - ------------- -------------- Net amount recognized $ 145,798 $ 133,687 ============= ============== 2002 2001 2000 ------------- -------------- --------------- Components of net periodic benefit cost - --------------------------------------- Service cost $ 12,159 $ 14,065 $ 12,286 Interest cost on projected benefit obligation 53,320 37,680 18,772 Return on plan assets (63,258) (44,852) (19,743) Amortization of prior service cost and unrecognized net obligation (106) (242) 196 Amortization of unrecognized loss 2,137 - - ------------- -------------- --------------- Net periodic benefit cost $ 4,252 $ 6,651 $ 11,511 ============= ============== ===============
F-38 Assumptions used in the computation of pension costs/year-end benefit obligations were as follows: 2002 2001 ---- ---- Discount rate 7.25%/6.75% 7.5%/7.25% Expected long-term rate of return on plan assets 8.25%/N/A 8.25%/N/A Rate of increase in compensation levels 4.0%/4.0% 4.0%/4.0% In June 2001, we acquired Frontier, including substantially all their pension assets and benefit obligation. This acquisition increased the pension benefit obligation by $447,279,000 and the fair value of plan assets by $583,190,000 as of June 29, 2001. As part of the Frontier acquisition, Global and we agreed to the transfer of pension liabilities and assets related to substantially all Frontier employees. The liabilities associated with the Frontier employees retained by Global were valued following the Pension Benefit Guaranty Corporation's "safe harbor" rules. Prior to Global's bankruptcy filing, Global and we reached agreement on the value of the pension assets and liabilities to be retained by Global as well as the time frame and procedures by which the remainder of the assets were to transfer to a pension trust held by Citizens. Global failed to execute and deliver an authorization letter to the Frontier plan trustee directing the trustee to transfer to our pension plan record ownership of the transferred assets. We initiated an adversary proceeding with the Bankruptcy Court supervising Global's bankruptcy proceeding, to determine and declare that Global's obligation was not "executory", and to compel Global to execute and deliver such authorization letter. On December 18, 2002 we entered into a stipulation with Global and other parties, "so ordered" by the bankruptcy court, fully and finally settling the adversary proceeding. Pursuant to the stipulation and order, on February 3, 2003 Global instructed the Frontier Plan Trustee to transfer record ownership of the transferred assets with a market value of $447,800,000 to our pension plan, and the transfer in fact took place on that date. The assets of the Global pension plan are invested primarily in equity securities. Due to the general decline in the equity markets, the assets have declined in value. We recorded an adjustment to our minimum pension liability as of December 31, 2002 in the amount of $180,798,000. The pension liability resulted from the declining market value of the pension plan assets during 2002 combined with a lower market interest rate used to value the plan's liabilities. As of December 31, 2002, the minimum pension liability is measured as the amount of the plan's accumulated benefit obligation that is in excess of the plan's market value of assets at December 31, 2002 plus any balance remaining in deferred or "prepaid" benefit costs that was recorded during periods when our pension plan assets exceeded our accumulated benefit obligation. A charge was recorded to shareholder's equity, net of income tax benefits, as a component of comprehensive loss in the amount of $111,589,000. The adjustment was computed separately for each plan that we maintain but is mainly attributable to the actual results of asset performance with respect to the Global pension plan (see Note 28). This adjustment does not impact current year earnings, or the funding requirements of the plan. However, pension expense for 2003 will increase as a result of these market declines and lower interest rates. If future market conditions cause either a decline in interest rates used to value our pension plan liabilities or reductions to the value of our pension plan assets we potentially could incur additional charges to our shareholder's equity at the end of 2003. Based upon market conditions existing at the end of February 2003, an additional charge of approximately $30,000,000 - $35,000,000 would be required at the end of 2003 should market conditions remain unchanged. F-39
Postretirement Benefits Other Than Pensions ------------------------------------------- We provide certain medical, dental, life insurance and telephone concession benefits for retired employees and their beneficiaries and covered dependents. The following table sets forth the plan's benefit obligations and the postretirement benefit liability recognized on our balance sheets at December 31, 2002 and 2001 and net periodic postretirement benefit costs for the years ended December 31, 2002, 2001 and 2000: ($ in thousands) 2002 2001 -------------- ------------- -------------- Change in benefit obligation - ---------------------------- Benefit obligation at beginning of year $ 190,342 $ 59,191 Service cost 1,350 937 Interest cost 13,753 8,812 Plan participants' contributions 3,771 1,023 Curtailments/settlements - (14,223) Actuarial loss 21,406 20,321 Acquisitions/Divestitures (4,348) 119,611 Plant closings/Reduction in force (1,950) - Amendments - 20 Benefits paid (13,641) (5,350) ------------- -------------- Benefit obligation at end of year $ 210,683 $ 190,342 ============= ============== Change in plan assets - --------------------- Fair value of plan assets at beginning of year $ 29,090 $ 25,412 Actual return on plan assets (1,711) 310 Benefits paid (9,870) (1,464) Employer contribution 9,541 1,498 Acquisitions - 3,334 ------------- -------------- Fair value of plan assets at end of year $ 27,050 $ 29,090 ============= ============== Accrued benefit cost - -------------------- Funded status $(183,633) $(161,252) Unrecognized transition obligation 234 258 Unrecognized prior service cost 16 18 Unrecognized loss 35,048 18,174 ------------- -------------- Accrued benefit cost $(148,335) $(142,802) ============= ============== 2002 2001 2000 ------------- -------------- --------------- Components of net periodic postretirement benefit cost - ------------------------------------------------------ Service cost $ 1,350 $ 937 $ 652 Interest cost on projected benefit obligation 13,753 8,812 3,943 Return on plan assets (2,438) (2,227) (1,688) Amortization of prior service cost and transition obligation 26 25 23 Amortization of unrecognized (gain)/loss 2,383 204 (793) Curtailment gain - - (757) Settlement loss - 491 - Acquisition loss - - 581 ------------- -------------- --------------- Net periodic postretirement benefit cost $ 15,074 $ 8,242 $ 1,961 ============= ============== ===============
For purposes of measuring year end benefit obligations, we used the same discount rates as were used for the pension plan and, depending on medical plan coverage for different retiree groups, an 8 - 12% annual rate of increase in the per-capita cost of covered medical benefits, gradually decreasing to 5% in the year 2010 and remaining at that level thereafter. The effect of a 1% increase in the assumed medical cost trend rates for each future year on the aggregate of the service and interest cost components of the total postretirement benefit cost would be $2,134,000 and the effect on the accumulated postretirement benefit obligation for health benefits would be $27,361,000. The effect of a 1% decrease in the assumed medical cost trend rates for each future year on the aggregate of the service and interest cost components of the total postretirement benefit cost would be $(1,759,000) and the effect on the accumulated postretirement benefit obligation for health benefits would be $(22,882,000). F-40 In August 1999, our Board of Directors approved a plan of divestiture for the public services properties. Any pension and/or postretirement gain or loss associated with the divestiture of these properties will be recognized when realized. During 2002, we sold our entire water distribution and wastewater treatment business and one of our three electric businesses. The pension plan has been frozen from the date of sale and we have retained those liabilities. In both transactions, the buyer assumed the retiree medical liabilities for those properties. In June 2001, we acquired Frontier Corp., including their postretirement benefit plans. This acquisition increased the accumulated postretirement benefit obligation by $118,819,000 and the fair value of plan assets by $3,334,000 as of June 29, 2001. 401(k) Savings Plans -------------------- We sponsor an employee retirement savings plan under section 401(k) of the Internal Revenue Code. The Plan covers substantially all full-time employees. Under the Plan, we provide matching and certain profit-sharing contributions. Effective May 1, 2002, the Plan was amended to provide for employer contributions to be made in cash rather than Company stock, impacting all non-union employees and most union employees. Employer contributions were $10,331,000, $6,878,000 and $5,973,000 for 2002, 2001 and 2000, respectively. (28) Commitments and Contingencies: ------------------------------ We have budgeted capital expenditures in 2003 of approximately $333,600,000, including $288,400,000 for ILEC and ELI and $45,200,000 for gas and electric. Certain commitments have been entered into in connection therewith. We expect to incur additional impairment losses during 2003 with respect to our public utility properties. These properties are carried at our estimates of net realizable values. Under the terms of the definitive agreements relating to the sale of our Arizona and Hawaiian properties, most of the capital expenditures we will make during 2003 for these properties will not be recovered. As a result, the amount of these expenditures (currently estimated at $28,000,000 through the expected closing dates) will be expensed as incurred and not capitalized. These expenditures are of a normal recurring nature and are necessary to provide safe, reliable utility service to customers. We generally do not enter into firm, committed contracts for such activities. If the closing dates for the sales of our Arizona and Hawaiian properties actually occur later than the currently expected dates, the actual amount of capital expenditures expensed will exceed these estimates. If the sale of our Arizona utility businesses to UniSource is completed, the sale agreement requires us to promptly redeem $111,760,000 principal amount of industrial revenue bonds. We conduct certain of our operations in leased premises and also lease certain equipment and other assets pursuant to operating leases. Future minimum rental commitments for all long-term noncancelable operating leases for continuing operations are as follows: ($ in thousands) Year Amount -------------- -------------- -------------- 2003 $ 26,790 2004 22,234 2005 18,918 2006 17,385 2007 17,193 thereafter 55,455 -------------- Total $ 157,975 ============== Total rental expense included in our results of operations for the years ended December 31, 2002, 2001 and 2000 was $36,550,000, $38,829,000 and $33,042,000 respectively. We sublease, on a month-to-month basis, certain office space in our corporate office to a charitable foundation formed by our Chairman. Minimum payments on operating leases are included in the table above. For payments on capital leases, see Note 9. F-41 We are a party to contracts with several unrelated long distance carriers. The contracts provide fees based on leased traffic subject to minimum monthly fees. We also purchase capacity and associated energy from various electric energy and natural gas suppliers. Some of these contracts obligate us to pay certain capacity costs whether or not energy purchases are made. These contracts are intended to complement the other components in our power supply to achieve the most economic mix reasonably available. At December 31, 2002, the estimated future payments for long distance contracts, and capacity and energy that we are obligated for are as follows:
Public ($ in thousands) Year ILEC / ELI Services Total -------------- -------------- -------------- -------------- -------------- 2003 $ 72,317 $ 28,495 $ 100,812 2004 49,578 28,147 77,725 2005 16,781 23,085 39,866 2006 - 23,236 23,236 2007 - 21,363 21,363 thereafter - 125,750 125,750 -------------- -------------- -------------- Total $138,676 $ 250,076 $ 388,752 ============== ============== ==============
The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities, including us, have entered into a purchase power agreement with Hydro-Quebec. The agreement contains "step-up" provisions that state that if any VJO member defaults on its purchase obligation under the contract to purchase power from Hydro-Quebec the other VJO participants will assume responsibility for the defaulting party's share on a pro-rata basis. As of December 31, 2002, 2001 and 2000, our obligation under the agreement is approximately 10% of the total contract. If any member of the VJO defaults on its obligations under the Hydro-Quebec agreement, the remaining members of the VJO, including us, may be required to pay for a substantially larger share of the VJO's total power purchase obligation for the remainder of the agreement. Such a result could have a materially adverse effect on our financial results. At December 31, 2002, we have outstanding performance letters of credit as follows: ($ in thousands) -------------- Qwest $ 64,280 Pinnacle West Capital Corporation 40,000 CNA 20,027 Water projects 1,809 ELI projects 50 ---------- Total $ 126,166 ========== None of the above letters of credit restrict our cash balances. On July 20, 2001, we notified Qwest that we were terminating eight acquisition agreements. On July 23, 2001, Qwest filed a notice of claim for arbitration with respect to the terminated acquisition agreements. Qwest asserts that we wrongfully terminated theses agreements and is seeking approximately $64,000,000 in damages, which is the aggregate of liquidated damages under letters of credit established in the terminated acquisition agreements. On September 7, 2001, we filed a response and counterclaims in the same arbitration proceedings, contesting Qwest's asserted claims and asserting substantial claims against Qwest for material breaches of representations, warranties, and covenants in the terminated acquisition agreements and in the acquisition agreement relating to North Dakota assets that we purchased from Qwest. The parties are currently engaged in discovery. An arbitration hearing has been scheduled to commence in the third quarter of 2003. On December 21, 2001, we entered into a settlement agreement resolving all claims in a class action lawsuit pending against the Company in Santa Cruz County, Arizona (Chilcote, et al. v. Citizens Utilities Company, No. CV 98-471). The lawsuit arose from claims by a class of plaintiffs that included all of our electric customers in Santa Cruz County for damages resulting from several power outages that occurred during the period January 1, 1997, through January 31, 1999. Under the terms of the settlement agreement, and without any admission of guilt or wrongdoing by us, we have paid the class members $5,500,000 in satisfaction of all claims. The court approved the settlement agreement on March 29, 2002, and the lawsuit against us was dismissed with prejudice. We accrued the full settlement amount, plus an additional amount sufficient to cover legal fees and other related expenses, during the fourth quarter of 2001 and no accrual remains at December 31, 2002. F-42 As part of the Frontier acquisition, Global and we agreed to Global's transfer, effective as of July 1, 2001, of certain liabilities and assets under the Global pension plan for Frontier employees. Such transfer and assumption of liabilities was to be to a trustee of a trust established under our pension plan, and would exclude (1) those liabilities relating to certain current and former Frontier employees who were not considered part of the Frontier acquisition (calculated using the "safe Harbor" methodology of the Pension Benefit Guaranty Corporation) and (2) those assets attributable to such excluded liabilities. After filing for bankruptcy on January 28, 2002, Global claimed that its obligation to transfer the Global pension plan's transferred assets and liabilities remained "executory" under the Bankruptcy Code, and refused to execute and deliver an authorization letter to the Frontier plan trustee (who was also the Global plan trustee) directing the trustee to transfer to our pension plan record ownership of such assets and liabilities. We initiated an adversary proceeding with the Bankruptcy Court supervising Global's bankruptcy proceeding to determine and declare that Global's obligation was not "executory," and to compel Global to execute and deliver such authorization letter. On December 18, 2002 we entered into a stipulation with Global and other parties, "so ordered" by the Bankruptcy Court, fully and finally setting the adversary proceeding. Pursuant to the stipulation and order, on February 3, 2003, among other things, Global instructed the Frontier plan trustee to transfer record ownership of the transferred assets and liabilities to our pension plan, and the transfer in fact took place on that date. The City of Bangor, Maine, filed suit against us on November 22, 2002, in the U.S. District Court for the District of Maine (City of Bangor v. Citizens Communications Company, Civ. Action No. 02-183-B-S). The City has alleged, among other things, that we are responsible for the costs of cleaning up environmental contamination alleged to have resulted from the operation of a manufactured gas plant by Bangor Gas Company, which we owned from 1948-1963. The City alleged the existence of extensive contamination of the Penobscot River and nearby land areas and has asserted that money damages and other relief at issue in the lawsuit could exceed $50,000,000. The City also requested that punitive damages be assessed against us. We have filed an answer denying liability to the City, and have asserted a number of counter claims against the City. We intend to defend ourselves vigorously against the City's lawsuit. We also have demanded that various of our insurance carriers defend and indemnify us with respect to the City's lawsuit. On or about December 26, 2002, we filed suit against those insurance carriers in the Superior Court of Penobscot County, Maine, for the purpose of establishing their obligations to us with respect to the City's lawsuit. We intend to vigorously pursue insurance coverage for the City's lawsuit. In addition, we have identified a number of other potentially responsible parties that may be responsible for the damages alleged by the City. We expect to initiate legal action within the next few weeks to bring those parties into the lawsuit. On February 7, 2003, we received a letter from counsel representing Enron North America Corporation (formerly known as Enron Gas Marketing, Inc.) demanding payment of an "early termination liability" of approximately $12,500,000 that Enron claims it is owed under a gas supply agreement that we lawfully terminated in November 2001. The demand was made in connection with Enron's ongoing bankruptcy proceeding in the United States Bankruptcy Court for the Southern District of New York. We believe Enron's claim lacks any merit and have so advised that company's counsel. Enron has threatened to initiate an adversary proceeding in the bankruptcy court to recover the amount of its demand plus applicable interest and attorney's fees. If that occurs, we will vigorously defend against any such action. During the fourth quarter of 2002 we became aware of irregularities involving payments made by certain of our public utilities operations for services or benefits that we did not receive. The payments do not involve our current operations in Arizona, Vermont, or Hawaii. With the assistance of forensic specialists, outside auditors, and counsel, we investigated these irregularities and identified a total of $7,800,000 that had been embezzled from the Company. These payments were reflected in our financial statements as charges to earnings (primarily during 2002). The U.S. Government has recovered approximately $6,000,000 (which we believe will be turned over to us) and we believe that most of the remaining funds outstanding will be reimbursed by insurance. We have provided detailed information regarding the results of our investigation to federal prosecutors and the Securities and Exchange Commission, including the names of two of our former officers (Ken Cohen and Livingston Ross, who were the President and Chief Operating Officer of the Public Services Sector and the Vice President of Reporting and Audit, respectively) who approved the payments. We have been advised by federal prosecutors that these two individuals have admitted their involvement in these schemes and we have terminated the employment of these individuals. F-43 In connection with an inquiry that we believe has arisen as a result of allegations made to federal authorities during their investigation of the embezzlement, we and our employees are cooperating fully with the Office of the U.S. Attorney for the Southern District of New York and with the New York office of the Securities and Exchange Commission. We have provided requested documents to the SEC and we have agreed to comply with an SEC request that, in connection with the informal inquiry that it has initiated, we preserve financial, audit, and accounting records. We are party to proceedings arising in the normal course of our business. The outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all such matters, after considering insurance coverage, will not have a material adverse effect on our financial position, results of operations, or our cash flows. F-44 The Board of Directors and Shareholders Citizens Communications Company: We have audited and reported separately herein on the balance sheets of Citizens Communications Company and subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of operations, shareholders' equity, comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 2002. Our report refers to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangibles Assets" as of January 1, 2002. Our audits were made for the purpose of forming an opinion on the basic financial statements of Citizens Communications Company and subsidiaries taken as a whole. The supplementary information included in Schedule II is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. KPMG LLP New York, New York March 4, 2003 F-45
Schedule II CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES Valuation and Qualifying Accounts ($ In thousands) Balance at Charged to Balance at Beginning of Revenue or Frontier End of Accounts Period Expense Acquisition Deductions Period - ---------------------------------------- ---------------- ----------------- ------------- -------------- ------------ Allowance for doubtful accounts 2000 28,278 16,719 - (21,084) 23,913 2001 23,913 41,233 (1) 10,709 (8,254) 67,601 2002 67,601 66,935 (2) - (95,590) (3) 38,946 (1) Includes the reserve for Global receivables (See Note 15 to Consolidated Financial Statements). (2) Net of recoveries of amounts previously written off. (3) Includes the sale of WorldCom receivables.
F-46 EX-3.200.3 3 bylawsamend.txt AMENDMENT TO BY-LAWS Exhibit 3.200.3 --------------- Amendment to the BY-LAWS of CITIZENS COMMUNICATIONS COMPANY (Effective July 30, 2002) ------------------------- The first sentence of SECTION 5 of the By-laws is amended in its entirety to read as follows: The property and business of the corporation shall be managed and controlled by its Board of Directors, which shall consist of not less than seven nor more than fifteen members. EX-10.11 4 kauaiagreement.txt KAUAI AGREEMENT Exhibit 10.11 ------------- AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT (KAUAI ELECTRIC) between CITIZENS COMMUNICATIONS COMPANY and KAUAI ISLAND UTILITY CO-OP Dated as of March 5, 2002
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.....................................................................................1 Section 1.1 Certain Defined Terms...................................................................1 Section 1.2 Other Defined Terms.....................................................................9 ARTICLE II PURCHASE AND SALE...............................................................................9 Section 2.1 Purchase and Sale of Assets.............................................................9 Section 2.2 Assumed Liabilities.....................................................................9 Section 2.3 Retained Liabilities...................................................................11 Section 2.4 Condition on Assignment or Assumption of Contracts and Rights..........................12 ARTICLE III PURCHASE PRICE.................................................................................12 Section 3.1 Purchase Price.........................................................................12 Section 3.2 Calculation of Purchase Price..........................................................12 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER........................................................13 Section 4.1 Organization, Existence and Qualification..............................................13 Section 4.2 Authority Relative to this Agreement and Binding Effect................................14 Section 4.3 Governmental Approvals.................................................................14 Section 4.4 Availability of Funds..................................................................14 Section 4.5 Filings................................................................................14 Section 4.6 Brokers................................................................................14 Section 4.7 Independent Investigation..............................................................15 Section 4.8 Public Utility Holding Company Status; Regulation as a Public Utility..................15 Section 4.9 Buyer's Financial Statements. .........................................................15 Section 4.10 Buyer's Insurance......................................................................15 ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER.......................................................15 Section 5.1 Organization, Existence and Qualification..............................................15 Section 5.2 Authority Relative to this Agreement and Binding Effect................................15 Section 5.3 Governmental and Other Required Consents...............................................16 Section 5.4 Public Utility Holding Company Status; Regulation as a Public Utility..................16 Section 5.5 Title to Assets; Liens.................................................................16 Section 5.6 Financial Statements...................................................................16 Section 5.7 Compliance with Legal Requirements; Governmental Permits...............................17 Section 5.8 Legal Proceedings; Outstanding Orders. ................................................17 Section 5.9 Taxes..................................................................................17 Section 5.10 Intellectual Property..................................................................17 Section 5.11 Personal Property......................................................................18 Section 5.12 Material Contracts; Existing Loan Documents............................................18 Section 5.13 Employee Benefit Matters...............................................................18 Section 5.14 Environmental Matters..................................................................18 Section 5.15 No Material Adverse Change.............................................................19 Section 5.16 State Regulatory Matters...............................................................19 Section 5.17 Brokers................................................................................19 Section 5.18 Disclaimer.............................................................................20 i ARTICLE VI COVENANTS......................................................................................20 Section 6.1 Covenants of Seller....................................................................20 Section 6.2 Covenants of Buyer.....................................................................22 Section 6.3 Governmental Filings...................................................................23 Section 6.4 Citizens Marks.........................................................................24 Section 6.5 Acknowledgment by Buyer................................................................24 Section 6.6 Transition Plan. .....................................................................25 Section 6.7 IDRB Obligations.......................................................................25 ARTICLE VII CONDITIONS PRECEDENT...........................................................................26 Section 7.1 Seller's Conditions Precedent to Closing...............................................26 Section 7.2 Buyer's Conditions Precedent to Closing................................................27 ARTICLE VIII CLOSING......................................................................................29 Section 8.1 Closing................................................................................29 ARTICLE IX TERMINATION..................................................................................30 Section 9.1 Termination Rights.....................................................................30 Section 9.2 Limitation on Right to Terminate; Effect of Termination................................31 ARTICLE X EMPLOYEE MATTERS.............................................................................31 Section 10.1 Employment of Transferred Employees....................................................31 Section 10.2 Assumption of Collective Bargaining Agreement Obligations..............................32 Section 10.3 Cessation of Participation in Seller's Plans; Proration of Bonuses.....................32 Section 10.4 Similarity of Benefit Packages.........................................................32 Section 10.5 Defined Benefit Pension Plan. .........................................................32 Section 10.6 401(k) Plan............................................................................33 Section 10.7 Welfare Benefits.......................................................................33 Section 10.8 Flexible Spending Accounts.............................................................34 Section 10.9 Employment Agreements..................................................................34 Section 10.10 Vacation...............................................................................34 Section 10.11 Severance..............................................................................35 Section 10.12 Plant Closing Notice...................................................................35 ARTICLE XI TAX MATTERS..................................................................................35 Section 11.1 Purchase Price Allocation..............................................................35 Section 11.2 Cooperation with Respect to Like-Kind Exchange.........................................35 Section 11.3 Transaction Taxes......................................................................36 Section 11.4 Taxes Based on Revenues................................................................36 ARTICLE XII ENVIRONMENTAL MATTERS........................................................................37 Section 12.1 Environmental Due Diligence............................................................37 ARTICLE XIII INDEMNIFICATION..............................................................................39 Section 13.1 Indemnification by Seller..............................................................39 Section 13.2 Indemnification by Buyer...............................................................39 Section 13.3 Limitations on Seller's Liability......................................................40 ii Section 13.4 Claims Procedure.......................................................................41 Section 13.5 Exclusive Remedy.......................................................................42 Section 13.6 Indemnification for Negligence.........................................................42 Section 13.7 Waiver and Release.....................................................................43 ARTICLE XIV GENERAL PROVISIONS...........................................................................43 Section 14.1 Expenses...............................................................................43 Section 14.2 Notices................................................................................43 Section 14.3 Assignment.............................................................................44 Section 14.4 Successor Bound........................................................................44 Section 14.5 Governing Law..........................................................................45 Section 14.6 Dispute Resolution.....................................................................45 Section 14.7 Cooperation............................................................................46 Section 14.8 Construction of Agreement..............................................................46 Section 14.9 Publicity. ...........................................................................46 Section 14.10 Waiver.................................................................................46 Section 14.11 Parties in Interest....................................................................47 Section 14.12 Section and Paragraph Headings.........................................................47 Section 14.13 Amendment..............................................................................47 Section 14.14 Entire Agreement.......................................................................47 Section 14.15 Counterparts...........................................................................47 Section 14.16 Severability...........................................................................47 iii
LIST OF EXHIBITS Exhibit 6.7 Form of IDRB Obligations Agreement Exhibit 7.1(g) Form of Buyer's Opinion of Counsel Exhibit 7.2(g) Form of Seller's Opinion of Counsel Exhibit 8.1(a) Form of Bill of Sale LIST OF SCHEDULES Schedule 1.1(b) Excluded Assets Schedule 2.2(d) Certain Assumed Proceedings Schedule 5.2 Seller's Authority Schedule 5.3 Seller's Governmental and Other Required Consents Schedule 5.5 Encumbrances; Owned Real Property Schedule 5.6(a) Financial Statements Schedule 5.6(b) Certain Liabilities Schedule 5.7 Compliance with Legal Requirements; Governmental Permits Schedule 5.8 Legal Proceedings; Outstanding Orders Schedule 5.9 Taxes Schedule 5.10 Intellectual Property Schedule 5.12 Material Contracts Schedule 5.13 Employee Matters Schedule 5.14 Environmental Matters Schedule 5.15 Material Adverse Changes Schedule 5.16 State Regulatory Matters Schedule 6.1 Conduct of Business Schedule 6.2(c) Citizens' Guarantees and Surety Instruments Schedule 10.1 Active Employees Schedule 10.7 Retirees and "Grandfathered Employees" AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT (KAUAI ELECTRIC) This AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT (this "Agreement") is made as of March 5, 2002 (the "Effective Date"), by and between CITIZENS COMMUNICATIONS COMPANY (f/k/a Citizens Utilities Company), a Delaware corporation ("Seller"), and Kauai Island Utility Co-Op, a cooperative association formed pursuant to the provision of Chapter 421C of the Hawaii Revised Statutes ("Buyer"). Capitalized terms used herein shall have the meanings ascribed to them in Article I, unless otherwise provided. W I T N E S S E T H : WHEREAS, Seller owns all of the Assets; WHEREAS, Seller and Buyer entered into that certain Purchase and Sale Agreement (Kauai Electric), dated as of February 11, 2000, for the purchase and sale of the Assets (the "Original Agreement"); WHEREAS, Seller and Buyer desire to amend and restate the Original Agreement to give effect to certain agreements reached between the parties regarding the purchase and sale of the Assets; and WHEREAS, Buyer desires to purchase, and Seller desires to sell, the Assets, subject in all respects to the provisions of this Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Certain Defined Terms. For purposes of this Agreement, the following terms have the meanings specified or referred to in this Article I (such definitions to be equally applicable to both the singular and plural forms of the terms defined): "Affiliates" or "Affiliated Entities" -- entities shall be deemed "Affiliated" as to each other to the extent (i) one of the entities directly or indirectly controls the other, or the direct or indirect control of one of the entities is exercised by the officers, directors, stockholders, or partners of the other entity (whether or not such persons exercise such control in their capacities as officers, directors, stockholders, or partners) or (ii) is deemed to be an Affiliate under existing statutes or regulations of the SEC. "Assets" -- all of the assets, property and interests of every type and description, real, personal or mixed, tangible and intangible, owned by Seller and relating primarily to the Business, other than the Excluded Assets. "Assumed Environmental Liabilities" -- means any of the following: (a) All Environmental Liabilities of Seller relating to the Business or the Assets and arising from or relating to the environmental matters or incidents either disclosed by Seller on Schedule 5.14 as of the Effective Date or otherwise known to Buyer on or before the Effective Date that remain outstanding as of the Closing Date, it being understood by the parties that the unadjusted Purchase Price reflects Buyer's estimate of any Losses that could arise on and after the Closing Date with respect to such Environmental Liabilities; (b) All Environmental Liabilities of Seller relating to the Business or the Assets and arising from or relating to the environmental matters or incidents either disclosed to Buyer by Seller after the Effective Date (including any additional disclosures appearing on Schedule 5.14 as revised by Seller and delivered to Buyer prior to the Closing Date) or otherwise known to Buyer as of the Closing Date that remain outstanding as of the Closing Date, other than any such Environmental Liabilities that are properly designated by Buyer as New Material Environmental Liabilities in accordance with Section 12.1(g) and that by the Closing Date have not been remedied or responded to by Seller in a manner reasonably satisfactory to Buyer; (c) All Environmental Liabilities of Seller relating to the Business or the Assets that were outstanding or had arisen prior to the Closing Date but with respect to which Seller had no Knowledge as of the Closing Date; and (d) Except for the Retained Environmental Liabilities, any other Environmental Liability of Seller relating to the Business or the Assets, Buyer or any Affiliate, successor or assign of Buyer, whether arising or relating to the period before or after the Closing, including with respect to the removal of asbestos or asbestos-containing materials in connection with any renovation or structural change to any Asset conducted after Closing. "Bonds" -- means any of the bonds issued pursuant to the Indentures of Trust, the proceeds from the issuance of which were advanced to Seller and used in connection with the Business or the Assets of the Business pursuant to any of the IDRB Documents. "Business" -- means collectively: (a) the regulated electricity generation, transmission and distribution business conducted by Seller on the island of Kauai, Hawaii through its Kauai Electric division; and (b) the provision of related services and products and the engagement in related activities by Seller on the island of Kauai, Hawaii through its Kauai Electric division. "Buyer's IDRB Obligations" - means the obligations of Buyer set forth in Section 6.7(a) and in the IDRB Obligations Agreement to be executed and delivered by Buyer on or prior to the Closing Date in accordance with Sections 6.7(a) and 8.1(d). 2 "Capital Budget" -- means the capital budget for the Business for fiscal year 2001 or 2002, as applicable, as adopted by the Board of Directors of Seller and provided to Buyer prior to the Effective Date or promptly upon adoption thereof, if later. "Claim Notice" -- means a written notice of a claim given by a party seeking indemnification pursuant to the terms of this Agreement that specifies in reasonable detail the nature of the Losses and the estimated amount of such Losses. "Confidentiality Agreement" -- means that certain confidentiality agreement dated October 15, 1999, between Buyer and Seller. "Consent" -- any approval, consent, ratification, waiver, or other authorization from any Person. "Contract" -- any agreement, contract, document, instrument, obligation, promise or undertaking (whether written or oral) that is legally binding, including Easements. "Easements"-- means all easements, rights of way, permits, licenses, and other ways of necessity, whether or not of record. "Encumbrance" -- any charge, adverse claim, lien, mortgage, pledge or security interest. "Environmental Law"-- any Order or Legal Requirement, and any judicial and administrative interpretation thereof and related policies, guidelines and standards, relating to pollution or protection of the environment and natural resources, including those relating to (a) emissions, discharges, Releases or threatened Releases of Hazardous Material into the environment (including ambient air, surface water, groundwater or land), and (b) the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Material, each as in effect as of the date of determination. "Environmental Liability" -- means any liability, responsibility or obligation arising out of or relating to: (a) the presence of any Hazardous Material in the fixtures, structures, soils, groundwater, surface water or air on, under or about or emanating from the assets and properties currently or formerly used, operated, owned, leased, controlled, possessed, occupied or maintained by a Person, and any such Hazardous Material emanating to adjoining or other properties; (b) the use, generation, production, manufacture, treatment, storage, disposal, Release, threatened Release, discharge, spillage, loss, seepage or filtration of Hazardous Materials by a Person or its employees, agents or contractors from, on, under or about the assets or properties currently or formerly used, operated, owned, leased, controlled, possessed, occupied or maintained by such Person or the presence therein or thereunder of any underground or above-ground tanks for the storage of fuel oil, gasoline and/or other petroleum products or by-products or other Hazardous Material; (c) the violation or noncompliance or alleged violation or noncompliance by a Person or its employees, agents or contractors of any Environmental Law arising from or related to its or their conduct, actions or operations or the former or current use, operation, ownership, lease, possession, control, occupancy, maintenance or condition of any of such Person's former or current assets or properties; 3 (d) the failure by a Person or its employees, agents, or contractors to have obtained or maintained in effect any certificate, permit or authorization required by any Environmental Law as a result of its or their conduct, actions or operations or the use, operation, ownership, lease, control, possession, occupancy, maintenance or condition of such Person's assets or properties; (e) any and all Proceedings arising out of any of the above-described matters, including Proceedings by Governmental Bodies for enforcement, cleanup, removal, treatment, response, remedial or other actions or damages and Proceedings by any third Person seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief; and (f) any and all remedial work and other corrective action (including investigation or monitoring of site conditions, or any clean-up, containment, restoration or removal) taken by, or the costs of which are imposed upon, a Person arising from any of the above-described matters. "ERISA" - the Employee Retirement Income Security Act of 1974, as amended, or any successor law, and regulations and rules issued pursuant to that act or any successor law. "Excluded Assets" -- means the following assets of Seller, each of which shall be excluded from the Assets, and not acquired by the Buyer, at Closing: (a) assets that Seller uses in both the Business and in Seller's other gas, electric or communications businesses, the material items of which are described on Schedule 1.1(b), and Contracts regarding the procurement of services or goods by Seller for use in such in other businesses; (b) cash and cash equivalents in transit, in hand or in bank accounts; (c) except as otherwise set forth in Article X, assets attributable to or related to a Benefit Plan of Seller; (d) the stock record and minute books of Seller, duplicate copies of all books and records transferred to Buyer, all records prepared in connection with the sale of the Business (including bids received from third parties and analysis relating to the Business) and all IDRB Documents; (e) assets disposed of by Seller after the Effective Date to the extent such dispositions are not prohibited by this Agreement; (f) except to the extent set forth in Section 3.4, rights to refunds of Taxes payable with respect to the Business, assets, properties or operations of Seller or any member of any affiliated group of which either of them is a member; (g) accounts owing, by and among Seller and its Affiliates; (h) all deferred tax assets or collectibles; (i) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; 4 (j) the Citizens Marks; and (k) the other assets listed on Schedule 1.1(b). "Existing Loan Documents"-- means all Contracts relating to the indebtedness for money borrowed by Seller and used in connection with the Business or the Assets as of the date hereof to which Seller is a party, including all IDRB Documents, but excluding line extension agreements or similar arrangements involving customer advances for construction, it being understood and agreed that customer advances, customer deposits and construction advances do not create indebtedness for money borrowed. "Final Order" -- an action by a Governmental Body as to which: (a) no request for stay of the action is pending, no such stay is in effect and if any time period is permitted by statute or regulation for filing any request for such stay, such time period has passed; (b) no petition for rehearing, reconsideration or application for review of the action is pending and the time for filing any such petition or application has passed; (c) such Governmental Body does not have the action under reconsideration on its own motion and the time in which such reconsideration is permitted has passed; and (d) no appeal to a court, or a request for stay by a court of the Governmental Body's action is pending or in effect and the deadline for filing any such appeal or request has passed. "Future Regulatory Obligations" -- means all liabilities, responsibilities and obligations relating to the Assets or the Business, including capital expenditure obligations and liabilities of the types that appear as "Accrued Liabilities" and "Non-Current Liabilities" on the Balance Sheet, arising out of any Legal Requirement or other action of any Governmental Body, including with respect to all Proceedings of any state regulatory commission relating to the Assets or the Business commenced before or after the Closing Date, regardless of whether the Legal Requirement or other action is or purports to be based on conduct, actions, facts, circumstances or conditions arising, existing or occurring at any time prior to the Closing Date, but other than relating to any Retained Environmental Liability. "GAAP" -- generally accepted United States accounting principles, applied on a consistent basis. "Governmental Body" -- any of the following that possesses competent jurisdiction: (a) federal, state, county, local, municipal or other governmental body; (b) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official or entity and any court or other tribunal); or (c) any governmental body entitled to exercise any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature. 5 "Hazardous Materials" -- any waste or other chemical, material or substance that is listed, defined, designated, or classified as, or otherwise determined to be, hazardous, radioactive, toxic, or a pollutant or a contaminant, or words of similar import, under or pursuant to any Environmental Law, including any admixture or solution thereof, and specifically including oil, natural gas, petroleum and all derivatives thereof or synthetic substitutes therefor, asbestos or asbestos-containing materials, any flammable substances or explosives, any radioactive materials, any toxic wastes of substances, urea formaldehyde foam insulation, toluene or polychlorinated biphenyls. "HSR Act" -- the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or any successor law, and regulations and rules issued by the U.S. Department of Justice or the Federal Trade Commission pursuant to that act or any successor law. "IDRB Documents" -- means the Loan Agreements, the Tax Regulatory Agreements and Tax Representations and Project Certificates listed in Schedule 5.12. "IDRB Indebtedness" -- means the indebtedness of Seller owing to the issuers of the Bonds and arising under the Loan Agreements included among the IDRB Documents. The IDRB Indebtedness is described further in Schedule 5.12 and in Exhibit 6.7. "IRC" -- the Internal Revenue Code of 1986, as amended. "IRS" -- the Internal Revenue Service or any successor agency. "Knowledge" -- means, with respect to Seller, the actual knowledge of Seller's Chief Financial Officer; Vice President and Chief Operating Officer, Citizens Public Services; Vice President and General Manager, Kauai Electric; Manager of Power Supply, Kauai Electric; and Manager of Transmission and Distribution, Kauai Electric; or their respective successors holding such offices or having comparable duties and responsibilities. "Legal Requirement" -- any federal, state, county, local, municipal, foreign, international, multinational, or other administrative Order, constitution, law, ordinance, adopted code, principle of common law, regulation, rule, directive, approval, notice, tariff, franchise agreement, statute or treaty. "Losses" -- shall mean all claims, losses, liabilities, causes of action, costs and expenses (including, without limitation, involving theories of negligence or strict liability and including court costs and reasonable attorneys' fees and disbursements in connection therewith). "Mandated Capital Expenditures" -- shall have the meaning set forth in Section 6.1(a)(6) of this Agreement. "Material Adverse Effect" -- an occurrence or condition that has a material adverse effect on the operation, financial condition or results of operations of the Business, taken as a whole. For purposes of this Agreement, an occurrence or condition shall not constitute a Material Adverse Effect (a) if it arises from general business, economic or financial market conditions, from conditions generally affecting the industries in which the Business competes, or from the transactions contemplated by this Agreement, (b) if it is of the type normally recoverable by the Business through rates, (c) to the extent that the Business may realize the benefit of insurance maintained by Seller or to the extent that Seller or Buyer may receive or recover payments in respect of such occurrence from any other source (whether in a lump sum or stream of payments), or (d) if it relates to or results from a threatened or pending condemnation Proceeding by the County of Kauai. 6 "Material Contract" -- a Contract relating primarily to the Business and involving a total commitment by or to any party thereto of at least $250,000 on an annual basis and which cannot be terminated by Seller with notice of ninety (90) days or less without penalty to Seller. "Order" -- any award, decision, injunction, judgment, order, writ, decree, ruling, subpoena, or verdict entered, issued, made, or rendered by any court, administrative agency, other Governmental Body, or by any arbitrator, each of which possesses competent jurisdiction. "Organizational Documents" -- the articles or certificate of incorporation and the bylaws of a corporation or the comparable organizational and governing documents of other Persons. "Permitted Encumbrances" -- means any of the following: (a) mechanics', carriers', workers' and other similar liens arising in the ordinary course of business and which in the aggregate are not substantial in amount and do not interfere with the present use of the Assets to which they apply; (b) liens for current Taxes and assessments not yet due and payable; (c) usual and customary nonmonetary real property Encumbrances, covenants, imperfections in title, Easements, restrictions and other title matters (whether or not the same are recorded) that do not and will not materially interfere with the operation of that portion of the Business currently conducted on such real property; (d) Encumbrances securing the payment or performance of any of the Assumed Liabilities; (e) all applicable zoning ordinances and land use restrictions; (f) with respect to any Asset which consists of a leasehold or other possessory interests in real property, all Encumbrances, covenants, imperfections in title, Easements, restrictions and other title matters (whether or not the same are recorded) to which the underlying fee estate in such real property is subject that do not currently interfere materially with the operation of that portion of the Business currently conducted on such property; and (g) any other Encumbrances, Contracts, obligations, defects or irregularities of any kind whatsoever, affecting the Assets that, individually or in the aggregate, are not such as are reasonably likely to have a Material Adverse Effect or that will be terminated, released or waived on or before the Closing Date. "Person" -- any individual, corporation (including any nonprofit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization or Governmental Body. "Proceeding" -- any claim, action, arbitration, hearing, litigation or suit commenced, brought, conducted, or heard by or before, or otherwise involving, any Governmental Body or arbitrator. 7 "PUHCA" - the Public Utility Holding Company Act of 1935, as amended, or any successor law, and regulations and rules issued by the SEC pursuant to that act or any successor law. "Real Property" -- all real property owned or leased by Seller in the operation of the Business, together with all interests in real property (including Easements) used or held for use by Seller in the operation of the Business. "Related Documents" -- any Contract provided for in this Agreement to be entered into by one or more of the parties hereto in connection with the transactions contemplated by this Agreement. "Release" -- any presence, emission, dispersal, disposal, spilling, leaking, emitting, discharging, depositing, pumping, pouring, escaping, leaching, dumping, releasing or migration into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), or in, into or from any facility, including the movement of any Hazardous Materials through the air, soil, surface water, groundwater or property. "Representative" -- with respect to a particular Person, any director, officer, employee, agent, consultant, advisor, or other representative of such Person, including legal counsel, accountants, and financial advisors. "Retained Environmental Liabilities" -- means (a) any fines or penalties imposed under applicable Environmental Laws by a Governmental Body as a result of Seller's failure to report any incident or condition required to be reported under applicable Environmental Laws, which shall be subject to the indemnification by Seller under Section 13.1 without regard to the deductible or limit on liability otherwise applicable to such indemnification under Sections 13.3(c) and (d); and (b) Environmental Liability of Seller that Buyer has properly designated to be a New Material Environmental Liability in accordance with Section 12.1(h) and that has not been remedied or responded to by Seller prior to Closing in a manner reasonably satisfactory to Buyer. "SEC" -- the United States Securities and Exchange Commission or any successor agency. "Tax" -- any tax (including any income tax, capital gains tax, value-added tax, sales and use tax, franchise tax, payroll tax, withholding tax or property tax), levy, assessment, tariff, duty (including any customs duty), deficiency, franchise fee or payment, payroll tax, utility tax, gross receipts tax or other fee or payment, and any related charge or amount (including any fine, penalty, interest or addition to tax), imposed, assessed or collected by or under the authority of any Governmental Body. "Tax Return" -- any return (including any information return), report, statement, schedule, notice, form, or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection, or payment of any Tax or in connection with the administration, implementation, or enforcement of or compliance with any Legal Requirement relating to any Tax. 8 "Threatened" -- a claim, dispute, or other matter will be deemed to have been "Threatened" if any demand or statement has been made in writing or any notice has been given in writing, and Seller has Knowledge of the same. Section 1.2 Other Defined Terms. In addition to the terms defined in Section 1.1, certain other terms are defined elsewhere in this Agreement as indicated below and, whenever such terms are used in this Agreement, they shall have their respective defined meanings. Term Section - ---- ------- Active Employees 10.1 Antitrust Authorities 6.3 Assumed Liabilities 2.2 Balance Sheet 5.6(a) Bill of Sale 8.1 Buyer Indemnitees 13.1 Buyer's Pension Plan 10.5 Buyer Welfare Plans 10.7(a) CERCLA 5.14(e) Citizens Marks 6.4 Closing 8.1 Closing Date 8.1 Employee Plans 5.13 Environmental Data 12.1(c) Estimated Purchase Price 3.3(a) Financial Statements 5.6 Purchase Price 3.1 Retained Liabilities 2.3 Seller Indemnitees 13.2 Seller's Pension Plan 10.5 Seller's 401(k) Plan 10.6 Seller Welfare Plan 10.7 Transaction Taxes 11.3 Transferred Employee 10.1 9 ARTICLE II PURCHASE AND SALE Section 2.1 Purchase and Sale of Assets. Upon the terms and subject to the conditions contained herein, at the Closing, Seller shall sell, transfer, assign, convey and deliver to Buyer, and Buyer shall purchase and accept delivery from Seller, all of the Assets. Section 2.2 Assumed Liabilities. In further consideration for the sale of the Assets at the Closing, Buyer will assume and agree to pay, perform and discharge when due, all liabilities and obligations, of every kind or nature, arising out of or relating to: (a) Seller's ownership of the Assets and Seller's conduct or operation of the Business, prior to the Closing Date, other than the Retained Liabilities; (b) all non-delinquent trade payables and other accrued expenses of the Business outstanding on the Closing Date, including the following: (i) electric, gas, telephone and other utility charges; (ii) payroll expenses, payroll taxes, reimbursable employee business expenses and accrued vacation time of the Transferred Employees; (iii) accrued non-delinquent payment obligations under the Contracts assigned to and assumed by Buyer at Closing; and (iv) subject to Section 11.4, Taxes such as sales, franchise, gross receipts and similar Taxes based upon revenues of the Business. (c) Buyer's ownership or use of the Assets and the conduct or operation of the Business by Buyer, in each case on and after the Closing Date, including all liabilities, responsibilities and obligations relating to or arising from the following: (i) Transferred Employees (except to the extent otherwise provided in Article X and except for any continuing obligations for any workers compensation claims where the basis of the claim occurred prior to the Closing Date), including any termination of any Transferred Employee for any reason (including constructive dismissal) and Buyer's hiring practices or decisions; (ii) performance of the Contracts included among the Assets (except that Buyer shall not assume any liabilities or obligations for any breach or default by, or delinquent payment obligations of, Seller under any such Contract occurring or arising or accruing prior to the Closing Date); (iii) customer advances, customer deposits and construction advances, unperformed service obligations, Easement relocation obligations, and engineering and construction required to complete scheduled construction, construction work in progress, and other capital expenditure projects, in each case relating to the Business and outstanding on or arising after the Closing Date; 10 (iv) Future Regulatory Obligations; (v) Assumed Environmental Liabilities; (vi) Transaction Taxes arising out of the sale of the Assets to Buyer hereunder; (vii) Proceedings based on conduct, actions, facts, circumstances or conditions arising or occurring on or after the Closing Date, Proceedings in respect of Future Regulatory Obligations regardless of when filed, and Proceedings arising from or related to any other Assumed Liability; and (viii) the Buyer's IDRB Obligations. (4) the Proceedings described in Schedule 2.2(d) as Assumed Liabilities; and (e) all Proceedings involving Seller, the Assets or the Business based on conduct, actions, facts, circumstances or conditions arising or occurring prior to the Closing Date that are pending or Threatened as of the Closing Date and that are disclosed to Buyer by Seller after the Effective Date but prior to the Closing Date (except any such Proceedings described as Retained Liabilities on Schedule 2.2(d) and any such Proceedings relating to the Retained Liabilities described in Sections 2.3(a), (b), (c), (d), and (f)), provided that any Losses incurred by Buyer in connection with any such individual Proceeding in excess of $200,000 shall be Retained Liabilities and Seller shall be obligated to indemnify Buyer pursuant to Section 13.1 (but subject to limitations on such obligations provided in Section 13.3) for such Losses incurred by Buyer in the amount of such excess; The liabilities, responsibilities and obligations to be assumed by Buyer pursuant to this Section 2.2 are hereinafter collectively referred to as the "Assumed Liabilities." Buyer hereby irrevocably and unconditionally waives and releases Seller from all Assumed Liabilities and all liabilities or obligations relating to the Business or the Assets to the extent arising from events or occurrences on or after the Closing Date or to the extent otherwise relating to the period commencing on the Closing Date, including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). Notwithstanding anything in this Section 2.2 to the contrary, "Assumed Liabilities" shall not include any liabilities, responsibilities or obligations expressly stated to be Retained Liabilities pursuant to Section 2.3. Section 2.3 Retained Liabilities. Buyer shall not assume and at the Closing Seller shall retain and pay, perform and discharge when due, all of the liabilities and obligations relating to or arising from the following (collectively referred to herein as the "Retained Liabilities"): (a) all obligations of Seller under the IDRB Documents except to the extent also included in Buyer's IDRB Obligations, and any other indebtedness for money borrowed by Seller (including items due to Seller's Affiliates) other than payment obligations arising on or after the Closing Date under any equipment lease listed in Part VII of Schedule 5.12 or under any line extension Contracts or similar construction arrangements, it being understood and agreed that such leases, Contracts and similar arrangements do not create indebtedness for money borrowed; (b) Taxes of Seller based on income and any motor vehicle registration Taxes for periods prior to the year in which Closing occurs; (c) Excluded Assets; (d) Non-Transferred Employees, the Seller's Employee Benefit Plans and Employee Plans (except to the extent provided in Article X or Section 2.2(b)(ii)) and any breach or default by, or payment obligations of, Seller with respect to any Transferred Employee occurring or arising or accruing prior to the Closing Date (except to the extent any such payment obligation becomes the responsibility and obligation of Buyer in accordance with Article X or Section 2.2(b)(ii)); 11 (e) Proceedings involving Seller, the Assets or the Business based on conduct (including Seller's performance under any Contract included among the Assets), action, facts, circumstances or conditions arising or occurring prior to the Closing Date including Proceedings described as Retained Liabilities in Schedule 2.2(d), but expressly excluding any such liabilities or obligations relating to any Proceeding described as Assumed Liabilities in Schedule 2.2(d) and any Proceeding relating to (x) Assumed Liabilities (subject to the proviso set forth in Section 2.2(e) with respect to the Proceedings described in Section 2.2(e)), (y) Future Regulatory Obligations and (z) Proceedings affecting the industries in which the Business competes; and (f) Retained Environmental Liabilities. Seller hereby irrevocably and unconditionally waives and releases Buyer from all Retained Liabilities including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). Section 2.4 Condition on Assignment or Assumption of Contracts and Rights. Anything in this Agreement to the contrary notwithstanding, this Agreement shall not constitute an agreement to assign or assume any Contract or any claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment or assumption thereof, without the Consent of a third party thereto, would constitute a breach thereof. Any transfer or assignment to Buyer by Seller of any property or property rights or any Contract which requires the Consent of any third party shall be made subject to such Consent being obtained. If such Consent is not obtained, or if an attempted assignment thereof would be ineffective or would affect the rights of Seller thereunder so that Buyer would not in fact receive all such rights, Seller will cooperate with Buyer in any arrangement reasonably designed to provide for Buyer, at Buyer's cost, the benefits under any such Contract including, without limitation, enforcement for the benefit of Buyer of any and all rights of Seller against a third party thereto arising out of the breach or cancellation by such third party or otherwise To the extent that Buyer does receive the benefits of any such Contract pursuant to the preceding sentence, such Contract shall be a Contract deemed to have been assigned or transferred to Buyer pursuant to Section 2.2(c)(ii). 12 ARTICLE III PURCHASE PRICE Section 3.1 Purchase Price. Subject to the terms and conditions of this Agreement, the aggregate purchase price for the Assets (the "Purchase Price") shall be an amount equal to $215,000,000 in cash, subject to increase for certain Mandated Capital Expenditures (as such term is defined in Section 6.1(a)(6)) in accordance with Section 3.2, and the assumption by Buyer at Closing of the Assumed Liabilities. Section 3.2 Calculation of Purchase Price. The Purchase Price shall be increased by the amount of Mandated Capital Expenditures made by Seller from and after the Effective Date through the day immediately preceding the Closing Date and which are not included in the 2001 or 2002 Capital Budget, but only to the extent that Seller did not have Knowledge of the need to incur the particular expenditures comprising such Mandated Capital Expenditures at the time the 2002 Capital Budget was adopted by the Board of Directors of Seller. Such increase, if applicable, shall be determined in accordance with the following: (a) The amount of Mandated Capital Expenditures by which the Purchase Price is increased shall be estimated by Seller in good faith based upon the relevant account balances at the end of the month for which Seller's books are closed next preceding the Closing Date, with such adjustments as may be appropriate to reflect changes in such account balances occurring between such month-end and the Closing Date. Any such estimated amount shall be set forth in a certificate of Seller delivered to Buyer at least five (5) business days prior to the Closing Date, which certificate shall set forth an estimate of the Purchase Price (the "Estimated Purchase Price"), including the estimated amount of any increase in the Purchase Price pursuant to this Section 3.2, and shall be accompanied by reasonably detailed supporting documentation. (b) Within one hundred twenty (120) days after the Closing Date, Seller shall notify Buyer of the actual amount as recorded on Seller's books and records for the Business of any Mandated Capital Expenditures that were estimated in arriving at the Estimated Purchase Price. Buyer may dispute any amount so determined by Seller, by written notice to Seller within fifteen (15) days after receipt of Seller's notice. If Buyer does not so dispute any item, the party owing the difference between the Estimated Purchase Price and the Purchase Price shall pay such difference to the other party within ten (10) days after the expiration of such fifteen (15) day period, plus interest at 8.25% per annum on such amount from the Closing Date to (but not including) the date of payment. If Buyer disputes the actual amount of any item, the undisputed amount plus interest at 8.25% per annum on such amount from the Closing Date to (but not including) the date of payment shall be paid promptly by the owing party. If such dispute cannot be resolved within sixty (60) days after the giving of Buyer's notice that there exists a disputed amount, then an independent auditor mutually agreeable to Buyer and Seller shall, upon written notice from either Buyer or Seller, resolve such dispute within sixty (60) days after receipt of such notice. The fees and expenses of such independent auditor shall be allocated between Buyer and Seller so that Seller's share of such fees and expenses shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Buyer to such auditor that are successfully disputed by Buyer (as finally determined by such auditor) bears to the total amount of such remaining disputed amounts so submitted by Buyer to such auditor. Any determination by such independent auditor shall be binding and conclusive upon the parties without further appeal therefrom. Within ten (10) days after the independent auditor shall have resolved such dispute, the party owing the determined amount shall pay such determined amount to the other party, plus interest at 8.25% per annum on such determined amount from the Closing Date to (but not including) the date of payment. 13 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Section 4.1 Organization, Existence and Qualification. Buyer is a cooperative association duly incorporated, validly existing, and in good standing under the laws of the State of Hawaii, with full corporate power and authority to conduct its business as it is now being conducted, to own or use the properties and assets that it purports to own or use, to perform its obligations under all Contracts to which it is a party, and to execute and deliver this Agreement and the Related Documents to which Buyer is a party. Section 4.2 Authority Relative to this Agreement and Binding Effect. The execution, delivery and performance of this Agreement and the Related Documents by Buyer have been duly authorized by Buyer's Board of Directors, which constitutes all necessary corporate action required on the part of Buyer for such authorizations. The execution, delivery and performance of this Agreement and the Related Documents by Buyer will not result in (a) any conflict with or breach or violation of or default under the Organizational Documents of Buyer, or (b) a violation or breach of any term or provision of, or constitute a default or accelerate the performance required under, any indenture, mortgage, deed of trust, security agreement, loan agreement, or Contract to which Buyer is a party or by which its assets are bound, or (c) a violation of any Order of any Governmental Body, except for such exceptions to the foregoing clauses (b) and (c) that, individually or in the aggregate, would not be reasonably likely to have a material adverse effect on Buyer. This Agreement constitutes, and the Related Documents to be executed by Buyer when executed and delivered will constitute, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their respective terms, except as such enforceability may be limited by (i) bankruptcy or similar laws from time to time in effect affecting the enforcement of creditors' rights generally or (ii) the availability of equitable remedies generally. Section 4.3 Governmental Approvals. Except for those Consents described in Schedule 5.3 to the extent (but only to the extent) applicable to Buyer, no Consent of any Governmental Body is required to be obtained by Buyer in connection with the execution and delivery by Buyer of this Agreement or the Related Documents or the consummation of the transactions contemplated by this Agreement or the Related Documents. Buyer has no knowledge of any facts or circumstances relating to Buyer or its Affiliates that reasonably would be likely to preclude or prolong the receipt of such required Consents. Section 4.4 Availability of Funds. Buyer has available, and will have available on the Closing Date, sufficient funds to enable it to consummate the transactions contemplated by this Agreement. Buyer has received, and has provided to Seller a true and complete copy of, that certain commitment letter dated as of January 7, 2002 for the Purchase Price, including reasonable flexibility to account for increases in the Purchase Price, duly executed by Buyer and the National Rural Utilities Cooperative Finance Corporation. Section 4.5 Filings. No statement furnished by Buyer for inclusion in any filing with any Governmental Body in connection with obtaining such Governmental Body's Consent for the consummation of the transactions contemplated by this Agreement will contain, as of the date such information is so provided, any untrue statement of a material fact or will omit to state, as of the date such information is so provided, any material fact which is necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 14 Section 4.6 Brokers. Other than the investment banking firm of Christenberry Collet & Company, Inc., no broker or finder has acted for or on behalf of Buyer or any Affiliate of Buyer in connection with this Agreement or the transactions contemplated by this Agreement. No broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Buyer or any Affiliate of Buyer for which Seller or any Affiliate of Seller has or will have any liability or obligations (contingent or otherwise). Buyer acknowledges full responsibility for the fees owed to Christenberry Collet & Company, Inc. Section 4.7 Independent Investigation. Buyer, through its agents or otherwise, is knowledgeable about the businesses engaged in by Seller through its Kauai Electric division and of the usual and customary practices of companies engaged in businesses similar to such businesses and has had access to the Assets, the officers and employees of Seller, and the books, records and files of Seller relating to the Business and the Assets. In making the decision to enter into this Agreement and to consummate the transactions contemplated hereby, Buyer has relied solely on the basis of its own independent due diligence investigation of the Business and upon the representations and warranties made in Article V. Accordingly, Buyer acknowledges that Seller has not made, and Seller is expressly disclaiming and negating any representation or warranty (other than those express representations and warranties made in Article V), express, implied, at common law, by statute or otherwise, relating to the Business. Section 4.8 Public Utility Holding Company Status; Regulation as a Public Utility. Neither Buyer nor any of its Affiliates is a "holding company", a "subsidiary" of a "public utility company" or of a "holding company," or an "affiliate" of a "public utility company" or of a "holding company," within the meaning of such terms in PUHCA. Section 4.9 Buyer's Financial Statements. As Buyer is not presently doing business, and has done no business prior to the Effective Date, it has no historical financial statements. Buyer agrees to deliver to Seller pro forma financial statements of Buyer, based on the Financial Statements and reflecting Buyer's financing for the acquisition contemplated by this Agreement, within 30 days after the Effective Date. Section 4.10 Buyer's Insurance. At least ten (10) days prior to the Closing Date, Buyer will deliver to Seller a Schedule that lists the Buyer's policies and contracts in effect as of the date hereof for casualty and property insurance covering its assets and properties and the operation of its business, together with the risks insured against, coverage limits, deductible amounts and carriers. 15 ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER Section 5.1 Organization, Existence and Qualification. Seller is a corporation duly incorporated, validly existing, and in good standing under the laws of the State of Delaware, with full corporate power and authority to conduct the Business as it is now being conducted, to own or use the Assets, to perform its obligations under all Contracts to which it is a party, and to execute and deliver this Agreement and the Related Documents to which Seller is a party. Seller is duly qualified to do business as a foreign corporation and is in good standing under the laws of the State of Hawaii and each other state in which the failure to be so qualified or in good standing would have a Material Adverse Effect. Section 5.2 Authority Relative to this Agreement and Binding Effect. The execution, delivery and performance of this Agreement and the Related Documents by Seller have been duly authorized by all requisite corporate action. Except as set forth in Schedule 5.2, the execution, delivery and performance of this Agreement and the Related Documents by Seller will not result in (a) any conflict with or breach or violation of or default under the Organizational Documents of Seller, (b) to Seller's Knowledge, a violation or breach of any term or provision of, or constitute a default or accelerate the performance required under, any indenture, mortgage, deed of trust, security agreement, loan agreement, or Material Contract to which Seller is a party or by which any of the Assets are bound, or (c) a violation of any Order of any Governmental Body, except for such exceptions to the foregoing clauses (b) and (c) that, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect or that will be cured, waived or otherwise remedied on or prior to the Closing Date. This Agreement constitutes and the Related Documents to be executed by Seller when executed and delivered will constitute valid and binding obligations of Seller, enforceable against Seller in accordance with their terms, except as enforceability may be limited by (i) bankruptcy or similar laws from time to time in effect affecting the enforcement of creditors' rights generally or (ii) the availability of equitable remedies generally. Section 5.3 Governmental and Other Required Consents. Except as set forth in Schedule 5.3, no Consent of any Governmental Body or third Person is required to be obtained by Seller in connection with the execution and delivery by Seller of this Agreement or the Related Documents or the consummation by Seller of the transactions contemplated by this Agreement or the Related Documents, other than (i) any Consent the failure of which to obtain would not be reasonably likely to have a Material Adverse Effect and (ii) any Consent that is obtained or made on or prior to the Closing Date. Section 5.4 Public Utility Holding Company Status; Regulation as a Public Utility. Seller is a "public utility company" (as such term is defined in PUHCA). Seller is not a "holding company", a "subsidiary" of a "public utility company," or an "affiliate" of a "public utility company" or of a "holding company," within the meaning of such terms in PUHCA. Section 5.5 Title to Assets; Liens. Seller has good and indefeasible title to the Assets reflected in the Financial Statements except those that in the aggregate are not material to the Business and those disposed of since the date of the Financial Statements in the ordinary course of business or otherwise disposed of in accordance with this Agreement. None of the Assets are subject to any Encumbrance except (i) Encumbrances described in Schedule 5.5 and (ii) Permitted Encumbrances. Schedule 5.5 lists each material parcel of Real Property owned in fee simple that is a part of the Assets. To Seller's Knowledge, except as described on Schedule 5.5, Seller owns or possesses all Easements necessary to conduct the Business as now being conducted without any known conflict with the rights of others, in each case except to the extent that the failure to own or possess such Easements would not have a Material Adverse Effect. Seller enjoys peaceful and undisturbed possession under all material real property leases included in the Assets, and to the Knowledge of Seller, all such leases are valid and subsisting and in full force and effect. 16 Section 5.6 Financial Statements. (a) Schedule 5.6(a) sets forth the unaudited proforma balance sheet for the Business as of December 31, 2001 (the "Balance Sheet") and unaudited proforma income statement of the Business for the twelve-month period ended December 31, 2001 (collectively, the "Financial Statements"). Except as set forth in Schedule 5.6(a), the Financial Statements have been prepared on a pre-tax basis in accordance, in all material respects, with GAAP applied on a basis consistent with prior periods. To the Knowledge of Seller and except as set forth in the notes to the Financial Statements, the Balance Sheet presents fairly in all material respects the financial condition of the Business as of its date and the income statement included in the Financial Statements presents fairly in all material respects the results of operations of the Business for the periods covered thereby. The books and records of Seller from which the Financial Statements were prepared were complete and accurate in all material respects at the time of such preparation. (b) To the Knowledge of Seller, as of the Effective Date, there are no Liabilities except for Liabilities (i) reflected in the Balance Sheet, (ii) arising under the Existing Loan Documents, (iii) listed in Schedule 5.6(b), or (iv) which individually or in the aggregate are not reasonably likely to result in a Material Adverse Effect. As used in this Section 5.6(b), the term "Liabilities" shall only mean claims of creditors and Governmental Bodies against Seller arising out of activities, operations or transactions of Seller relating to the Business occurring before the Effective Date which have been Threatened or resulted in a Proceeding against Seller and that have become due or accrued or could reasonably be expected to become due or accrued within the twelve-month period following the Effective Date, but excluding any Liabilities under Legal Requirements, Orders and Contracts where Seller is not currently in material violation of or default under any provision thereof. Section 5.7 Compliance with Legal Requirements; Governmental Permits. Except as set forth in Schedule 5.7, to the Knowledge of Seller: (a) Seller is not in violation of any Legal Requirement or Order that is applicable to it, to the conduct or operation of the Business, or to the ownership or use of any of the Assets, other than such violations, if any, which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect; and (b) Seller possesses all permits, licenses, and authorizations from Governmental Bodies required by any applicable Legal Requirement or Order necessary to permit the operation of the Business in the manner in which it is currently being conducted by Seller, except where the failure to possess any such permit, license or authorization is not reasonably likely to result in a Material Adverse Effect. Section 5.8 Legal Proceedings; Outstanding Orders. Except as set forth in Schedule 5.8, there is no pending or Threatened Proceeding (a) that has been commenced against Seller that is reasonably likely to have a Material Adverse Effect or (b) as of the Effective Date, that challenges, or that may have the effect of preventing, delaying, making illegal, or otherwise interfering with, the transactions contemplated hereby. Except as disclosed in Schedule 5.8, there are currently no outstanding Orders against Seller which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Assets (other than any Order relating to rates, tariffs and similar matters arising in the ordinary course of business) which individually or in the aggregate would have a Material Adverse Effect. Section 5.9 Taxes. Seller has filed all United States federal, state and local income Tax Returns required to be filed by Seller or requests for extensions to file such Tax Returns have been timely filed, and Seller has paid and discharged or made adequate provision for all Taxes except where failure to so file, pay, discharge or make adequate provision for are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. There are no pending audits or other examinations relating to any Tax matters except as set forth in Schedule 5.9. There are no Tax liens on the Assets. As of the Effective Date, Seller has not granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax except as set forth in Schedule 5.9. Section 5.10 Intellectual Property. Schedule 5.10 lists all patents, trademarks, service marks and copyrights used or held for use by Seller primarily in the operation of the Business. Seller has no Knowledge of (i) any infringement or claimed infringement by Seller of any patent, trademark, service mark or copyright of others or (ii) any infringement of any patent, trademark, service mark or copyright owned by or under license to Seller except for any such infringements of the type described in clause (i) or (ii) that are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. Section 5.11 Personal Property. Except for normal wear and tear, and with such exceptions as are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect, the tangible Assets are in normal operating condition and in a state of reasonable maintenance and repair. 17 Section 5.12 Material Contracts; Existing Loan Documents. Schedule 5.12 contains, to Seller's Knowledge, a complete and correct list as of the date hereof of all Material Contracts (other than line extension Contracts and similar construction arrangements), including all Existing Loan Documents. To Seller's Knowledge, there are no defaults under any such Contracts that, individually or in the aggregate, will have a Material Adverse Effect. Except as set forth in Schedule 5.12, Seller is not obligated under any Contract relating to the Business or the Assets with respect to industrial development bonds or other obligations with respect to which the interest thereon is excluded from gross income of the holder for federal or state income tax purposes. Section 5.13 Employee Benefit Matters. (a) Schedule 5.13 lists (i) each "Employee Benefit Plan," as such term is defined in Section 3(3) of ERISA, which is covered by any provision of ERISA and which is maintained by Seller for the benefit of the Active Employees; (ii) each other material fringe benefit plan, policy or arrangement currently maintained by Seller for the benefit of Active Employees which provides for pension, deferred compensation, bonuses, severance, employee insurance coverage or similar employee benefits (collectively, "Employee Plans"); and (iii) each collective bargaining, union or other employee association agreement, employment, managerial advisory, and consulting agreement, employee confidentiality agreement, and all other material agreements, policies, or arrangements maintained by Seller for the Active Employees. Seller has made available to Buyer copies, which were accurate and complete as of the date so made available, of all such documents and (if applicable) summary plan descriptions with respect to such plans, agreements and arrangements, or summary description(s) of any such plans, agreements or arrangements not otherwise in writing. (b) Seller's Pension Plan and Seller's 401(k) Plan are the only Employee Benefit Plans which are intended to be qualified under Section 401(a) of the IRC. (c) To the Knowledge of Seller, each Employee Benefit Plan has been established and administered in all material respects in accordance with the material terms of ERISA and the applicable provisions of the IRC. Section 5.14 Environmental Matters. (a) Except as listed in Schedule 5.14, since December 31, 1996, Seller has not received a written notice from a Governmental Body that Seller is in violation of any Environmental Law arising out of Seller's ownership, use or operation of the Assets or the operation of the Business, except for any violation not reasonably likely to result in a Material Adverse Effect. (b) Except as listed in Schedule 5.14, there are no Proceedings pending or Threatened with respect to Seller's compliance with Environmental Laws and relating to the Business or the Assets. (c) Except as listed in Schedule 5.14, since December 31, 1996, Seller has not received any written notice from any Governmental Body that Seller does not have all certificates, permits and authorizations required by any Environmental Law for Seller's ownership, use or operation of the Assets or the operation of the Business (other than any such environmental permit the absence of which is not reasonably likely to result in a Material Adverse Effect). (d) Except as set forth in Schedule 5.14, to Seller's Knowledge, no environmental remediation of any Release is occurring on any Real Property included in the Assets nor has Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for any such environmental remediation. (e) Except as set forth in Schedule 5.14, none of the Real Property is (i) situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area designated under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), or (ii) to Seller's Knowledge, situated in any site or study area designated under any state statute comparable to CERCLA. Section 5.15 No Material Adverse Change. Except as set forth in Schedule 5.15, between the date of the Balance Sheet and the Effective Date, no Material Adverse Effect has occurred. Except for actions taken in connection with the contemplated sale of the Business and this Agreement, between the date of the Balance Sheet and the Effective Date, the Business has been conducted in substantially the same manner in which it has been previously conducted. 18 Section 5.16 State Regulatory Matters. (a) To Seller's Knowledge, Schedule 5.16 reflects all of the currently pending rate filings relating to the Business heretofore made by Seller before state regulatory commissions and each other currently pending Proceeding of such state regulatory commission that is reasonably likely to have a Material Adverse Effect. (b) To Seller's Knowledge, all currently effective material filings relating to the Business heretofore made by Seller with state regulatory commissions were made in compliance with Legal Requirements then applicable thereto and the information contained therein was true and correct in all material respects as of the respective dates of such filings. Section 5.17 Brokers. Except for Morgan Stanley & Co. Incorporated, no broker or finder has acted for or on behalf of Seller or any Affiliate of Seller in connection with this Agreement or the transactions contemplated by this Agreement. No broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Seller or any Affiliate of Seller for which Buyer has or will have any liabilities or obligations (contingent or otherwise). Section 5.18 Disclaimer. Except as otherwise expressly set forth in this Article V, Seller expressly disclaims any representations or warranties of any kind or nature, express or implied, as to the condition, value or quality of the assets or properties currently or formerly used, operated, owned, leased, controlled, possessed, occupied or maintained by Seller, and Seller SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO SUCH ASSETS OR PROPERTIES, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, IT BEING UNDERSTOOD THAT SUCH ASSETS AND PROPERTIES ARE BEING ACQUIRED, "AS IS, WHERE IS" ON THE CLOSING DATE, AND IN THEIR PRESENT CONDITION, WITH ALL FAULTS AND THAT BUYER SHALL RELY ON ITS OWN EXAMINATION AND INVESTIGATION THEREOF. 19 ARTICLE VI COVENANTS Section 6.1 Covenants of Seller. Seller agrees to observe and perform the following covenants and agreements: (a) Conduct of the Business Prior to the Closing Date. With respect to the Business, except (i) as contemplated in this Agreement or in Schedule 6.1, (ii) as required by any Legal Requirement or Order or (iii) as otherwise expressly consented to in writing by Buyer which consent will not be unreasonably withheld or delayed, prior to the Closing, Seller will, with respect to the Business: (1) Not make or permit any material change in the general nature of the Business; (2) Maintain the Business in the ordinary course of business in accordance with prudent business judgment and consistent with past practice and policy, and maintain the Assets in their present condition, reasonable wear and tear excepted, subject to retirements in the ordinary course of business; (3) Not enter into any material transaction or Material Contract other than in the ordinary course of business; (4) Not purchase, sell, lease, dispose of or otherwise transfer or make any Contract for the purchase, sale, lease, disposition or transfer of, or subject to Encumbrance, any material Assets other than in the ordinary course of business; (5) Not hire any new employee unless such employee is a bona fide replacement for either a presently-filled position or a vacancy in an authorized position with the Business; (6) Continue to make capital expenditures necessary to maintain, operate or repair the Assets or to replace Assets damaged or destroyed by casualty loss, and to make Mandated Capital Expenditures, in each case in the ordinary course of business in accordance with prudent business judgment and consistent with past practice and policy, including capital expenditures required to (i) provide service to ensure adequate transmission or distribution facilities under power supply contracts, and (ii) fulfill requirements under the Certificate of Public Convenience and Necessity. Notwithstanding the foregoing, Seller will not be required to make any capital expenditures relating to any capital project that is not included in the applicable Capital Budget unless such expenditures are required to comply with either a tariff for the Business or a mandate by a Governmental Body (in either case, "Mandated Capital Expenditures"). For purposes of clarification, Mandated Capital Expenditures also shall include, without duplication, expenditures to purchase materials, supplies and other capital items that are dedicated to, but as of Closing have not been used in, mandated capital projects and other expenditures relating to mandated capital projects that are recorded as an asset of the Business as of the Closing Date to the extent such expenditures are normally recoverable through rates, including all such expenditures recorded in the Preliminary Survey and Investigation account of the Business. If Seller becomes obligated to incur any Mandated Capital Expenditures, then Seller shall provide to Buyer a written description of the mandated capital project to which the expenditures relate. Seller also shall deliver to Buyer a copy of the 2002 Capital Budget promptly after it is approved by the Board of Directors of Seller. If at Closing Seller's actual 2002 capital expenditures for the Business through the day immediately preceding the Closing Date are less than the capital expenditures proposed in such approved fiscal year 2002 Capital Budget, then Seller nonetheless shall be deemed to have complied with this Section 6.1(a)(6) if such actual 2002 capital expenditures reasonably approximate an appropriate proportion of such approved 2002 budgeted capital expenditures in light of the number of months in 2002 that have passed prior to the Closing Date, the project timelines used by Seller to plan for and to complete the various approved capital projects, and other facts and circumstances relating to when such approved capital expenditures should reasonably be expected to have been incurred during the 2002 fiscal year; 20 (7) Comply in all material respects with all applicable material Legal Requirements and Orders, including without limitation those relating to the filing of reports and the payment of Taxes due to be paid prior to the Closing, other than those contested in good faith; (8) Except in the ordinary course of business or in accordance with the terms of any existing Contract, Employee Plan or collective bargaining agreement, not grant any material increase or change in total compensation or benefits (taken as a whole) to any of the Transferred Employees or enter into any employment, severance or similar Contract with any Person or amend any such existing Contracts to increase any amounts payable thereunder or benefits provided thereunder, provided that Seller agrees to consult with Buyer prior to granting any increase in the aggregate recurring cash compensation of the non-union Transferred Employees by an amount in excess of three percent (3%) in any year; (9) Not terminate any Material Contract except in the case of a breach of such Contract by the other party thereto; or (10) Not create, incur, assume, guarantee or otherwise become liable with respect to any indebtedness for money borrowed other than in the ordinary course of business (it being understood and agreed that customer advances, customer deposits and construction advances do not create indebtedness for money borrowed), except in connection with additional borrowings under the Existing Loan Documents and any renewal, extension, rearrangement or refunding of any indebtedness created under or evidenced by the Existing Loan Documents, and except pursuant to advances made by Seller to the Business. (b) Access to the Business, Assets and Records; Updating Information. (1) From and after the date hereof and until the Closing Date, Seller shall permit Buyer and its Representatives to have, on reasonable notice and at reasonable times, reasonable access to all books, papers and records to the extent that they reasonably relate to the ownership, operation, obligations and liabilities of the Business and the Assets; provided, however, that such access shall not unreasonably interfere with the operation of the Business; and provided, further, that Buyer hereby agrees to defend, indemnify and hold harmless Seller from and against all Losses arising out of or relating to Buyer's access provided pursuant to this Section 6.1(b)(1). Without limiting the application of the Confidentiality Agreement, all documents or information furnished by Seller hereunder shall be subject to the Confidentiality Agreement. (2) Seller will notify Buyer as promptly as practicable of any significant change in the ordinary course of business for the Business and of any material Proceedings (Threatened or pending) involving or affecting the Business or the transactions contemplated by this Agreement, and shall use reasonable efforts to keep Buyer fully informed of such events. (c) Consents. Seller will use its commercially reasonable efforts to obtain all necessary Consents from any Person required to consummate the transactions contemplated hereby, including the Consent of any Person required under any Legal Requirement or Contract applicable to the Business. 21 Section 6.2 Covenants of Buyer. Buyer agrees to observe and perform the following covenants and agreements: (a) Consents. Buyer will use its commercially reasonable efforts to assist Seller in obtaining all necessary Consents from any Person required to consummate the transactions contemplated hereby, including the Consent of any Person required under any Legal Requirement or Contract applicable to the Business, and will use its commercially reasonable efforts to obtain all Consents listed in Schedule 4.2 or Schedule 4.3. (b) Access to Information. After Closing, Buyer will, and will cause its Representatives to, afford to Seller, including its Representatives, reasonable access to all books, records, files and documents related to the Business in order to permit Seller to prepare and file its tax returns and to prepare for and participate in any investigation with respect thereto, to prepare for and participate in any other investigation and defend any Proceedings relating to or involving Seller or the Business for which Seller may be responsible, to discharge its obligations under this Agreement and the other Related Documents to which its is a party and for other reasonable purposes and will afford Seller reasonable assistance in connection therewith. Buyer will cause such records to be maintained for not less than seven years from the Closing Date and will not dispose of such records without first offering in writing to deliver them to Seller; provided, however, that in the event that Buyer transfers all or a portion of the Business to any third party during such period, Buyer may transfer to such third party all or a portion of the books, records, files and documents related thereof, provided such third party transferee expressly assumes in writing the obligations of Buyer under this Section 6.2(b). In addition, on and after the Closing Date, at Seller's request, Buyer shall make available to Seller and its Affiliates, employees, representatives and agents, those employees of Buyer requested by Seller in connection with any Proceeding, including to provide testimony, to be deposed, to act as witnesses and to assist counsel; provided, however, that (x) such access to such employees shall not unreasonably interfere with the normal conduct of the operations of Buyer and (y) Seller shall reimburse Buyer for the allocated time charges of such employees and the out-of-pocket costs reasonably incurred by Buyer in making such employees available to Seller. (c) Citizens Guarantees and Surety Instruments. Buyer shall use its reasonable efforts to assist Seller in obtaining full and complete releases on the guarantees, letters of credit, bonds and other surety instruments listed in Schedule 6.2(c). For purposes of this Section 6.2(c), reasonable efforts shall include: (i) Buyer's assumption of the Contracts on the terms set forth in this Agreement; and (ii) an obligation on the part of Buyer to provide a guaranty, letter of credit, bond or other surety instrument at Closing to the extent required by any Contract assumed by Buyer at Closing and, in general, an equivalent surety instrument to be substituted for any surety instrument provided by Citizens to any beneficiary in connection with the Business. (d) Other Covenants of Buyer. Buyer agrees to submit to regulation by the Hawaii Public Utilities Commission to the same extent as such state regulatory commission currently regulates Seller in connection with the Business, it being agreed that this covenant shall terminate and have no further effect upon Closing. Buyer also agrees to make no filings with such state regulatory commission or take any other action in connection with any Proceeding or Legal Requirement relating to any other businesses conducted by Seller that also are subject to regulation by such state regulatory commission. 22 Section 6.3 Governmental Filings. (a) HSR Act Filing. Buyer and Seller shall comply promptly with the notice and reporting requirements of the HSR Act. Buyer and Seller shall comply substantially with any additional requests for information, including requests for production of documents and production of witnesses for interviews or depositions, made by the Antitrust Division of the United States Department of Justice, the United States Federal Trade Commission or the antitrust or competition law authorities of any other jurisdiction (the "Antitrust Authorities"). Buyer shall exercise its best efforts, and Seller shall cooperate fully with Buyer, to prevent the entry in any Proceeding brought by an Antitrust Authority or any Governmental Body which would prohibit, make unlawful or delay the consummation of the transactions contemplated by this Agreement. Seller shall not oppose any efforts of Buyer, including Buyer's proffer of consent to any Order, to complete lawfully the transactions contemplated by this Agreement, and shall cooperate in good faith with Buyer and the Antitrust Authorities to the same effect. (b) Other Regulatory Filings. Buyer and Seller will, as soon as reasonably practicable following the Effective Date, prepare and file with each Governmental Body, including a joint application with the Hawaii Public Utilities Commission, requests for such Consents as may be necessary for the transfer of the Assets (including the transfer of Seller's franchise relating to the Business) in accordance with the terms of this Agreement. Buyer and Seller will diligently pursue such Consents and will cooperate with each other in seeking such Consents. To this end, the parties agree to make available the personnel and other resources of their respective organizations in order to accomplish actions reasonably required by them to obtain all such Consents. Section 6.4 Citizens Marks. Buyer acknowledges and agrees with Seller that Seller has the absolute and exclusive proprietary right to all names, marks, trade names, trademarks and corporate symbols and logos incorporating "Citizens" and "CZN" (collectively and together with all other names, marks, trade names, trademarks and corporate symbols and logos owned by Seller or any of its Affiliates, the "Citizens Marks"), all rights to which and the goodwill represented thereby and pertaining thereto are being retained by Seller. Within one hundred eighty (180) days after the Closing Date, Buyer shall cease using any Citizens Mark and shall remove from the Assets any and all Citizens Marks. Thereafter, Buyer shall not use any Citizens Mark in connection with the sale of any products or services or otherwise in the conduct of its businesses. In the event that Buyer breaches this Section 6.4, Seller shall be entitled to specific performance of this Section 6.4 and to injunctive relief against further violations, as well as any other remedies at law or in equity available to Seller. Section 6.5 Acknowledgment by Buyer. In order to induce Seller to enter into and perform this Agreement and the Related Documents, Buyer acknowledges and agrees with Seller as follows: (a) To the knowledge of Buyer, Seller's representations and warranties made in Article V are true and correct as of the Effective Date. To the extent any representation or warranty of Seller made herein is, to the knowledge of Buyer acquired prior to the Effective Date, untrue or incorrect, (i) Buyer shall have no rights under this Agreement or any Related Documents by reason of such untruth or inaccuracy, and (ii) any such representation or warranty by Seller shall be deemed to be amended to the extent necessary to render it consistent with such knowledge of Buyer. (b) Other than any additional environmental due diligence that Buyer may conduct pursuant to Section 12.1 of this Agreement, Buyer has concluded whatever inspections, studies, tests and investigations Buyer desired to conduct relating to the Business and the Assets, including economic reviews and analyses, soil tests, engineering analyses, environmental analyses (including Phase I environmental assessments of the Assets) and analyses of any applicable records of any Governmental Body. Buyer is relying solely on its own investigation as to the Business and the Assets and is assuming the risk that adverse physical, economic or other conditions or circumstances (including soil and groundwater conditions) may not have been revealed by such investigation. (c) NONE OF SELLER OR ANY OF ITS AFFILIATES OR REPRESENTATIVES MAKES ANY REPRESENTATION OR WARRANTY AS TO THE ACCURACY OR COMPLETENESS OF ANY INFORMATION, WRITTEN OR ORAL, FURNISHED TO OR PREPARED AT THE REQUEST OF BUYER OR ANY OF ITS AFFILIATES OR REPRESENTATIVES WITH RESPECT TO THE BUSINESS OR THE ASSETS. 23 (d) THE REPRESENTATIONS AND WARRANTIES SET FORTH IN ARTICLE V OF THIS AGREEMENT CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES OF SELLER TO BUYER IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED HEREBY AND BY THE RELATED DOCUMENTS THERE ARE NO REPRESENTATIONS, WARRANTIES, COVENANTS, UNDERSTANDINGS OR AGREEMENTS, ORAL OR WRITTEN, IN RELATION THERETO BETWEEN THE PARTIES OTHER THAN THOSE INCORPORATED HEREIN AND THEREIN. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES EXPRESSLY SET FORTH IN ARTICLE V OF THIS AGREEMENT, BUYER DISCLAIMS RELIANCE ON ANY REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, BY OR ON BEHALF OF SELLER OR ITS AFFILIATES OR REPRESENTATIVES. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, BUYER ACKNOWLEDGES AND AGREES THAT, EXCEPT AS PROVIDED IN SECTIONS 5.7, 5.11 AND 5.14, THERE ARE NO REPRESENTATIONS OR WARRANTIES OF SELLER WITH RESPECT TO THE CONDITION OF THE ASSETS, COMPLIANCE WITH ENVIRONMENTAL LAWS AND ENVIRONMENTAL PERMITS OR THE PRESENCE OR RELEASES OF HAZARDOUS MATERIAL IN THE FIXTURES, SOILS, GROUNDWATER, SURFACE WATER OR AIR ON, UNDER OR ABOUT OR EMANATING FROM ANY OF THE PROPERTIES OR ASSETS OF SELLER. Section 6.6 Transition Plan. If Buyer and Seller have not already done so, then (i) within 30 days after the Effective Date, Buyer shall deliver to Seller a list of its proposed representatives to a joint transition team, which shall include expertise from various functional specialties associated or involved in providing billing, payroll and other support services provided to the Business by any automated or manual process using facilities or employees that are not included among the Assets or Transferred Employees, and (ii) Seller will add its representatives to such team within 15 days after receipt of Buyer's list. Such team will be responsible for preparing as soon as reasonably practicable after the Effective Date and at least 60 days prior to the Closing Date, and timely implementing, a transition plan which will identify and describe substantially all of the various transition activities that the parties will cause to occur before and after the Closing and any other transfer of control matters that any party reasonably believes should be addressed in such transition plan, including the migration or conversion of the data relating to the Business that is included among the Assets to Buyers information systems (it being understood and agreed that such activity will be at Buyer's sole cost and expense and to be performed by consultants reasonable satisfactory to Seller). If requested by either party, the terms and conditions governing such transition activities will be more fully set forth in a Transition Agreement reasonably satisfactory to the parties. If the parties have not already done so, then Buyer and Seller shall use their commercially reasonable efforts to cause their Representatives on such transition team to cooperate in good faith and take all reasonable steps necessary to develop a mutually acceptable transition plan by no later than 120 days after the Effective Date. 24 Section 6.7 IDRB Obligations. (a) Buyer's Obligations Regarding IDRB Indebtedness. Each party acknowledges that (x) Seller is and on and after the Closing Date shall continue to be and shall remain the primary obligor with respect to all IDRB Indebtedness and related Bonds outstanding immediately on and after the Closing Date to the same extent as though no sale of the Assets had been made and that Buyer shall have no payment obligations with respect to such IDRB Indebtedness and related Bonds and (y) the IDRB Documents require Seller not to take or permit to be taken any action which would have the effect, directly or indirectly, of subjecting the interest on any of the Bonds to federal or state income taxation. Accordingly, Buyer covenants and agrees at Closing to execute and deliver to Seller an agreement substantially in the form attached hereto as Exhibit 6.7, with respect to the Bonds that will be outstanding on and after the Closing Date. Buyer represents, warrants, covenants and agrees, that so long as any Bonds are outstanding, (a) as the "successor in interest" to Seller (as such term is used in Section 142(f)(3)(B) of the IRC), Buyer will cause the Assets that were acquired, constructed, improved or equipped with the proceeds of such Bonds to be used as facilities for the local furnishing of electric energy within the meaning of Sections 142(a)(8) and 142(f) of the IRC or, if applicable, Section 103(b)(4)(E) of the Internal Revenue Code of 1954, as amended (that is, the local furnishing of electric energy from such Assets shall only include furnishing solely within the area consisting of (i) a city and one contiguous county, or (ii) two contiguous counties; provided that such use shall be to provide service within the same service area as served by Seller on January 1, 1997 (or within a county or a city any potion of which is within such area)), (b) Buyer has not made and shall not make an election pursuant to Section 142(f)(4)(B) of the IRC to terminate tax-exempt bond financing by Buyer and (c) Buyer shall not otherwise take or permit to be taken any action with respect to the Assets and its use and operation thereof which would have the effect, directly or indirectly, of subjecting interest on any of such Bonds to federal or state income taxation. Buyer acknowledges and agrees that Seller's bond counsel may rely on Buyer's representations, warranties and covenants as hereinabove provided for the purpose of rendering legal opinions, as required by the IDRB Documents as a precondition to the sale by Seller of such Assets, to the effect that the sale of such Assets will not result in the inclusion of the interest on the Bonds in the gross income of the recipient for purposes of federal income taxation. Nothing in this Agreement is intended to nor shall it be interpreted as (i) an assignment to, and assumption by, Buyer of any of the IDRB Documents, or (ii) as an undertaking or agreement by Buyer to assume, guarantee or pay any of Seller's loan or other payment obligations pursuant to the IDRB Documents. (b) Consents and Legal Opinions. The parties shall use their respective commercially reasonable efforts to obtain all Consents and legal opinions as may be required under the IDRB Documents to enable Seller to retain until maturity the IDRB Indebtedness and to sell the Assets to Buyer without the result that the interest on the Bonds will be included in the gross income of the recipient for purposes of federal income taxation. 25 ARTICLE VII CONDITIONS PRECEDENT Section 7.1 Seller's Conditions Precedent to Closing. The obligation of Seller to consummate the transactions contemplated by this Agreement shall be subject to fulfillment prior to the Closing of the following conditions: (a) Representations and Warranties True as of the Closing Date. Buyer's representations and warranties in this Agreement shall have been true and correct in all material respects as of the Effective Date and shall be true and correct in all material respects as of the Closing Date as if made on the Closing Date, subject to changes expressly contemplated and permitted by this Agreement, except that representations and warranties made as of, or in respect of, only a specified date or period shall be true and correct in all material respects as of, or in respect of, such date or period. (b) Compliance with Agreements. The covenants, agreements and conditions required by this Agreement to be performed and complied with by Buyer shall have been performed and complied with in all material respects prior to or at the Closing Date. (c) Certificate. Buyer shall execute and deliver to Seller a certificate of an authorized officer of Buyer, dated the Closing Date, stating that the conditions specified in Sections 7.1(a) and 7.1(b) of this Agreement have been satisfied. (d) Governmental Approvals and Other Consents. The Hawaii Public Utilities Commission shall have issued an Order approving the transactions contemplated hereby, the terms and conditions of such Order shall be acceptable in all material respects to Seller in its reasonable discretion and shall have no significant adverse effect on Seller's acquisition and divestiture activities in the State of Hawaii (including the divestiture of the Assets), and such Order shall have become a Final Order. Seller also shall have obtained all other Consents of Governmental Bodies and other Persons which are required in order to consummate the transactions contemplated hereby and to transfer the Assets to Buyer without incurring material liability under any Legal Requirement, Order or Contract. (e) HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or have been terminated. (f) Injunctions. On the Closing Date, there shall be no Orders which operate to restrain, enjoin or otherwise prevent the consummation of the transactions contemplated by this Agreement. (g) Opinion of Counsel. On the Closing Date, Seller shall have received from counsel to Buyer an opinion in the form of Exhibit 7.1(g). (h) Documents. Buyer shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by it hereunder prior to the Closing Date, including pursuant to Section 8.1, and shall have taken such actions as Seller may have requested pursuant to Section 11.2 hereof. (i) IDRB Indebtedness. Seller shall have obtained all Consents and legal opinions required under the IDRB Documents to enable Seller to retain the IDRB Indebtedness until maturity, and to sell the Assets to Buyer without the result that the interest on any of the Bonds will be included in the gross income of the recipient for purposes of federal income taxation and without any event of taxability (as such term is customarily used in municipal securities transactions) arising from the sale of the Assets pursuant to this Agreement, and Buyer shall have duly executed and delivered all of the instruments contemplated by Section 6.7(a). 26 Section 7.2 Buyer's Conditions Precedent to Closing. The obligation of Buyer to consummate the transactions contemplated by this Agreement shall be subject to fulfillment prior to the Closing of the following conditions: (a) Representations and Warranties True as of the Closing Date. Seller's representations and warranties in this Agreement shall have been true and correct in all material respects as of the Effective Date and shall be true and correct in all material respects as of the Closing Date as if made on the Closing Date, subject to changes expressly contemplated and permitted by this Agreement; except (i) that representations and warranties made as of, or in respect of, only a specified date or period shall be true and correct in all material respects as of, or in respect of, such date or period, and (ii) to the extent that any failure of such representations and warranties to be true and correct as aforesaid when taken in the aggregate would not have a Material Adverse Effect. (b) Compliance with Agreements. The covenants, agreements and conditions required by this Agreement to be performed and complied with by Seller shall have been performed and complied with in all material respects prior to or at the Closing Date, except where the failure to so perform or comply when taken in the aggregate would not have a Material Adverse Effect. (c) Certificate. Seller shall execute and deliver to Buyer a certificate of an authorized officer of Seller, dated the Closing Date, stating that the conditions specified in Sections 7.2(a) and 7.2(b) of this Agreement have been satisfied. (d) Governmental Approvals. The Hawaii Public Utilities Commission shall have issued an Order approving the transactions contemplated hereby, such Order shall not contain any restrictions or conditions (other than those in effect on the Effective Date or requiring that the regulatory treatment with respect to the Business in existence as of the Effective Date applicable to Seller be continued following the Closing) which would have a Material Adverse Effect, and such Order shall have become a Final Order. In addition, Seller shall have obtained all other Consents of Governmental Bodies and other Persons which are required in order to consummate the transactions contemplated hereby other than those the failure of which to obtain would not have a Material Adverse Effect. (e) HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or have been terminated. (f) Injunctions. On the Closing Date, there shall be no Orders which operate to restrain, enjoin or otherwise prevent the consummation of the transactions contemplated by this Agreement. (g) Opinion of Counsel. On the Closing Date, Buyer shall have received from L. Russell Mitten, Vice President and General Counsel of Seller, an opinion in the form of Exhibit 7.2(g) hereto. (h) Documents. Seller shall have delivered all of the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Section 8.1, and shall have made arrangements reasonably satisfactory to Buyer to deliver to Buyer as promptly as practicable after the Closing such records (including customer and employee records) necessary to own and operate the Business. (i) No Material Adverse Change. Since the Effective Date, no Material Adverse Effect shall have occurred that has continuing effect as of the Closing Date. 27 ARTICLE VIII CLOSING Section 8.1 Closing. The closing of the purchase and sale of the Assets (the "Closing") will take place at the offices of Fleischman and Walsh, L.L.P., 1400 Sixteenth Street, N.W., Suite 600, Washington, D.C. 20036, on the first calendar day of the month immediately following the month in which the conditions specified in Sections 7.1(d) and 7.2(d) have been satisfied, unless another time, date and place is agreed to in writing by the parties. The date of the Closing is referred to in this Agreement as the "Closing Date." The transactions to be consummated on the Closing Date shall be deemed to have been consummated as of 12:01 a.m. on the Closing Date. At the Closing the following events shall occur, each event being deemed to have occurred simultaneously with the other events. (a) Bill of Sale. Seller and Buyer shall execute and deliver the Bill of Sale and Assignment and Assumption Agreement in the form of Exhibit 8.1(a) hereto (the "Bill of Sale"). (b) Payment of Purchase Price. Buyer will pay to Seller an amount equal to the Estimated Purchase Price by wire transferring such amount, in lawful money of the United States of America in immediately available funds, to such account as Seller shall have designed by notice to Buyer. If the Closing Date is not a business day on which financial institutions are open and operating, then on or before the last business day on which financial institutions are open and operating before the Closing Date, Buyer shall deliver the Estimated Purchase Price to Buyer's lead bank (the "Escrow Agent") in immediately available funds in U.S. dollars. Upon receipt, the Escrow Agent shall invest the Estimated Purchase Price in an interest-bearing account mutually agreed upon by Seller and Buyer. At Closing, Buyer shall sign and deliver to Seller a statement which confirms that the Closing has occurred and which instructs the Escrow Agent to transfer to Seller the funds representing the Estimated Purchase Price, plus an amount representing the interest earned on and after the Closing Date until the date the funds are transferred, to an account that Seller shall designate at least two (2) business days prior to the date the funds are required to be transferred hereunder. The Escrow Agent shall refund the balance to Buyer. The fees and expenses of Escrow Agent shall be paid equally by Seller and Buyer. (c) Other Related Documents. To the extent consistent with the other provisions of this Agreement, Seller (or the appropriate Affiliate of Seller) and Buyer shall execute and deliver such other Related Documents (including special warranty deeds, conveyances, certificates of title, bills of sale and assignment and assumption instruments) reasonably requested by a party that are necessary in order to satisfy any applicable Legal Requirements relating to the transfer of the Assets to Buyer or the assumption of the Assumed Liabilities by Buyer or which are customarily given in the State of Hawaii to accomplish transfers of assets of the type involved; provided, however, that nothing in this clause (c) shall obligate Seller or any Affiliate of Seller to execute or deliver any document that affects, in a manner adverse to Seller, Seller's liability to Buyer as expressed herein and in the Bill of Sale. (d) IDRB Indebtedness. Buyer and Seller shall execute and deliver the IDRB Obligations Agreement contemplated by Section 6.7(a) to the extent not previously executed and delivered by Buyer and Seller. 28 ARTICLE IX TERMINATION Section 9.1 Termination Rights. This Agreement may be terminated in its entirety at any time prior to the Closing: (a) By the mutual written agreement of Seller and Buyer; (b) By Buyer, on the one hand, or Seller, on the other hand, in writing if there shall be in effect a nonappealable Order prohibiting the transactions contemplated by this Agreement; (c) By Buyer, upon the breach in any material respect of any of the representations and warranties of Seller contained herein or in the failure by Seller to perform and comply in any material respect with any of the agreements and obligations required by this Agreement to be performed or complied with by Seller, provided that such breach or failure is reasonably likely to result in a Material Adverse Effect and is not cured or otherwise addressed by Seller in a manner reasonably acceptable to Buyer within 30 days of Seller's receipt of a written notice from Buyer that such a breach or failure has occurred (or significant efforts have not been commenced to cure such misrepresentation or breach if it is susceptible to cure but not capable of being cured within such 30 days); (d) By Seller, upon the breach in any material respect of any of the representations and warranties of Buyer contained herein or the failure by Buyer to perform and comply in any material respect with any of the agreements and obligations required by this Agreement to be performed or complied with by Buyer, provided that such breach or failure is not cured or otherwise addressed by Buyer in a manner reasonably acceptable to Seller within 30 days of Buyer's receipt of a written notice from Seller that such a breach or failure has occurred (or significant efforts have not been commenced to cure such misrepresentation or breach if it is susceptible to cure but not capable of being cured within such 30 days); (e) By either party in writing if the Closing has not occurred within twelve (12) months after the Effective Date; provided, however, that the right to terminate this Agreement under this Section 9.1(e) will not be available to any party that is in material breach of its representations, warranties, covenants or agreements contained herein; provided, however, that if Closing has not occurred within such period of time, then Seller shall have the unilateral right to extend such period of time by a further six (6) months, and upon Seller's exercise of such right, such period of time shall be so extended; (f) By Seller or Buyer, as appropriate, if any Governmental Body whose Consent is required to fulfill a condition precedent to Closing set forth in Section 7.1(d) (with respect to Seller) or in Section 7.2(d) (with respect to Buyer) has affirmatively indicated that such Consent will not be given or will contain terms or conditions (or, if such Consent has been obtained, contains terms or conditions) that, in the reasonable business judgment of Seller or Buyer, as appropriate, will result in a condition precedent to Closing set forth in Section 7.1(d) (with respect to Seller) or in Section 7.2(d) (with respect to Buyer) not being satisfied; or 29 (g) By Seller if Buyer shall have failed to pay the Purchase Price at Closing or if Seller reasonably concludes that Buyer does not have available to it committed sources of funding with which to pay the Purchase Price. Section 9.2 Limitation on Right to Terminate; Effect of Termination. (a) A party shall not be allowed to exercise any right of termination pursuant to Section 9.1 if the event giving rise to the termination right shall be due to the willful failure of such party seeking to terminate this Agreement to perform or observe in any material respect any of the covenants or agreements hereof to be performed or observed by such party. (b) If this Agreement is terminated as permitted under Section 9.1, such termination shall be without liability of or to any party to this Agreement, or any shareholder or Representative of such party; provided, however, that if such termination shall result from the willful failure of any party to fulfill a condition to the performance of any other party or to perform a covenant of this Agreement or from a material and willful breach by any party to this Agreement (it being understood that the failure to cure a breach shall not, by itself, be a willful breach of this Agreement), then such party shall (subject to the limitation set forth in the last sentence of this Section 9.2(b)) be fully liable for any and all damages sustained or incurred by the other party. If prior to Closing either party to this Agreement resorts to legal proceedings to enforce this Agreement, the prevailing party in such proceedings shall be entitled to recover all costs incurred by such party including reasonable attorney's fees, in addition to any other relief to which such party may be entitled; provided, however, and notwithstanding anything to the contrary in this Agreement, in no event shall either party be entitled to receive any punitive, indirect or consequential damages. ARTICLE X EMPLOYEE MATTERS Section 10.1 Employment of Transferred Employees. (a) Schedule 10.1 lists the total number of salaried and hourly, nonunion and union, employees actively employed as of the Effective Date by Seller or its Affiliates whose primary duties relate to the Business ("Active Employees"). As of the Closing Date, Buyer shall employ all Active Employees of Seller employed in the Business being acquired ("Transferred Employees") in the same or substantially equivalent positions, and at the same compensation level (including wages, salary and bonuses) as were in effect with Seller immediately prior to the Closing Date. For purposes of the preceding sentence, "Active Employees" shall include all full-time and part-time employees, employees on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, on short-term disability, on layoff with recall rights, and employees on other leaves of absences where there is a legal or contractual right to reinstatement. 30 (b) Prior to the Effective Date, Seller has delivered to Buyer a list of the persons who would have been Transferred Employees had the Closing Date occurred on September 30, 2001, showing the following information for each such person: (i) the name of each such person; (ii) the name of his or her current employer; (iii) his or her current base pay and 2000 bonus; (iv) his or her hire date, any rehire date (if available) and years of service; (v) his or her then-current position and job title; (vi) whether such employee is subject to a collective bargaining agreement or represented by a labor organization and, if so, the name of the union and local, (vii) whether such employee is on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, short-term disability, on layoff with recall rights, or on other leave of absence with a legal or contractual right to reinstatement. Seller shall update such list reflecting such information as of a date not more than thirty (30) days prior to the Closing Date and deliver such updated list to Buyer at least ten (10) days prior to the Closing Date. Section 10.2 Assumption of Collective Bargaining Agreement Obligations. On and after the Closing Date, Buyer, shall assume all of the Seller's obligations under, and be bound by the provisions of, each collective bargaining agreement to the extent of provisions covering Transferred Employees. Each collective bargaining agreement shall be identified on a Schedule 10.2 to be prepared by Seller and submitted to Buyer prior to the Closing Date. Seller shall cooperate with Buyer in Buyer's efforts to contact the unions representing Transferred Employees. Section 10.3 Cessation of Participation in Seller's Plans; Proration of Bonuses. From and after the Closing Date, Transferred Employees shall accrue no additional benefits under any employee benefit plan, policy, program or arrangement of Seller or its Affiliates. Seller and Buyer shall pro-rate the obligation to pay any bonuses declared by Seller on or after the Closing Date that would have been payable to the Transferred Employees had the Transferred Employees remained employed by Seller or its Affiliates throughout the calendar year in which the Closing Date occurs, in accordance with the provisions of any policy, plan, practice or arrangement of Seller under which such bonus would have been paid. Buyer shall be obligated to pay that portion of each such bonus determined by multiplying the amount of such bonus by a fraction, the numerator of which is the number of days from and after the Closing Date through the end of the calendar year in which the Closing Date occurs, and the denominator of which is 365. Section 10.4 Similarity of Benefit Packages. As of the Closing Date, and except as otherwise expressly provided in this Article X, Buyer shall include each Transferred Employee in a benefit package providing benefits that are in the aggregate substantially similar to those provided by Seller to such Transferred Employees immediately prior to the Closing Date. Notwithstanding the foregoing, to the extent that one or more collective bargaining agreements being assumed by Buyer contains provisions pertaining to employee benefits, Buyer shall provide the Transferred Employees covered by such agreements with benefits that are consistent with the terms of such agreements or are otherwise acceptable to the applicable Union. For purposes of the preceding sentence, Buyer's 401(k) Plan (as defined in Section 10.6) shall not be deemed to fail to provide benefits that are consistent with the terms of the applicable collective bargaining agreement merely by reason of the fact that (i) matching contributions under Buyer's 401(k) Plan are made in cash rather than employer stock, (ii) Buyer's 401(k) Plan offers comparable, but not identical, investment options to the investment options (other than employer stock) under Seller's 401(k) Plan, and (iii) Buyer's 401(k) Plan employs a different third-party administrator than Seller's 401(k) Plan. Except as otherwise expressly provided in this Article X, Buyer shall treat all service and compensation credited to each such Transferred Employee as if such service and compensation had been rendered to, and paid by, Buyer for all purposes under Buyer's benefit plans, arrangements, and policies. 31 Section 10.5 Defined Benefit Pension Plan. Seller shall retain all liabilities and assets for pension benefits accrued through the day immediately preceding the Closing Date by Transferred Employees under the Citizens' Pension Plan (the "Seller's Pension Plan"). Buyer shall cause all Transferred Employees to be included in Buyer's defined benefit plan to be established prior to Closing ("Buyer's Pension Plan") providing benefits no less valuable than those provided in Seller's Pension Plan. Buyer shall take all actions necessary to cause Buyer's Pension Plan to recognize the service that all Transferred Employees had under Seller's Pension Plan for purposes of such Employees' eligibility to participate, vesting, attainment of retirement dates, subsidized benefits, entitlement to optional forms of payment, and benefit accrual; provided, however, that a Transferred Employee's benefit under Buyer's Pension Plan shall be offset by his or her accrued benefit under Seller's Pension Plan, such offset amount to be based on the benefit that would have been available with respect to such Transferred Employee under the terms of Seller's Pension Plan had such Seller's Pension Plan benefit commenced on the Transferred Employee's annuity starting date under Buyer's Pension Plan and been paid in the same form as the benefit paid under Buyer's Pension Plan. Section 10.6 401(k) Plan. Seller shall vest Transferred Employees in their account balances under Citizens 401(k) Savings Plan ("Seller's 401(k) Plan") as of the Closing Date. Buyer shall take all action necessary to ensure that, as of the Closing Date, it includes all Transferred Employees in a qualified 401(k) plan ("Buyer's 401(k) Plan") providing for matching contributions at least equivalent in value to those provided to the Transferred Employee under Seller's 401(k) Plan immediately prior to the Closing Date. Buyer shall take all actions necessary to cause Buyer's 401(k) Plan (i) to recognize the service that the Transferred Employees had in Seller's 401(k) Plan for purposes of determining such Employees' eligibility to participate, vesting, attainment of retirement dates, contribution levels and, if applicable, eligibility for optional forms of benefit payments, and (ii) to accept direct-rollover transfers of Transferred Employees' account balances in Seller's 401(k) Plan, including transfers of loan balances and related promissory notes. Section 10.7 Welfare Benefits. (a) Buyer shall take all action necessary and appropriate to ensure that, on and after the Closing Date, Buyer maintains medical, health, dental, flexible spending account, accident, life, short-term disability, long-term disability and other employee welfare benefit plans for the benefit of Transferred Employees that, in the case of nonunion Transferred Employees are substantially similar to those benefits provided by Seller under its corresponding welfare benefit plans as in effect immediately prior to the Closing Date (the "Buyer's Nonunion Welfare Plans"), and in the case of union Transferred Employees are consistent with the terms of the applicable collective bargaining agreement or are otherwise acceptable to the applicable Union (the "Buyer's Bargained Welfare Plans"). The Buyer's Nonunion Welfare Plans and the Buyer's Bargained Welfare Plans are hereinafter referred to collectively as the "Buyer Welfare Plans." For purposes of determining eligibility to participate, and entitlement to benefits, in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller immediately prior to the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions, actively at work requirements, waiting periods, and requirements for evidence of insurability under the Buyer Welfare Plans shall be waived in the Buyer Welfare Plans for Transferred Employees, and Transferred Employees shall receive credit under the Buyer Welfare Plans for co-payments, payments under a deductible limit made by them, and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in which the Closing Date occurs. As soon as practicable on or after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees who had credited service under a Seller Welfare Plan, together with each such Transferred Employee's service, co-payment, deductible and out-of-pocket payment amounts under such plan. 32 (b) Buyer shall provide or cause to be provided retiree medical, dental, and life benefits to each retiree of the Business identified in Schedule 10.7 as updated as of the Closing Date (the "Retirees") and to each Transferred Employee who is considered to be a "grandfathered employee" (as hereinafter defined) under the same terms and conditions as applied to such Retiree or Transferred Employee immediately prior to the Closing Date, and Seller shall have no obligation or liability, contingent or otherwise, to provide retiree medical, dental or life benefits to any such Retiree or Transferred Employee on or after the Closing Date. For purposes of this Section 10.7, a "grandfathered employee" is a union or nonunion Transferred Employee who met "Rule 55" (meaning such employee's age plus years of service equaled or exceeded fifty-five (55)) as of November 30, 1998. Schedule 10.7 identifies, as of December 31, 2001, each Retiree and each Active Employee who is a "grandfathered employee." Seller shall update and deliver to Buyer an updated Schedule 10.7 concurrently with Seller's updating and delivery to Buyer of the updated list required by Section 10.1(b). Buyer agrees not to terminate or materially modify those post-retirement benefit provisions covering "grandfathered" Transferred Employees, Retirees, their spouses and dependents that are in effect immediately prior to the Closing Date. (c) Within sixty (60) days after the Closing Date, Seller agrees to transfer to an exempt trust established by Buyer under Section 501(c)(9) of the IRC ("Buyer's VEBA") the amount held under any trust established by Seller under Section 501(c)(9) of the IRC ("Seller's VEBA") to fund post-retirement health care and life insurance benefits for the Business. Such amount shall be determined based upon the records of Seller and any third Person engaged by Seller to administer Seller's VEBA. Buyer agrees that Buyer's VEBA will apply an amount at least equal to the sum of the assets transferred from Seller's VEBA (and earnings thereon calculated at the rate of return generated by Buyer's VEBA) to provide post-retirement health care and life insurance benefits on and after the Closing Date to the Retirees and, as applicable, the Transferred Employees who become eligible for such benefits after Closing. Upon Closing, Buyer shall be responsible for all obligations of Seller to provide post-retirement health care and life insurance benefits to such Transferred Employees and Retirees, and Seller and Seller's VEBA shall cease to have any liability, contingent or otherwise, for such benefits. Section 10.8 Flexible Spending Accounts. Within sixty (60) days after the Closing Date, Seller shall transfer to Buyer's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the date immediately prior to the Closing Date. As soon as practicable after the Closing Date, Seller shall provide to Buyer a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such account, and balances standing to their credit as of the date immediately prior to the Closing Date. Section 10.9 Employment Agreements. Buyer shall assume all obligations of each employment agreement to which Seller or its Affiliates is a party and which covers any Transferred Employee immediately prior to the Closing Date. Section 10.10 Vacation. Seller shall pay to Transferred Employees any "banked" vacation credited to them prior to the Closing Date. On and after the Closing Date, Buyer shall provide to each Transferred Employee vacation in an amount equal to the Transferred Employee's vacation entitlement for the year of the Closing reduced by the number of vacation days that such Transferred Employee has taken prior to the Closing. 33 Section 10.11 Severance. In the event that Buyer terminates the services of any Transferred Employee within twenty-four (24) months following the Closing Date without cause, Buyer shall provide to any such Transferred Employee severance or separation pay benefits that are at least equal to the severance or separation pay benefits that would have been paid by Seller had Seller continued to employ such Transferred Employee through the period ending on the employee's date of termination from Buyer, based on Seller's severance or separation pay program at the Closing Date; provided, however, that if a collective bargaining agreement that is applicable to a union Transferred Employee would provide for a greater benefit to be paid by Buyer, the terms and conditions of such agreement shall instead be applicable. Section 10.12 Plant Closing Notice. Upon not less than 60 days' written notice from Buyer of Buyer's then present intention to terminate any Transferred Employees after the Closing, Seller shall give any notice required to be given by Seller under Chapter 394B, Hawaii Revised Statutes, as amended. Buyer shall have the right to review and approve such notice prior to Seller's release of the same. Seller shall not be obligated to provide any notice if in Seller's reasonable opinion, after consultation with counsel and with Buyer, such action (including the content of such notice) reasonably could result in Seller's violation of any Legal Requirement or Order. ARTICLE XI TAX MATTERS Section 11.1 Purchase Price Allocation. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the IRC. If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Body or in any Proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all Tax Returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the IRC and any Treasury regulations promulgated thereunder) consistent with each of such party's good faith Allocations, unless otherwise required because of a change in any Legal Requirement. 34 Section 11.2 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller may, at Seller's election prior to the Closing Date, direct that all or a portion of the Purchase Price be delivered to a "qualified intermediary" (as defined in Treasury Regulation ss.1.1031(k) - (g)(4)) as to enable Seller's relinquishment of the Assets to qualify as part of a like-kind exchange of property covered by Section 1031 of the IRC. If Seller so elects, Buyer shall cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the IRC (including any actions required to facilitate the use of a "qualified intermediary"), and Buyer agrees that Seller may assign all or part of its rights and delegate all or part of its obligations under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of a like-kind exchange of property covered by Section 1031 of the IRC. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts are not required to include an unreasonable delay in the consummation of the transactions contemplated by this Agreement. Section 11.3 Transaction Taxes. Buyer shall bear and be responsible for paying any Hawaii sales, use, transfer, documentary, registration, business and occupation and other similar Taxes, other than Hawaii General Excise Taxes, if any, (including related penalties (civil or criminal), additions to tax and interest) imposed with respect to the transfer of Assets (including the Real Property) to Buyer ("Transaction Taxes"), regardless of whether the tax authority seeks to collect such Taxes from Seller or Buyer. Seller shall prepare all tax filings related to any Transaction Taxes (other than with respect to Real Property and motor vehicle title transfer and registration, which shall be prepared by Buyer). Seller shall bear and be responsible for any costs similar to Transaction Taxes imposed by any Governmental Body other than the State of Hawaii or one of its political subdivisions. Fifteen (15) days prior to making any such filings, the filing party shall provide to the nonfiling party the filing party's work papers for the nonfiling party's review and approval. Ten (10) days prior to the filing date, the non-filing party shall provide to the filing party approval of such work papers. Buyer shall also be responsible for (i) administering the payment of such Transaction Taxes, (ii) defending or pursuing any Proceedings related thereto, and (iii) paying any expenses related thereto. Seller shall give prompt written notice to Buyer of any proposed adjustment or assessment of any Transaction Taxes with respect to the transaction, or of any examination of said transaction in a sales, use, transfer or similar tax audit. In any proceedings, whether formal or informal, Seller shall permit Buyer to participate and control the defense of such proceeding and shall take all actions and execute all documents required to allow such participation. Seller shall not negotiate a settlement or compromise of any Transaction Taxes without the prior written consent of Buyer, which consent shall not be unreasonably withheld. Section 11.4 Taxes Based on Revenues. All Taxes arising with respect to the revenues of the Business shall be prorated between Buyer and Seller, with Seller being obligated to reimburse Buyer only for the portion of any such Tax that is applicable to the cash received by Seller prior to the Closing Date that relates to the revenues of the Business being taxed. Upon receipt by Buyer of the tax bill, invoice or other statement regarding such Taxes, Buyer shall calculate the pro rata share of such tax bill, invoice or other statement attributable to Buyer and Seller. Buyer then shall forward, as soon as practicable, to Seller a copy of such tax bill, invoice or statement along with the supporting documentation relating to the calculation of the pro rata share to Seller. Seller then shall forward to Buyer payment in immediately available funds of its pro rata share of such Taxes as soon as practicable in advance of the due date of the tax bill, invoice or statement and in time to avoid the incurrence of penalties or interest. Upon its receipt of such payment, Buyer will pay the full amount of the tax bill, invoice or statement to the applicable taxing authority. In the event Seller first receives a tax bill, invoice or statement relating to the revenues of the Business from a taxing authority, Seller shall immediately forward such tax bill, invoice or statement to Buyer. 35 ARTICLE XII ENVIRONMENTAL MATTERS Section 12.1 Environmental Due Diligence. (a) Right to Conduct Environmental Due Diligence. Regarding environmental matters, other than any additional environmental due diligence that Buyer may conduct pursuant to this Section 12.1, Buyer has completed its reasonable and prudent environmental due diligence prior to the Effective Date, including a review of the Environmental Data and Phase I environmental assessments of the Assets. Buyer also has required Seller to make the representations concerning environmental matters set forth in Section 5.14, upon which Buyer is relying. In light of these actions, Buyer agrees not to conduct additional environmental due diligence (including employee interviews and sampling of any media or wastewater) except in accordance with this Section 12.1. All activities of Buyer regarding environmental due diligence shall be conducted to minimize any inconvenience or interruption of the normal use and enjoyment of the Business and the Assets. (b) Delivery of Environmental Reports. Seller has made available to Buyer before the Effective Date copies of all written environmental audits, reports or studies in Seller's possession of which Seller has Knowledge and which were prepared after December 31, 1996 (including any updated environmental audits, reports and studies regarding the foregoing which were prepared after the date of execution of the Original Agreement), concerning the existence or possible existence of Hazardous Materials on, or under or adjacent to any of the Real Property or relating to potential Environmental Liability of Seller in connection with the Business or the Assets. Buyer shall provide to Seller copies of all reports, assessments and other information composed or compiled by Buyer or Buyer's environmental consultant(s) promptly following Buyer's receipt thereof. Buyer shall treat all such information delivered to, or composed or compiled by, Buyer or Buyer's environmental consultant(s) as Environmental Data in accordance with the procedures of Section 12.1(c). (c) Confidentiality of Environmental Data. All audits, reports and studies delivered to or prepared by Buyer and all other information collected and generated as a result of Buyer's environmental due diligence ("Environmental Data") will be subject to the terms and conditions of the Confidentiality Agreement, except as otherwise expressly provided in this Section 12.1. Neither Buyer nor its environmental consultant(s) shall disclose or release any Environmental Data without the prior written consent of Seller and all such information shall be kept strictly confidential. The Environmental Data shall be prepared at the request of counsel to Buyer and, to the fullest extent permitted by law, shall be the work product of such counsel and constitute confidential attorney/client communications. The Environmental Data shall be transferred among Buyer and its consultant(s) in a manner that will preserve, to the greatest extent possible, such privileges. Buyer expressly agrees that until the Closing, it will not distribute the Environmental Data to any third party without Seller's prior written consent. After the Closing, Buyer agrees that it will not distribute the Environmental Data to any third party without Seller's prior written consent, except as required by law or by express provisions of Buyer's corporate compliance program if Seller is provided written notice at least ten (10) days prior to such distribution, provided, however, that for a period of two (2) years after the Closing Date, Buyer may distribute the Environmental Data to any potential purchaser of the Assets only after first notifying the Seller. 36 (d) Environmental Consultants. Buyer may retain one or more outside environmental consultants to assist in its environmental due diligence concerning the Assets and shall notify Seller of the environmental consultant or consultants Buyer intends to retain. Thereafter, Seller shall have five (5) days after receipt of such notification to notify Buyer in writing of Seller's objection (which must be for good cause) and substantiate the basis for that objection. If Seller does not object for good cause and substantiate that objection within said five (5) day period, Seller shall be deemed to have consented to Buyer's selection. (e) Completed Phase I Reviews. Buyer has completed its Phase I environmental assessment activities with respect to the Assets, including reviewing existing environmental reports, correspondence, permits and related materials regarding the Assets, individual site inspections and all other Phase I activities as set forth in the ASTM protocol regarding Phase I environmental assessments, and has delivered to Seller a true and complete copy of the related Phase I assessment report from Buyer's environmental consultant. The parties mutually acknowledge that all incidents and conditions addressed in such Phase I assessment report comprise either incidents and conditions that had been previously disclosed by Seller in writing to Buyer or, with respect to the previously undisclosed incidents and conditions, are incidents and conditions that are not reasonably likely to result in any significant Environmental Liabilities. (f) Further Phase I Reviews. Buyer may not conduct any further Phase I environmental assessment activities with respect to the Assets without the prior written consent of Seller, which consent may be withheld, conditioned or delayed by Seller in its sole discretion. Any further Phase I environmental assessment activities permitted by Seller shall not include any sampling or intrusive testing and shall be conducted in accordance with ASTM standards regarding Phase I assessments. As soon as reasonably practicable after completion of any further Phase I assessment activities, Buyer's environmental consultant shall prepare and deliver to Buyer a written report with respect thereto. (g) Phase II Reviews. Buyer may not conduct any Phase II environmental assessment activities with respect to the Assets (including, but not limited to, the taking and analysis of soil, surface water and groundwater samples, testing of buildings, drilling wells, taking soil borings and excavating) without the prior written consent of Seller, which consent may be withheld, conditioned or delayed by Seller in its sole discretion. (h) Additional Due Diligence. Notwithstanding the foregoing, if prior to Closing Seller receives notice of any Proceeding or Threatened Proceeding arising under Environmental Laws or if Seller otherwise acquires Knowledge that is reasonably likely to require a change to Schedule 5.14, Seller promptly shall notify Buyer of the same and Buyer may request that Seller authorize Buyer to conduct specific additional environmental due diligence measures if and to the extent that such measures are required to determine the extent of any potential Environmental Liability relating thereto. Such authorization shall not be unreasonably withheld, conditioned or delayed by Seller. Any such additional environmental due diligence shall be conducted at Buyer's sole expense. Within ten (10) days following the completion of any additional environmental due diligence conducted by Buyer pursuant to this Section 12.1(h), Buyer shall notify Seller of each incident of potential Environmental Liability of Seller that Buyer in good faith has determined is reasonably likely to result in Losses in excess of $1,000,000 (each, a "New Material Environmental Liability"). Prior to Closing, Seller may respond to and remedy any New Material Environmental Liability. Any New Material Environmental Liability not responded to and remedied by Seller to Buyer's reasonable satisfaction shall be considered a Retained Environmental Liability for purposes of this Agreement. 37 (i) Indemnity for Due Diligence Activities. Buyer hereby agrees to indemnify and hold harmless Seller, Seller's Affiliates and their respective officers, directors, employees, agents, successors and assigns from and against any and all Losses with respect to persons or property arising out of or in connection with any site visit by Buyer or its environmental consultant(s) and resulting from an act or omission of Buyer or its environmental consultant(s). ARTICLE XIII INDEMNIFICATION Section 13.1 Indemnification by Seller. From and after Closing and subject to the other provisions of this Article XIII, Seller shall indemnify and hold harmless Buyer, its Representatives, Affiliates, successors and permitted assigns (collectively, the "Buyer Indemnitees") from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Seller in this Agreement not being true and correct when made or when required by this Agreement to be true and correct, or any breach or default by Seller in the performance of its covenants, agreements, or obligations under this Agreement required to be performed prior to Closing; (b) any breach or default by Seller in the performance of its covenants, agreements, or obligations under this Agreement required to be performed after Closing; and (c) the Retained Liabilities, including the Retained Environmental Liabilities. Section 13.2 Indemnification by Buyer. From and after Closing and subject to the other provisions of this Article XIII, Buyer shall indemnify and hold harmless Seller, its Representatives, Affiliates, successors and permitted assigns (collectively, the "Seller Indemnitees") from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and correct when made or when required by this Agreement to be true and correct, or any breach or default by Buyer in the performance of its covenants, agreements, or obligations under this Agreement required to be performed prior to Closing; (b) any breach or default by Buyer in the performance of its covenants, agreements, or obligations under this Agreement required to be performed after Closing, including the Buyer's IDRB Obligations; (c) Assumed Liabilities, including the Assumed Environmental Liabilities; and (d) any event as a result of which the interest on the Bonds may be included in the gross income of the recipient for purposes of federal income taxation, to the extent such event arises out of or results from any act, negligence, fault or failure of Buyer or any assignee, lessee or successor of Buyer, including any violation of the representations, warranties, covenants and agreements set forth in Section 6.7(a) or in the IDRB Obligations Agreement executed and delivered by Buyer in accordance with Sections 6.7(a) and 8.1(d). 38 Section 13.3 Limitations on Seller's Liability. Notwithstanding anything to the contrary in this Agreement, the liability of Seller under this Agreement and any documents delivered in connection herewith or contemplated hereby shall be limited as follows: (a) IN NO EVENT SHALL SELLER BE LIABLE TO THE BUYER INDEMNITEES FOR ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES; provided, however, that if Buyer is held liable to a third party for any of such damages and Seller is obligated to indemnify Buyer for the matter that gave rise to such damages, then Seller shall be liable for, and obligated to reimburse Buyer for, such damages. (b) The representations, warranties, covenants and agreements of Seller set forth in this Agreement shall survive the Closing for a period of one year, and all representations, warranties, covenants and agreements of Seller under this Agreement and the indemnities granted by Seller in Section 13.1 shall terminate at 5:00 p.m., local time in Stamford, Connecticut, on the first anniversary of the Closing Date; provided, however, that such indemnities shall survive with respect only to the specific matters that is the subject of a proper Claim Notice delivered in good faith in compliance with the requirements of this Section 13.3 until the earlier to occur of (A) the date on which a final nonappealable resolution of the matter described in such Claim Notice has been reached or (B) the date on which the matter described in such Claim Notice has otherwise reached final resolution. In no event shall any amounts be recovered from Seller under Section 13.1 or otherwise for any matter for which a Claim Notice is not delivered to Seller prior to the close of business on the applicable date set forth above. (c) Notwithstanding anything to the contrary in this Agreement, in no event shall Seller indemnify the Buyer Indemnitees, or be otherwise liable in any way whatsoever to the Buyer Indemnitees, for any Losses until the Buyer Indemnitees have suffered Losses (determined after giving effect to the provisions of Section 13.3(f)) that are in excess of a deductible in an amount equal to $5,400,000, after which point Seller will be obligated only to indemnify the Buyer Indemnitees from and against further Losses in excess of such deductible. (d) Notwithstanding anything to the contrary in this Agreement, in no event shall Seller indemnify the Buyer Indemnitees, or be otherwise liable in any way whatsoever to the Buyer Indemnitees, for any Losses that are in excess of an amount equal to $5,400,000. (e) No amount shall be recovered from Seller for the breach or untruth of any of Seller's representations, warranties, covenants or agreements, or for any other matter, to the extent that Buyer had knowledge of such breach, untruth or other matter prior to the Closing, nor shall Buyer be entitled to rescission with respect to any such matter. 39 (f) Seller shall have no liability for any claim or Loss (A) that is covered by insurance maintained by or for the benefit of Buyer or any Affiliate of Buyer (including any such insurance coverage applicable to the Business the benefit of which the Buyer will realize) or for which Buyer otherwise recovers payments in respect of such Loss from any other sources (whether in a lump sum or stream of payments) or (B) that is the type normally recoverable by the Business through rates. No cost or expense relating to any such claim or Loss shall be included in determining the extent of Losses suffered by the Buyer Indemnitees for purposes of Section 13.3(c) or Section 13.3(d). Buyer agrees to use its commercially reasonable efforts to give timely and effective written notice to the appropriate insurance carrier(s) of any occurrence or circumstances which, in the judgment of Buyer consistent with its customary risk management practices, appear likely to give rise to a claim against Buyer that is likely to involve one or more insurance policies of Buyer. Any such notice shall be given in good faith by Buyer without regard to the possibility of indemnification payments by Seller under Section 13.1, and shall be processed by Buyer in good faith and in a manner consistent with its risk management practices involving claims for which no third party contractual indemnification is available. Buyer agrees that (i) if it is entitled to receive payment from Seller for a Loss, and (ii) if Buyer has obtained insurance which may cover the claim or matter giving rise to such Loss, then (iii) such insurance shall be primary coverage and Buyer will make a claim under such insurance (if such claim can be made in good faith) before enforcing its right to receive payment from Seller. If at any time subsequent to the receipt by a Buyer Indemnitee of an indemnity payment from Seller hereunder, such Buyer Indemnitee (or any Affiliate thereof) receives any recovery, settlement or other similar payment with respect to the Loss for which it receives such indemnity payment, such Buyer Indemnitee shall promptly pay to Seller an amount equal to the amount of such recovery, less (for insurance proceeds only) any out-of-pocket costs incurred by such Buyer Indemnitee (or its Affiliates) in connection with claim preparation and settlement, but in no event shall any such payment exceed the amount of such indemnity payment; provided, that if such net recover reduces the amount of Losses actually incurred by the Buyer Indemnitees below the deductible amount set forth in Section 13.3(c) and if Seller has made other payments to the Buyer Indemnitees for other Losses in excess of such deductible amount, then Buyer also shall promptly pay to Seller an amount equal to the portion of such payments made by Seller that Seller would not have been obligated to make pursuant to Section 13.3(c) had the Losses of the Buyer Indemnitees not included the Losses covered by such net recovery. No other costs or expense relating to any such recovery shall reduce the amount of such payment to Seller. (g) Notwithstanding any language contained in any Related Document (including deeds and other conveyance documents relating to the Real Property), the representations and warranties of Seller set forth in this Agreement will not be merged into any such Related Document and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement shall control. No provision set forth in any such Related Document shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. Section 13.4 Claims Procedure. 40 (a) All claims for indemnification under Section 13.1 or 13.2, or any other provision of this Agreement except as otherwise expressly provided in this Agreement, shall be asserted and resolved pursuant to this Article XIII. Any Person claiming indemnification hereunder referred to as the "Indemnified Party" and any Person against whom such claims are asserted hereunder is hereinafter referred to as the "Indemnifying Party." In the event that any Losses are asserted against or sought to be collected from an Indemnified Party by a third party, said Indemnified Party shall with reasonable promptness provide to the Indemnifying Party a Claim Notice. The Indemnifying Party shall not be obligated to indemnify the Indemnified Party with respect to any such Losses if the Indemnified Party fails to notify the Indemnifying Party thereof in accordance with the provisions of this Agreement in reasonably sufficient time so that the Indemnifying Party's ability to defend against the Losses is not prejudiced. The Indemnifying Party shall have 30 days from the personal delivery or receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Party (i) whether or not it disputes the liability of the Indemnifying Party to the Indemnified Party hereunder with respect to such Losses and/or (ii) whether or not it desires, at the sole cost and expense of the Indemnifying Party, to defend the Indemnified Party against such Losses; provided, however, that any Indemnified Party is hereby authorized prior to and during the Notice Period to file any motion, answer or other pleading that it shall deem necessary or appropriate to protect its interests or those of the Indemnifying Party (and of which it shall have given notice and opportunity to comment to the Indemnifying Party) and not prejudicial to the Indemnifying Party. In the event that the Indemnifying Party notifies the Indemnified Party within the Notice Period that it desires to defend the Indemnified Party against such Losses, the Indemnifying Party shall have the right to defend all appropriate proceedings, and with counsel of its own choosing, which proceedings shall be promptly settled or prosecuted by them to a final conclusion. If the Indemnified Party desires to participate in, but not control, any such defense or settlement it may do so at its sole cost and expense. If requested by the Indemnifying Party, the Indemnified Party agrees to cooperate with the Indemnifying Party and its counsel in contesting any Losses that the Indemnifying Party elects to contest or, if appropriate and related to the claim in question, in making any counterclaim against the Person asserting the third party Losses, or any cross-complaint against any Person. No claim may be settled or otherwise compromised without the prior written consent of the Indemnifying Party. (b) The Indemnified Party shall provide reasonable assistance to the Indemnifying Party and provide access to its books, records and personnel as the Indemnifying Party reasonably requests in connection with the investigation or defense of the Losses. The Indemnifying Party shall promptly upon receipt of reasonable supporting documentation reimburse the Indemnified Party for out-of-pocket costs and expenses incurred by the latter in providing the requested assistance. (c) With regard to third party claims for which Buyer or Seller is entitled to indemnification under Section 13.1 or 13.2, such indemnification shall be paid by the Indemnifying Party upon: (i) the entry of an Order against the Indemnified Party and the expiration of any applicable appeal period; or (ii) a settlement with the consent of the Indemnifying Party, provided that no such consent need be obtained if the Indemnifying Party fails to respond to the Claim Notice as provided in Section 13.4(a). Notwithstanding the foregoing but subject to Section 13.4(a), and provided that there is no dispute as to the applicability of indemnification, expenses of counsel to the Indemnified Party shall be reimbursed on a current basis by the Indemnifying Party as if such expenses are a liability of the Indemnifying Party. Section 13.5 Exclusive Remedy. Except as otherwise provided in Section 6.4 or 14.6, the rights, remedies and obligations of the Buyer Indemnitees and the Seller Indemnitees set forth in this Article XIII will be the exclusive rights, remedies and obligations of such Persons after the Closing with respect to this Agreement, the events giving rise to this Agreement and the transactions provided for herein or contemplated hereby or thereby. No Proceeding for termination or rescission, or claiming repudiation, of this Agreement or the Bill of Sale may be brought or maintained by either party against the other on and after the Closing Date no matter how severe, grave or fundamental any breach, default or nonperformance may be by one party. Accordingly, the parties hereby expressly waive and forego any and all rights they may possess to bring any such Proceeding. 41 Section 13.6 Indemnification for Negligence. WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, VIOLATION OF ANY LAW OR OTHER LEGAL FAULT OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. Section 13.7 Waiver and Release. Buyer, on behalf of itself and each other Buyer Indemnitee, hereby forever waives, relieves, releases and discharges the Seller Indemnitees and their successors and assigns from any and all rights, liabilities, Proceedings (including future Proceedings) and Losses of any Buyer Indemnitee, whether known or unknown on the Closing Date, which any Buyer Indemnitee has or incurs, or may in the future have or incur, arising out of or related to any Assumed Environmental Liability. ARTICLE XIV GENERAL PROVISIONS Section 14.1 Expenses. Except as otherwise specifically provided herein, each Party will pay all costs and expenses of its performance of and compliance with this Agreement, except Buyer will pay all real estate transfer taxes and real estate recording fees, if any, including expenses of counsel associated with real estate title, transfer and recording issues. Section 14.2 Notices. All notices, requests and other communications hereunder shall be in writing and shall be deemed to have been given upon receipt if either (a) personally delivered, (b) sent by prepaid first class mail, and registered or certified and a return receipt requested (c) sent by overnight delivery via a nationally recognized carrier or (d) by facsimile with completed transmission acknowledged: If to Seller, to: Citizens Communications Company 1460 Poydras Street, Suite 1800 New Orleans, LA 70112 Attention: Kenneth L. Cohen Telecopier: (504) 544-5822 with a copy to: Citizens Communications Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten Telecopier: (203) 614-4651 and: 42 Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telecopier: (202) 387-3467 If to Buyer, to: Kauai Island Utility Co-Op 2970 Haleko Road, Suite #205 Lihue, Kauai, HI 96766 Attention: Gregg Gardiner, Chairman Telecopier: (808) 245-7428 with a copy to: McCorriston Miller Mukai MacKinnon LLP 5 Waterfront Plaza, 4th Floor 500 Ala Moana Blvd. Honolulu, HI 96813 Attention: Brian Hirai Telecopier: (808) 524-8293 or at such other address or number as shall be given in writing by a party to the other party. Section 14.3 Assignment. This Agreement may not be assigned, by operation of law or otherwise, by any party hereto without the prior written consent of the other party hereto, such consent not to be unreasonably withheld; provided, however, in the event of any such assignment by a party by operation of law without the consent of the other party as required above, such other party may consent to such assignment after it has occurred and, in such event, this Agreement and all the provisions hereof shall be binding upon the Person receiving such assignment by operation of law. Notwithstanding the foregoing, (a) Buyer may assign this Agreement, without the prior written consent of Seller, to any direct or indirect wholly-owned subsidiary of Buyer provided such subsidiary assumes in writing all of the duties and obligations of Buyer hereunder (provided that no such assignment by Buyer shall in any way operate to enlarge, alter or change any obligation due to Seller or relieve Buyer of its obligations hereunder if such subsidiary fails to perform such obligations, with the understanding that Buyer shall be jointly and severally liable with such subsidiary for any nonperformance of Buyer's obligations hereunder); and (b) Seller may assign all or part of its rights or delegate all or part of its duties under this Agreement, without the prior written consent of Buyer, to a qualified intermediary chosen by Seller to structure all or part of the transactions contemplated hereby as a like-kind exchange of property covered by Section 1031 of the IRC. Section 14.4 Successor Bound. Subject to the provisions of Section 14.3, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 43 Section 14.5 Governing Law. The validity, performance, and enforcement of this Agreement and all Related Documents, unless expressly provided to the contrary, shall be governed by the laws of the State of Delaware without giving effect to the principles of conflicts of law of such state. Section 14.6 Dispute Resolution. Except as otherwise provided in Sections 3.2(b) and 6.4, and this Section 14.6, any dispute, controversy or claim between the parties relating to, arising out of or in connection with this Agreement (or any subsequent agreements or amendments thereto), including as to its existence, enforceability, validity, interpretation, performance or breach or as to indemnification or damages, including claims in tort, whether arising before or after the termination of this Agreement (any such dispute, controversy or claim being herein referred to as a "Dispute") shall be settled without litigation and only by use of the following alternative dispute resolution procedure: (a) At the written request of a party, each party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any Dispute. The discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the parties' representatives for purposes of these negotiations shall be treated as confidential information developed for the purposes of settlement, exempt from discovery and production, and without the concurrence of both parties shall not be admissible in the arbitration described below, or in any lawsuit. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in the arbitration. (b) If negotiations between the representatives of the parties do not resolve the Dispute within 60 days of the initial written request, the Dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration Association (the "Rules"). Either party may demand such arbitration in accordance with the procedures set out in the Rules. The arbitration shall take place in San Francisco, California. The arbitration hearing shall be commenced within 60 days of such party's demand for arbitration. The arbitrator shall have the power to and will instruct each party to produce evidence through discovery (i) that is reasonably requested by the other party to the arbitration in order to prepare and substantiate its case and (ii) the production of which will not materially delay the expeditious resolution of the dispute being arbitrated; each party hereto agrees to be bound by any such discovery order. The arbitrator shall control the scheduling (so as to process the matter expeditiously) and any discovery. The parties may submit written briefs. At the arbitration hearing, each party may make written and oral presentations to the arbitrator, present testimony and written evidence and examine witnesses. No party shall be eligible to receive, and the arbitrator shall not have the authority to award, exemplary or punitive damages. The arbitrator shall rule on the Dispute by issuing a written opinion within 30 days after the close of hearings. The arbitrator's decision shall be binding and final. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. 44 (c) Each party will bear its own costs and expenses in submitting and presenting its position with respect to any Dispute to the arbitrator; provided, however, that if the arbitrator determines that the position taken in the Dispute by the nonprevailing party taken as a whole is unreasonable, the arbitrator may order the nonprevailing party to bear such fees and expenses, and reimburse the prevailing party for all or such portion of its reasonable costs and expenses in submitting and presenting its position, as the arbitrator shall reasonably determine to be fair under the circumstances. Each party to the arbitration shall pay one-half of the fees and expenses of the arbitrator and the American Arbitration Association. (d) Notwithstanding any other provision of this Agreement, (i) either party may commence an action to compel compliance with this Section 14.6 and (ii) if any party, as part of a Dispute, seeks injunctive relief or any other equitable remedy, including specific enforcement, then such party shall be permitted to seek such injunctive or equitable relief in any federal or state court or competent jurisdiction before, during or after the pendency of a mediation or arbitration proceed under this Section 14.6. Section 14.7 Cooperation. Each of the parties hereto agrees to use its reasonable best efforts to take or cause to be taken all action, and to do or cause to be done all things necessary, proper or advisable under applicable laws, regulations or otherwise, to consummate and to make effective the transactions contemplated by this Agreement, including, without limitation, the timely performance of all actions and things contemplated by this Agreement to be taken or done by each of the parties hereto. Section 14.8 Construction of Agreement. The terms and provisions of this Agreement represent the results of negotiations between Buyer and Seller, each of which has been represented by counsel of its own choosing, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Accordingly, the terms and provisions of this Agreement shall be interpreted and construed in accordance with their usual and customary meanings, and Buyer and Seller hereby waive the application in connection with the interpretation and construction of this Agreement of any rule of law to the effect that ambiguous or conflicting terms or provisions contained in this Agreement shall be interpreted or construed against the party whose attorney prepared the executed draft or any earlier draft of this Agreement. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the parties as to whether any obligation, item or matter is or is not material for purposes hereof. Section 14.9 Publicity. No party hereto shall issue, make or cause the publication of any press release or other announcement with respect to this Agreement or the transactions contemplated hereby, or otherwise make any disclosures relating thereto, without the consent of the other party, such consent not to be unreasonably withheld or delayed; provided, however, that such consent shall not be required where such release or announcement is required by applicable law or the rules or regulations of a securities exchange, in which event the party so required to issue such release or announcement shall endeavor, wherever possible, to furnish an advance copy of the proposed release to the other party. 45 Section 14.10 Waiver. Except as otherwise expressly provided in this Agreement, neither the failure nor any delay on the part of any party to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise or waiver of any such right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege available to each party at law or in equity. Section 14.11 Parties in Interest. This Agreement (including the documents and instruments referred to herein) is not intended to confer upon any Person, other than the parties hereto and their successors and permitted assigns, any rights or remedies hereunder; provided, however, that the indemnification provisions in Article XIII shall inure to the benefit of the Buyer Indemnitees and the Seller Indemnitees as provided therein. Section 14.12 Section and Paragraph Headings. The section and paragraph headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14.13 Amendment. This Agreement may be amended only by an instrument in writing executed by the parties hereto. Section 14.14 Entire Agreement. This Agreement, the Exhibits and Schedules hereto and the documents specifically referred to herein and the Confidentiality Agreement constitute the entire agreement, understanding, representations and warranties of the parties hereto, and supersede all prior agreements, both written and oral, between Buyer and Seller, including the Original Agreement. All Exhibits and Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Disclosure of any fact or item in any Schedule referenced by a particular paragraph or Section in this Agreement shall, should the existence of the fact or item or its contents be relevant to any other paragraph or Section, be deemed to be disclosed with respect to that other paragraph or Section whether or not any explicit cross-reference appears therein. Section 14.15 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Section 14.16 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the greatest extent possible. [SIGNATURES APPEAR ON FOLLOWING PAGE] 46 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. CITIZENS COMMUNICATIONS COMPANY By: /s/ Scott N. Schneider ------------------------------------------ Scott N. Schneider, Vice Chairman and Executive Vice President KAUAI ISLAND UTILITY CO-OP By: /s/ Gregg Gardiner ---------------------------- Gregg Gardiner, Chairman [Signature page to Amended and Restated Purchase and Sale Agreement (Kauai Electric) between Citizens Communications Company and Kauai Island Utility Co-Op.] 47 EX-10.12 5 assetpurchagremnt.txt ASSET PURCHASE AGREEMENT HAWAII Execution copy ================================================================================ Exhibit 10.12 ------------- ASSET PURCHASE AGREEMENT by and between CITIZENS COMMUNICATIONS COMPANY, as SELLER, and K-1 USA VENTURES, INC., as BUYER, Dated as of December 19, 2002 ================================================================================
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.................................................................................. 1 ARTICLE II PURCHASE AND SALE........................................................................... 15 2.1 Transfer of Assets............................................................................ 15 2.2 Excluded Assets............................................................................... 16 2.3 Assumed Liabilities........................................................................... 18 2.4 Excluded Liabilities.......................................................................... 20 2.5 Control of Litigation......................................................................... 21 ARTICLE III THE CLOSING................................................................................ 22 3.1 Closing....................................................................................... 22 3.2 Closing Payment............................................................................... 22 3.3 Adjustment to Base Purchase Price............................................................. 22 3.4 Prorations.................................................................................... 25 3.6 Deliveries by Seller.......................................................................... 25 3.5 Deliveries by Buyer........................................................................... 27 3.7 Work in Progress.............................................................................. 27 ARTICLE IV REPRESENTATIONS, WARRANTIES AND DISCLAIMERS OF SELLER .............................................................................................. 28 4.1 Incorporation; Qualification.................................................................. 28 4.2 Authority..................................................................................... 28 4.3 Consents and Approvals; No Violation.......................................................... 28 4.4 Insurance..................................................................................... 29 4.5 Real Property Leases.......................................................................... 29 4.6 Environmental Matters......................................................................... 29 4.7 Labor Matters................................................................................. 30 4.8 Benefit Plans: ERISA......................................................................... 30 4.9 Real Property................................................................................. 32 4.10 Condemnation.................................................................................. 32 4.11 Assigned Agreements........................................................................... 32 4.12 Legal Proceedings............................................................................. 33 4.13 Permits ...................................................................................... 33 4.14 Taxes......................................................................................... 33 4.15 Intellectual Property......................................................................... 34 4.16 Capital Expenditures.......................................................................... 34 4.17 Compliance With Laws.......................................................................... 34 4.18 Title......................................................................................... 34 4.19 DISCLAIMERS................................................................................... 34 4.20 Financial Statements.......................................................................... 35 4.21 SEC Filings; Financial Statements............................................................. 35 4.22 Sufficiency of Assets......................................................................... 36 4.23 Easements..................................................................................... 36 4.24 Tangible Personal Property.................................................................... 36 4.25 Regulatory Matters............................................................................ 36 i ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER...................................................... 36 5.1 Organization.................................................................................. 36 5.2 Authority..................................................................................... 37 5.3 Consents and Approvals; No Violation.......................................................... 37 5.4 Availability of Funds......................................................................... 38 5.5 Public Company Filings; Financial Statements.................................................. 38 5.6 Legal Proceedings............................................................................. 38 5.7 No Knowledge of Seller's Breach............................................................... 38 5.8 Qualified Buyer............................................................................... 39 5.9 Inspections................................................................................... 39 5.10 WARN Act...................................................................................... 39 5.11 Public Utility Holding Company Status; Regulation as a Public Utility......................... 39 5.12 Ownership and Control of Buyer................................................................ 39 ARTICLE VI COVENANTS OF THE PARTIES.................................................................... 40 6.1 Conduct of Business and Operation of Assets................................................... 40 6.2 Access to Information......................................................................... 41 6.3 Additional Inspections and Information........................................................ 42 6.4 Confidentiality............................................................................... 44 6.5 Public Statements............................................................................. 45 6.6 Expenses...................................................................................... 45 6.7 Further Assurances............................................................................ 45 6.8 Consents and Approvals........................................................................ 46 6.9 Fees and Commissions.......................................................................... 49 6.10 Tax Matters................................................................................... 49 6.11 Advice of Changes............................................................................. 51 6.12 Seller Employees.............................................................................. 51 6.13 Risk of Loss.................................................................................. 56 6.14 Tax Exempt Financing.......................................................................... 57 6.15 Seller Guarantees and Surety Instruments...................................................... 61 6.16 Citizens and Gasco Marks...................................................................... 61 6.17 Title Commitments............................................................................. 62 6.18 Post-Execution Delivery of Schedules.......................................................... 62 6.19 Transition Plan............................................................................... 62 6.20 Certain Transactions.......................................................................... 63 ARTICLE VII CONDITIONS................................................................................. 63 7.1 Conditions to Obligations of Buyer............................................................ 63 7.2 Conditions to Obligations of Seller........................................................... 64 ARTICLE VIII POST-CLOSING INDEMNIFICATION............................................................... 65 8.1 Indemnification of Seller by Buyer............................................................ 65 8.2 Indemnification of Buyer by Seller............................................................ 65 8.3 Certain Limitations on Indemnification........................................................ 66 8.4 Defense of Claims............................................................................. 69 8.5 BHP Indemnity Arrangements.................................................................... 70 ii ARTICLE IX TERMINATION................................................................................. 72 9.1 Termination................................................................................... 72 9.2 Procedure and Effect of Termination........................................................... 73 9.3 Liquidated Damages............................................................................ 73 ARTICLE X MISCELLANEOUS............................................................................... 74 10.1 Amendment and Modification.................................................................... 74 10.2 Waiver of Compliance; Consents................................................................ 74 10.3 [Intentionally Omitted]....................................................................... 74 10.4 Notices....................................................................................... 74 10.5 Assignment.................................................................................... 76 10.6 Governing Law................................................................................. 76 10.7 Counterparts.................................................................................. 77 10.8 Interpretation................................................................................ 77 10.9 Schedules and Exhibits........................................................................ 77 10.10 Entire Agreement.............................................................................. 77 10.11 U.S. Dollars.................................................................................. 77 10.12 Bulk Sales Laws............................................................................... 77 10.13 Construction of Agreement..................................................................... 77 10.14 Severability.................................................................................. 78 10.15 Third Party Beneficiary....................................................................... 78
iii ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated as of December 19, 2002 (this "Agreement"), by and among Citizens Communications Company, a Delaware corporation ("Seller"), and K-1 USA Ventures, Inc. ("K-1 USA" and until the effective time of the assignment of this Agreement to the k1 Designee as required by Section 6.8(f)(i), the "Buyer"), a Delaware corporation and a wholly-owned subsidiary of k1 Ventures Limited, a Singapore corporation. Seller and Buyer are referred to, individually, as a "Party" and, together, as the "Parties." W I T N E S S E T H ------------------- WHEREAS, Seller owns all of the Assets (as defined below); and WHEREAS, Buyer desires to purchase and assume, and Seller desires to sell and assign, the Assets, and certain associated liabilities, upon the terms and conditions hereinafter set forth in this Agreement; and WHEREAS, (i) on the date hereof k1 Ventures Limited and Seller have entered into a letter agreement wherein k1 Ventures Limited undertakes certain obligations to provide financial support to enable Buyer to satisfy certain of Buyer's financial obligations under this Agreement (the "Support Agreement"), and (ii) Kephinance Investments Pte Ltd and PCG Greenstreet Venture I, L.P. have entered into Voting Agreements with Seller pursuant to which such shareholders of k1 Ventures Limited have agreed to vote, in accordance with the terms of such Voting Agreements, all shares of voting securities of k1 Ventures Limited over which they have the power to control the voting thereof (which shares in the aggregate exceed the number of shares that are needed to approve the matters addressed in such Voting Agreements). NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements hereinafter set forth, and intending to be legally bound hereby, the Parties agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Agreement, the following terms have the meanings specified in this Section 1.1. "Affiliate" of any Person means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. "Agreement" means this Asset Purchase Agreement together with the Schedules and Exhibits attached hereto, as the same may be from time to time amended. "Allocation" has the meaning set forth in Section 6.10(f). "ALTA" has the meaning set forth in Section 6.17. "Ancillary Agreements" means the agreements, contracts, documents, instruments and certificates provided for in this Agreement to be entered into by one or more of the Parties or any of their Affiliates in connection with the transactions contemplated by this Agreement. "Assets" has the meaning set forth in Section 2.1. "Asset Material Adverse Effect" means any occurrence or condition, arising after the date hereof, that has or would reasonably be expected to have an aggregate adverse economic impact, taking into account all relevant considerations, in excess of $10,000,000 on the condition of the Assets, taken as a whole, or on the business, operations, financial condition or results of operations of the Business, taken as a whole, other than any such occurrence or condition (a) arising from business, economic or financial market conditions, considered generally, (b) arising from the conditions in the gas utility industry, considered generally and not specifically as to the Business, (c) which is remedied, cured or otherwise reversed (including by the payment of money or application of insurance proceeds) before the Termination Date, or (d) arising from entering into this Agreement or the announcement of the transactions contemplated by this Agreement; it being understood that the occurrences and/or conditions which could, depending on the nature and extent thereof, be deemed to result in an Asset Material Adverse Effect shall include, without limitation, (x) the terms or conditions of a Final Order with respect to any Required Regulatory Approval, considered individually or together with any other such Final Order(s) with respect to any other Required Regulatory Approval(s), other than Regulatory Exceptions, and (y) facts or circumstances relating to the Assets and/or the Business which come to the attention of Buyer between the date of this Agreement and the Closing Date, whether as a result of Buyer's Inspection of the Assets or its examination of information and data relating to the Assets and/or the Business, as contemplated by Section 6.2 or 6.3, or otherwise. "Assigned Agreements" means any contracts, agreements, software licenses and related contracts, Easements, Real Property Leases and personal property leases entered into by Seller or any of its Affiliates (and any amendment to any of the foregoing) with respect to the ownership, operation or maintenance of the Assets or the Business, including without limitation, the CBA and those disclosed on Schedules 4.5 and 4.11(a) and excluding those disclosed on Schedule 2.2. "Assignment and Assumption Agreement" means the Assignment and Assumption Agreement between Seller and Buyer substantially in the form of Exhibit A attached hereto. "Assumed Liabilities" has the meaning set forth in Section 2.3. "Balance Sheet" has the meaning set forth in Section 4.20. "Base Purchase Price" has the meaning set forth in Section 3.2. 2 "Benefit Plans" means each of Seller's deferred compensation and each bonus or other incentive compensation, stock purchase, stock option and other equity compensation plan, program, agreement or arrangement; each severance or termination pay, medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program (within the meaning of Section 3(1) of ERISA); each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); each employment, termination or severance agreement; and each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by such Party or by any ERISA Affiliate, in any case maintained for employees of Seller connected with the Business, or in which such employees participate. "BHP" means collectively BHP Hawaii, Inc. and The Broken Hill Proprietary Company Limited, and any successors thereof. "BHP Stock Sale Agreement" has the meaning set forth in Section 8.5. "Bill of Sale" means the Bill of Sale, substantially in the form of Exhibit B attached hereto, to be delivered at the Closing by Seller with respect to the Tangible Personal Property included in the Assets transferred to Buyer. "Bond Counsel" has the meaning set forth in Section 6.14(c)(i). "Business" -- means collectively: (a) the regulated utility business of manufacturing, selling and distributing synthetic natural gas on the island of Oahu, Hawaii, and of propane gas within the State of Hawaii, conducted by Seller through The Gas Company division of Seller; (b) the non-utility business of purchasing, marketing and selling propane gas conducted by Seller within the State of Hawaii through The Gas Company division of Seller; (c) the appliance repair and service business and propane vehicle conversion business conducted by Seller within the State of Hawaii through The Gas Company division of Seller; and (d) the provision of related services and products and the engagement in related activities by Seller within the State of Hawaii through The Gas Company division of Seller. "Business Day" means any day other than Saturday, Sunday and any day which is a day on which banking institutions in the States of Hawaii and New York are authorized by law or other governmental action to remain closed. "Buyer" has the meaning set forth in the Preamble. 3 "Buyer Indemnifiable Loss" has the meaning set forth in Section 8.2. "Buyer Indemnitee" has the meaning set forth in Section 8.2. "Buyer Material Adverse Effect" means a Material Adverse Effect with respect to Buyer. "Buyer Required Regulatory Approvals" means the Required Regulatory Approvals set forth in Schedule 5.3(b). "CBA" has the meaning set forth in Section 6.12(a). "CERCLA" means the federal Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as amended. "Capital Expenditures" means capital additions to or replacements of property, plants and equipment included in the Assets or otherwise relating to the Business and other expenditures or repairs on property, plants and equipment included in the Assets or otherwise relating to the Business that are customarily capitalized by Seller in accordance with GAAP and its normal accounting policies. "Capital Expenditures Schedule" has the meaning set forth in Section 4.16. "Citizens Marks" has the meaning set forth in Section 2.2(c). "Classified Plan" means the Pension Plan for Classified Employees of Gasco, Inc. "Closing" has the meaning set forth in Section 3.1. "Closing Date" means one minute after 11:59 p.m. on the date which is five (5) Business Days following the date on which the last of the conditions precedent to the Closing set forth in Article VII of this Agreement have been either satisfied or waived by the Party for whose benefit such conditions precedent exist, subject to such extensions (not to exceed six (6) months) as may be required by Seller to repair or replace lost or damaged Assets in accordance with Section 6.13(c), or such other date as the Parties may mutually agree. "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1984. "COBRA Continuation Coverage" means the requirements of Section 4980B(f) of the Code. "Code" means the Internal Revenue Code of 1986, as amended. "Commercially Reasonable Efforts" means efforts by a Party which are reasonably within the contemplation of the Parties at the time of executing this Agreement and which do not require the performing Party to expend any funds other than expenditures which are customary and reasonable in transactions of the kind and nature contemplated by this Agreement in order for the performing Party to satisfy its obligations hereunder. 4 "Current Retirees" has the meaning set forth in Section 6.12(d)(iii)(G). "Direct Claim" has the meaning set forth in Section 8.4(c). "Easements" means all easements, rights of way, permits, licenses, prescriptive rights and other ways of necessity, and other similar real property grants, whether or not of record, relating to real property. "Encumbrances" means any mortgages, pledges, liens, security interests, conditional and installment sale agreements, activity and use limitations, conservation easements, deed restrictions, encumbrances and charges of any kind. "Environmental Claim" means any and all pending and/or threatened administrative, regulatory or judicial actions, suits, orders, claims, demands, liens, notices, notices of violations, investigations, complaints, requests for information, proceedings, or other written communication, whether criminal or civil, pursuant to or relating to any applicable Environmental Law or pursuant to a common law theory, by any Person (including, but not limited to, any Governmental Authority, private person and citizens' group) based upon, alleging, asserting, or claiming any actual or potential (a) violation of, or liability under any Environmental Law, (b) violation of any Environmental Permit, or (c) liability for investigatory costs, cleanup costs, removal costs, remedial costs, response costs, natural resource damages, property damage, personal injury, fines, or penalties arising out of, based on, resulting from, or related to any Environmental Condition or any Release or threatened Release into the environment of any Regulated Substances at any location related to the Assets, including, but not limited to, any Off-Site Location to which Regulated Substances, or materials containing Regulated Substances, were transported for handling, storage, treatment, or disposal. "Environmental Condition" means the presence or Release of a Regulated Substance (other than a naturally-occurring substance) on or in environmental media, or structures on Real Property, at an Off-Site Location or other property (including the presence in surface water, groundwater, soils or subsurface strata, or air), including the subsequent migration of any such Regulated Substance, regardless of when such presence or Release occurred or is discovered. "Environmental Data" has the meaning set forth in Section 6.3(d). "Environmental Laws" means all federal, state, local, provincial, foreign and international civil and criminal laws, regulations, rules, ordinances, codes, decrees, judgments, directives, or judicial or administrative orders, and any judicial or administrative interpretations thereof, relating to pollution or the regulation and protection of the environment, natural resources or human health and safety, including, without limitation, laws relating to Releases or threatened Releases of Regulated Substances (including, without limitation, Releases to ambient air, surface water, groundwater, land, surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport, disposal or handling of Regulated Substances. "Environmental Laws" include: (a) with respect to federal law, CERCLA, the Hazardous Materials Transportation Act (49 U.S.C.ss.ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.ss.ss. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C.ss.ss. 1251 et seq.), the Clean Air Act (42 U.S.C.ss.ss. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C.ss.ss. 2601 et seq.), the Oil Pollution Act (33 U.S.C. ss.ss. 2701 et seq.), the Emergency Planning and Community Right-to-Know Act (42 U.S.C.ss.ss. 11001 et seq.), the Occupational Safety and Health Act (29 U.S.C.ss.ss. 651 et seq.), the Safe Drinking Water Act (42 U.S.C.ss. 300f et. seq.), the Surface Mine Conservation and Reclamation Act (30 U.S.C.ss.ss. 1251-1279), and regulations adopted pursuant thereto, and counterpart state and local laws, regulations adopted pursuant thereto; and (b) with respect to Hawaii law, laws comparable to such federal statutes and regulations adopted pursuant thereto. 5 "Environmental Liabilities" means any liabilities, responsibilities or obligations arising under Environmental Laws or relating to Environmental Conditions or Regulated Substances (including Environmental Claims and common law liabilities relating to Environmental Conditions and Regulated Substances) including but not limited to: (i) costs of compliance (including capital, operating and other costs) relating to any violation or alleged violation of Environmental Laws with respect to the ownership of the Assets or operation of the Business; (ii) property damage or natural resource damage arising from Environmental Conditions or Releases of Regulated Substances at, on, in, under, adjacent to, or migrating from any Assets; (iii) any Remediation of Environmental Conditions or Regulated Substances that are present or have been Released at, on, in, adjacent to or migrating from the Assets; (iv) any Environmental Claims with respect to the ownership of any Assets or operation of the Business; (v) any bodily injury or loss of life arising from Environmental Conditions or Releases of Regulated Substances at, on, in, under, adjacent to or migrating from any Asset; (vi) any bodily injury, loss of life, property damage, or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, of Regulated Substances generated in connection with the ownership of the Assets or the operation of the Business; and (vii) any Remediation of any Environmental Condition or Release of Regulated Substances arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, of Regulated Substances generated in connection with the ownership or operation of the Assets. 6 "Environmental Permits" means any permits, registrations, certificates, certifications, licenses and authorizations, consents and approvals of Governmental Authorities issued under Environmental Laws held by Seller with respect to the Assets or the Business. "Environmental Reports" has the meaning set forth in Section 4.6. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means a trade or business, whether or not incorporated, that together with a Party would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA. "Estimated Adjustment" has the meaning set forth in Section 3.3(b). "Estimated Closing Statement" has the meaning set forth in Section 3.3(b). "Excluded Assets" has the meaning set forth in Section 2.2. "Excluded Liabilities" has the meaning set forth in Section 2.4. "Exempt Facilities" means those facilities listed in Exhibit A to the Loan Agreement included in the IDRB Documents. "Final Order" means an action by the relevant Governmental Authority that has not been reversed, stayed, enjoined, set aside, annulled or suspended and/or with respect to which any waiting period prescribed by law before the transactions contemplated hereby may be consummated has expired and the time period permitted by statute or regulation for filing any request for a stay, petition for rehearing, reconsideration or application for review of the action or for filing a court appeal has passed. "Financial Statements" has the meaning set forth in Section 4.20(a). "FIRPTA Affidavit" means the Foreign Investment in Real Property Tax Act Certification and Affidavit to be executed by Seller. "GAAP" means U.S. generally accepted accounting principles. "Gas Franchise Act" means The Gas Franchise Act (Act 262, Session Laws of Hawaii 1967), as unamended. "Good Utility Practices" means those practices, methods, standards, guides, or acts, as applicable, that (a) are generally accepted in the region during the relevant time period for use in the gas, transmission and distribution industry, (b) are commonly used in prudent gas, transmission and distribution engineering, construction, project management and operations, and (c) would be expected if the Business is to be conducted at a reasonable cost in a manner consistent with laws, rules and regulations applicable to the Business and the objectives of reliability, safety, environmental protection, economy and expediency. Good Utility Practice is intended to be acceptable practices, methods, or acts generally accepted in the region, and is not intended to be limited to the optimum practices, methods, or acts to the exclusion of all others. 7 "Governmental Authority" means any foreign, federal, state, local or other governmental, regulatory or administrative agency, court, commission, department, board, or other governmental subdivision, legislature, rulemaking board, court, tribunal, arbitrating body or other governmental authority. "Grandfathered Active Employees" has the meaning set forth in Section 6.12(d)(iii)(G). "Grandfathered Individuals" has the meaning set forth in Section 6.12(d)(iii)(G). "HTAWU" means Hawaii Teamsters and Allied Workers Union Local 996. "HPUC" means the Public Utilities Commission of the State of Hawaii. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "IDRB Documents" has the meaning set forth in Section 6.14(l). "IDRB Indebtedness" means the indebtedness of Seller owing to the Department of Budget and Finance of the State of Hawaii, as the issuer of the Revenue Bonds and arising under the Loan Agreement included among the IDRB Documents. "Income Tax" means any federal, state, local or foreign Tax (a) based upon, measured by or calculated with respect to gross or net income, profits or receipts (including, without limitation, capital gains Taxes and minimum Taxes) or (b) based upon, measured by or calculated with respect to multiple bases (including, without limitation, corporate franchise taxes) if one or more of the bases on which such Tax may be based, measured by or calculated with respect to, is described in clause (a), in each case together with any interest, penalties, or additions to such Tax. "Indemnifying Party" means a Party obligated to provide indemnification under this Agreement. 8 "Indemnitee" means a Person entitled to receive indemnification under this Agreement. "Independent Accounting Firm" means such independent accounting firm of national reputation as is mutually appointed by the Buyer and Seller. "Inspection" means all tests, reviews, examinations, inspections, investigations, interviews, verifications, samplings and similar activities conducted by Buyer or its Representatives prior to the Closing with respect to the Assets, including "Phase I" and/or "Phase II" environmental assessments. "Intellectual Property" means patents and patent rights, trademarks and trademark rights, service marks and rights to service marks, inventions, copyrights and copyright rights, and all pending applications for registrations of patents, trademarks, and copyrights. "Inventories" means materials, spare parts, consumable supplies, fuel supplies and chemical inventories relating to the Assets or the operation of the Business. "Iwilei Property" means that certain parcel of real property formerly owned by Gasco, Inc. located at 432 Pacific Street (formerly known as 616 Iwilei Road), Honolulu, Hawaii, and which is the same parcel of real property defined as the "Iwilei Property" in the BHP Stock Sale Agreement. "k1 Designee" has the meaning set forth in Section 6.8(f)(i). "K-1 USA" means K-1 USA Ventures, Inc., a Delaware corporation. "Knowledge" means the actual knowledge, as of the date hereof or, with respect to any certificate delivered pursuant to this Agreement, the date of delivery of such certificate, of the Persons identified on Schedule 1.1 and successors to each such Person's employment responsibilities. "Loss" means any claim, demand, suit, proceeding, investigation by a Governmental Authority, loss, liability, fine, levy, damage, obligation, payment, cost or expense (including, without limitation, the cost and expense of any action, suit, proceeding, assessment, judgment, settlement or compromise relating thereto and reasonable attorneys' fees and reasonable disbursements in connection therewith). "Material Adverse Effect" means any occurrence or condition, arising after the date hereof, that has or would reasonably be expected to have an aggregate adverse economic impact, taking into account all relevant considerations, in excess of $10,000,000 on the business, operations, properties, financial condition or results of operations of any Party (including its Affiliates, taken as a whole) or on the ability of either Party to perform in all material respects its obligations under this Agreement and the Ancillary Agreements. "Material Taking" has the meaning set forth in Section 6.13(b). "Non-Union Employees" has the meaning set forth in Section 6.12(b). "Off-Site Location" means any real property or location other than the Real Property. "Order" means any award, decision, injunction, judgment, order, consent order, writ, decree, consent decree, ruling, subpoena, or verdict entered, issued, made or rendered by any court, administrative agency, other Governmental Authority, or by an arbitrator, each of which possesses competent jurisdiction. 9 "Party" has the meaning set forth in the Recitals. "Permitted Encumbrances" means any of the following: (a) mechanics', carriers', workers' and other similar liens arising in the ordinary course of business for charges that are not delinquent or that are being contested in good faith and have not proceeded to judgment; (b) liens for current Taxes and assessments not yet due and payable; (c) with respect to the Real Property, usual and customary nonmonetary Encumbrances, covenants, Easements, restrictions and other title matters (whether or not recorded) that do not and are not reasonably likely to interfere materially with the operation of that portion of the Business conducted on such Real Property or the Business as a whole; (d) Encumbrances securing the payment or performance of any of the Assumed Liabilities; (e) all applicable zoning ordinances and land use restrictions in effect as of the date of this Agreement and all changes to or new adoptions of zoning ordinances and land use restrictions prior to the Closing Date that do not and are not reasonably likely to interfere materially with the operation of that portion of the Business conducted on such Real Property or the Business as a whole; (f) with respect to any Asset which consists of a leasehold or other possessory interests in real property, all Encumbrances, covenants, Easements, restrictions and other title matters (whether or not recorded) to which the underlying fee estate in such real property is subject that do not and are not reasonably likely to interfere materially with the operation of that portion of the Business currently conducted on such property or the Business as a whole; and (g) any other Encumbrances, obligations, defects or irregularities of any kind whatsoever affecting title to the Assets that will be terminated, released or waived on or before the Closing Date or that are not, individually or in the aggregate, reasonably likely to interfere materially with the present use of the Assets or to interfere materially with the operation of the Business as a whole. "Permits" means any permits, licenses, registrations, certificates, franchises and other authorizations, consents and approvals of Governmental Authorities held by Seller with respect to the Assets or the Business. 10 "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, or governmental entity or any department or agency thereof. "Post-Closing Adjustment" has the meaning set forth in Section 3.3(d). "Post-Retirement Life Insurance Benefits" has the meaning set forth in Section 6.12(d)(iii)(G). "Proposed Post-Closing Adjustment" has the meaning set forth in Section 3.3(c). "Proprietary Information" of a Party means all information about the Party or its Affiliates, including their respective properties or operations, furnished to the other Party or its Representatives by the Party or its Representatives, before or after the date hereof, regardless of the manner or medium in which it is furnished and all analyses, reports, tests or other information created or prepared by, or on behalf of, a Party during the performance of "Phase I" or "Phase II" environmental site assessments. Proprietary Information does not include information that: (a) is or becomes generally available to the public, other than as a result of a disclosure by the other Party or its Representatives; (b) was available to the other Party on a nonconfidential basis prior to its disclosure by the Party or its Representatives; (c) becomes available to the other Party on a nonconfidential basis from a person, other than the Party or its Representatives, who is not otherwise bound by a confidentiality agreement with the Party or its Representatives, or is not otherwise under any obligation to the Party or any of its Representatives not to transmit the information to the other Party or its Representatives; or (d) is independently developed by the other Party. "PUHCA" has the meaning set forth in Section 4.25. "PUHCA Staff Concurrence" has the meaning set forth in Section 6.8(f)(ii). "Purchase Price" has the meaning set forth in Section 3.2. "Qualifying Offer" means an offer to a Transferred Employee of the same or similar job that is at least 100% of such employee's current total cash compensation at the time the offer was made (consisting of base salary and participation in 2003 incentive bonus as contemplated in Section 6.12(i) hereof), and does not require, as a condition of acceptance, a relocation of residence as described in Section 6.12(f). "Real Property" has the meaning set forth in Section 2.1(a). Any reference to the Real Property includes, by definition, Seller's right, title and interest in and to the surface and subsurface elements, including the soils and groundwater present at the Real Property, and any reference to items "at the Real Property" includes all items "at, on, in, upon, over, across, under and within" the Real Property. "Real Property Leases" has the meaning set forth in Section 4.5. "Recovery Costs" has the meaning set forth in Section 8.4(d). 11 "Regulated Substances" means (a) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and dielectric fluid containing polychlorinated biphenyls; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "hazardous constituents," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants," "pollutants," "toxic pollutants" or words of similar meaning and regulatory effect under any applicable Environmental Law; and (c) any other chemical, material or substance, exposure to which or whose discharge, emission, disposal or Release is prohibited, limited or regulated by any applicable Environmental Law. "Regulations" has the meaning set forth in Section 6.14(a)(iii). "Regulatory Exceptions" means any of the following: (a) an imposition by the HPUC of a reasonable rate moratorium for the Business or a requirement by the HPUC of the filing of a rate case for the Business; (b) an imposition by the HPUC requiring Buyer to provide service, or to improve service, to Persons located in any authorized service area of the Business, provided such requirement has a corresponding rate recovery opportunity; and (c) terms and conditions imposed by any Governmental Authority that is required to issue a Required Regulatory Approval that are either (i) usual and customary; (ii) applicable to the Business as of the date of this Agreement, including the terms and conditions of the tariffs applicable to the Business; or (iii) contemplated by this Agreement, including the understandings of the Parties referenced in Section 6.8(c)(i). "Regulatory Material Adverse Effect" means, with respect to any Party, a Material Adverse Effect resulting from the effect on such Party of the terms and conditions of a Final Order with respect to any Required Regulatory Approval other than Regulatory Exceptions, and additionally with respect to Buyer, a Regulatory Material Adverse Effect also shall result from a denial by the HPUC of the Parties' joint request for Buyer to republish and file, in Buyer's name, Seller's existing rates and tariffs for the Business upon Closing except to the extent any required changes would not have a material effect on Buyer after taking into account all relevant considerations. "Release" means release, emission, spill, leak, discharge, dispose of, pump, pour, emit, empty, inject, leach, dump or allow to escape into or through the environment. "Remediation" means any action taken in the investigation, removal, confinement, mitigation, cleanup, treatment, or monitoring of a Release or an Environmental Condition on Real Property or Off-Site Location, including, without limitation, (a) obtaining any Permits or Environmental Permits required for such remedial activities, and (b) implementation of any engineering controls and institutional controls. The term "Remediation" includes, without limitation, any action which constitutes "removal action" or "remedial action" as defined by Section 101 of CERCLA, Section 6901(23) and (24); or any action which constitutes "remedial action" as defined by Hawaii Revised Statutes Sections 128D-1. 12 "Representatives" of a Party means such Party's authorized representatives, including without limitation, its professional and financial advisors. "Required Regulatory Approvals" means with respect to a Party, any consent or approval of, filing with, or notice to, any Governmental Authority that is necessary for the execution and delivery of this Agreement and the Ancillary Agreements by such Party or the consummation thereby of the transactions contemplated hereby, other than such consents, approvals, filings or notices (i) which are not required in the ordinary course to be obtained or made prior to the Closing and the transfer of the Assets, (ii) which, if not obtained or made, will not prevent such Party from performing its material obligations hereunder, or (iii) that relate to a Permit or an Assigned Agreement that is not material to the Business, taken as a whole. "Required Shareholder Actions" has the meaning set forth in Section 5.3(c). "Revenue Bonds" has the meaning set forth in Section 6.14(a)(i). "Savings Plan" has the meaning set forth in Section 6.12(d)(iii)(H). "SEC" means the Securities and Exchange Commission and any successor agency thereto. "Seller" has the meaning set forth in the Preamble. "Seller Indemnifiable Loss" has the meaning set forth in Section 8.1. "Seller Indemnitee" has the meaning set forth in Section 8.1. "Seller Material Adverse Effect" means a Material Adverse Effect with respect to Seller. "Seller Required Regulatory Approvals" means the Required Regulatory Approvals set forth in Schedule 4.3(b). "Seller SEC Reports" has the meaning set forth in Section 4.21. "Seller's Pension Plan" has the meaning set forth in Section 6.12(d)(iii)(E). "Seller's 401(k) Plan" means the Citizens 401(k) Savings Plan. "Special Warranty Deed" means a special warranty deed substantially in the form of Exhibit C attached hereto. "Subsidiary" when used in reference to any Person means any entity of which outstanding securities having ordinary voting power to elect a majority of the Board of Directors or other Persons performing similar functions of such entity are owned directly or indirectly by such Person. 13 "Sufficient Notice" has the meaning set forth in Section 6.14(c)(ii). "Support Agreement" has the meaning set forth in clause (i) of the third recital to this Agreement. "Taking" has the meaning set forth in Section 6.13(b). "Tangible Personal Property" has the meaning set forth in Section 2.1(c). "Taxes" means all taxes, charges, fees, levies, penalties or other assessments imposed by any federal, state, local or foreign taxing authority, including, but not limited to, income, excise, property, sales, transfer, franchise, payroll, withholding, social security, gross receipts, license, stamp, occupation, employment or other taxes, including any interest, penalties or additions attributable thereto. "Tax Impact" has the meaning set forth in Section 6.14(a)(vi). "Tax Return" means any return, report, information return, declaration, claim for refund or other document (including any schedule or related or supporting information) required to be supplied to any taxing authority with respect to Taxes including amendments thereto. "Termination Date" has the meaning set forth in Section 9.1(b). "Third Party Claim" means any claim, action, or proceeding made or brought by any Person who is not (a) a Party to this Agreement, or (b) an Affiliate of a Party to this Agreement. "Title Commitment" has the meaning set forth in Section 6.17. "Title Company" has the meaning set forth in Section 6.17. "Title Policies" has the meaning set forth in Section 6.17. "Transfer Taxes" means any real property transfer or gains tax, sales tax, conveyance fee, use tax, stamp tax, stock transfer tax or other similar tax, including any related penalties, interest and additions to tax, but excluding any Income Tax. "Transferable Permits" means those Permits and Environmental Permits with respect to the Assets or the Business which may be transferred to Buyer with or without a filing with, notice to, consent of or approval of any Governmental Authority, and excluding those Permits and Environmental Permits with respect to the Assets or the Business which are non-transferable to Buyer and with respect to which Buyer must apply for and obtain replacements. 14 "Transferred Employees" means Transferred Non-Union Employees and Transferred Union Employees. "Transferred Employee Records" means records related to Seller's employees who become employees of Buyer but only to the extent such records pertain to (A) skill and development training and biographies, (B) seniority histories, (C) salary and benefit information, (D) Occupational, Safety and Health Administration reports, or (E) subject to the limitation of the Health Insurance Portability and Accountability Act of 1996 and any applicable state privacy legislation and regulations, active medical restriction forms. "Transferred Non-Union Employees" has the meaning set forth in Section 6.12(b). "Transferred Union Employees" has the meaning set forth in Section 6.12(a). "Union Employees" has the meaning set forth in Section 6.12(a). "WARN Act" means the Federal Worker Adjustment Retraining and Notification Act of 1988, as amended. 1.2 Certain Interpretive Matters. In this Agreement, unless the context otherwise requires, the singular shall include the plural, the masculine shall include the feminine and neuter, and vice versa. The term "includes" or "including" shall mean "including without limitation." The terms "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement. References to a Section, Article, Exhibit or Schedule shall mean a Section, Article, Exhibit or Schedule of this Agreement, and reference to a given agreement or instrument shall be a reference to that agreement or instrument as modified, amended, supplemented or restated through the date as of which such reference is made. ARTICLE II PURCHASE AND SALE 2.1 Transfer of Assets. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, at the Closing, Seller will sell, assign, convey, transfer and deliver to the k1 Designee, as Buyer, and the k1 Designee, as Buyer, will purchase, assume and acquire from Seller, free and clear of all Encumbrances (except for Permitted Encumbrances), all of Seller's right, title and interest in and to all the assets (except for Excluded Assets), real, personal or mixed, tangible, or intangible, used or held for use by Seller in or in connection with, or otherwise necessary for, the conduct of the Business, each as in existence on the Closing Date (such assets, collectively, the "Assets"), including, without limitation, those assets described below, each as in existence on the Closing Date: (a) those certain parcels of real property owned by Seller together with all fixtures, buildings, facilities, storage tanks, and other improvements thereon and all appurtenances thereto as described in Schedule 4.9 (the "Real Property"); 15 (b) all accounts receivable and earned but unbilled revenues attributable to the Business, and all Inventories; (c) all machinery (mobile or otherwise), equipment (including communications equipment and computers), vehicles, rolling stock, transport vessels, barges, tools, furniture and furnishings and other personal property related to the Business, owned by Seller and located on the Real Property on the Closing Date, together with all the personal property of Seller used principally in the operation of the Business that are in the possession of Seller and whether or not located on the Real Property (collectively, the "Tangible Personal Property"), and all transmission, distribution and other pipelines used by Seller in the operation of the Business, and all fixtures, facilities, storage tanks and other improvements related to the Business, owned by Seller and located on any real property leased by Seller on the Closing Date; (d) subject to the provisions of Section 6.7(c), all rights of Seller under all Assigned Agreements; (e) subject to the provisions of Section 6.7(c), all rights of Seller under all Real Property Leases; (f) all rights of Seller under all Transferable Permits and all rights of Seller, and the franchise granted to Seller, under the Gas Franchise Act; (g) all books, customer lists and customer information databases, meter reading and service data, accounts payable and receivable data, operating and maintenance records, warranty information, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures and similar items of Seller relating specifically to the Assets and necessary for the operation of the Assets and the Business (subject to the right of Seller to retain copies of same for its use) other than such items which are proprietary to third parties and accounting records, and the books and records of Gasco, Inc. to the extent reasonably available; (h) all unexpired, transferable warranties and guarantees from third parties with respect to any Asset as of the Closing Date; (i) Seller prepaid expenses; (j) petty cash held locally for the benefit of the Business; and (k) to the extent transferable, the insurance policies of Seller (or designated rights of Seller thereunder, as the case may be) described in Schedule 2.1(k). 2.2 Excluded Assets. Nothing in this Agreement will constitute a transfer to Buyer of, or be construed as conferring on Buyer, and Buyer is not acquiring, any right, title or interest in or to the following specific assets which are associated with the Assets or the Business, but which are hereby specifically excluded from the sale and the definition of Assets herein (the "Excluded Assets"): 16 (a) assets that Seller uses in both the Business and Seller's electric or communications businesses, the material items of which are identified in Schedule 2.2 hereto, and any contracts or agreements regarding the procurement of goods or services by Seller other than primarily for use in the Business; (b) cash and cash equivalents (including checks) in transit, in hand or in bank accounts, other than petty cash held locally for the benefit of the Business; (c) the rights of Seller and its Affiliates to the names "Citizens Communications Company", "Citizens Energy Services", "Citizens Utilities", "CZN" or "Citizens" or any other trade names, trademarks, service marks, corporate names, corporate symbols or logos or any part, derivative or combination thereof (the "Citizens Marks"); (d) the stock record and minute books of Seller, duplicate copies of all books and records transferred to Buyer, all records prepared in connection with the sale of the Business (including bids received from third parties and analyses relating to the Business and all original documents relating to the Revenue Bonds (provided that copies of such documents relating to the Revenue Bonds have been furnished to Buyer); (e) assets disposed of by Seller after the date of this Agreement to the extent such dispositions are not prohibited by this Agreement; (f) the rights of Seller in and to any causes of action against third parties (including indemnification and contribution) relating to any Real Property or Tangible Personal Property, Permits, Environmental Permits, Taxes, Real Property Leases or the Assigned Agreements, if any, and not relating to any of the Assumed Liabilities (subject to the proviso in Section 2.3(f) and to the provisions of Section 8.5, to the extent applicable), including any claims for refunds, prepayments, offsets, recoupment, insurance proceeds (subject to Section 6.13(c)), condemnation awards (subject to Section 6.13(b)), judgments and the like, whether received as payment or credit against future liabilities, relating specifically to the Real Property or any improvements thereon and relating to any period prior to the Closing Date; (g) all personnel records of Seller and its Affiliates relating to the Transferred Employees other than Transferred Employee Records or other records, the disclosure of which is required by law or legal or regulatory process or subpoena; (h) any and all of Seller's rights and interests in any contract that is not an Assigned Agreement or that is an intercompany transaction between Seller and an Affiliate of Seller and all accounts owing by and among Seller and any of its Affiliates, whether or not any such intercompany transaction or account relates to the provision of goods and services, payment arrangements, intercompany charges or balances, or the like; (i) except to the extent set forth in Section 3.4, rights to refunds of Taxes payable with respect to the Business, the Assets, or any other assets, properties or operations of Seller or any Affiliate thereof, including without limitation all rights to refunds of the overpayment of public utility Taxes paid prior to the Closing Date; (j) all deferred tax assets or collectibles; 17 (k) any insurance policy, bond, letter of credit or similar item, and any cash surrender value in regard thereto, other than the insurance policies (or the designated rights of Seller thereunder, as the case may be) described in Section 2.1(k); (l) except as otherwise set forth in Section 6.12 (including Section 6.12(d)(iii)(D) with respect to the Classified Plan), assets attributable to or related to a Benefit Plan; and (m) all other assets listed in Schedule 2.2 hereto. 2.3 Assumed Liabilities. On the Closing Date, the k1 Designee, as Buyer, shall deliver to Seller the Assignment and Assumption Agreement pursuant to which the k1 Designee, as Buyer, shall assume and agree to discharge when due, without recourse by Buyer against Seller, in accordance with the respective terms and subject to the respective conditions thereof, all of the Assumed Liabilities. The following liabilities and obligations of Seller or Buyer which relate to, or arise by virtue of Seller's or Buyer's ownership of the Assets or operation of the Business (other than Excluded Liabilities as provided in Section 2.4) are referred to collectively as the "Assumed Liabilities": (a) except as otherwise provided in Section 6.7(c), all liabilities and obligations of Seller or Buyer arising on or after the Closing Date under the Assigned Agreements, the Real Property Leases, and the Transferable Permits in accordance with the terms thereof, including, without limitation, the Assigned Agreements entered into by Seller (i) prior to the date hereof and (ii) after the date hereof consistent with the terms of this Agreement, except in each case to the extent such liabilities and obligations, but for a breach or default by Seller, would have been paid, performed or otherwise discharged on or prior to the Closing Date and are not otherwise included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3 or to the extent such liabilities or obligations arise out of any such breach or default or out of any event which after the giving of notice or passage of time or both would constitute a default by Seller; (b) all liabilities and obligations of Seller for accounts payable, other taxes accrued, and other current and accrued liabilities to the extent included among the items included in the adjustment to the Base Purchase Price contemplated in Section 3.3; (c) all liabilities and obligations associated with the Assets or the Business in respect of Taxes for which Buyer is liable pursuant to Section 3.4 or 6.10(a) hereof; (d) all liabilities and obligations of Seller or Buyer with respect to the Transferred Employees incurred prior to, on or after the Closing Date for which Buyer is responsible pursuant to Section 6.12; (e) all Environmental Liabilities, in each case, to the extent that such liability, responsibility, obligation, Environmental Claim or Remediation is attributable to or arises from an act, event, occurrence or Environmental Condition transpiring, occurring or arising on or after the Closing Date. For purposes of clarity and subject to Section 2.3(f), (i) a liability, responsibility, obligation, Environmental Claim or Remediation attributable to or arising from an Environmental Condition or an Environmental Claim arising or asserted on or after the Closing Date, but relating to an act, event, Release or occurrence that transpired or occurred prior to the Closing Date shall not be an Assumed Liability under this Section 2.3(e), and (ii) a liability, responsibility, obligation, Environmental Claim or Remediation attributable to or arising from an Environmental Condition or Release that commenced or occurred prior to the Closing Date and continued after the Closing Date shall be deemed to be an Assumed Liability under this Section 2.3(e) in such proportion as is reasonably allocable to the post-Closing period taking into account all the relevant facts and circumstances relating thereto; 18 (f) until Buyer has incurred at least but not more than $1,150,000 of otherwise indemnifiable Losses (determined after giving effect to the provisions of Section 8.3) and thereby has become entitled to indemnification by Seller under Section 8.2 and in accordance with Section 8.3(c), all Environmental Liabilities of Seller, in each case, to the extent that such liability, responsibility, obligation, Environmental Claim or Remediation is attributable to or arises from an act, event, occurrence or Environmental Condition transpiring, occurring or arising prior to the Closing Date, it being understood and agreed that a liability, responsibility, obligation, Environmental Claim or Remediation attributable to or arising from an Environmental Condition or Release that commenced or occurred prior to the Closing Date and continued after the Closing Date shall be deemed to be an Assumed Liability under this Section 2.4(f) in such proportion as is reasonably allocable to the pre-Closing period taking into account all the relevant facts and circumstances relating thereto; provided, that nothing set forth in this Section 2.3(f) shall require Buyer to assume any liabilities, responsibilities or obligations of Seller that are expressly excluded in Section 2.4(h) (relating to the Iwilei Property) or, subject to Section 8.5, for any Losses which either Party, as a "Buyer Indemnified Party" under the BHP Stock Sale Agreement, is entitled to and actually receives indemnification recovery from BHP as contemplated in Section 8.5; (g) any Tax that may be imposed by any federal, state or local government on the ownership, sale (except as otherwise provided in Section 3.4 or 6.10(a)), operation of the Business or use of the Assets on or after the Closing Date, except for any Income Taxes attributable to the income of Seller; (h) all liabilities and obligations of Seller or Buyer arising on and after the Closing Date pursuant to the tariff applicable to the Business or under those Orders specifically relating to the Assets or the Business issued by or entered into with any Governmental Authority and listed in Schedule 2.3(h) or imposed on Buyer in any Required Regulatory Approval; (i) customer advances, customer deposits, customer contributions in aid of construction, unperformed service obligations, Easement relocation obligations, and engineering and construction required to complete scheduled construction, construction work in progress, and other capital expenditure projects, in each case directly related to the Business and outstanding on or arising after the Closing Date; and (j) actions and proceedings based on conduct, actions, circumstances or conditions arising or occurring on or after the Closing Date, actions and proceedings described in Schedule 2.3(j), actions and proceedings arising from or directly related to any other Assumed Liability, and generic or industry-wide actions and proceedings outstanding on or arising on or after the Closing Date that are applicable to the Business. 19 2.4 Excluded Liabilities. Notwithstanding anything to the contrary in this Agreement, Buyer shall not assume or be obligated to pay, perform or otherwise discharge the following liabilities or obligations of Seller (collectively, the "Excluded Liabilities"): (a) any liabilities or obligations of Seller that are not Assumed Liabilities, including in respect of any Excluded Assets or other assets of Seller that are not Assets; (b) any liabilities or obligations with respect to Taxes attributable to Seller's ownership, or use of the Assets or operation of the Business for taxable periods, or portions thereof, ending before the Closing Date, except for Taxes for which Buyer is liable pursuant to Section 3.4 or 6.10(a) hereof; (c) any liabilities or obligations of Seller accruing under any of the Assigned Agreements prior to the Closing Date or any liability, other than an Assumed Liability, underlying a Permitted Encumbrance, in each case to the extent not included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3; (d) without duplication of any of the liabilities and obligations relating to environmental matters addressed in Section 2.4(g) or Section 2.4(h), which shall be the exclusive expression of all Excluded Liabilities relating to environmental matters, any and all asserted or unasserted liabilities or obligations to third parties (including employees) for injuries or damages, whether arising from tortious conduct or otherwise, or similar causes of action relating to the Assets or the Business arising during or attributable to the period prior to the Closing Date, other than such that relate to any of the Assumed Liabilities; (e) all obligations and liabilities of Seller relating to any accrual included among the other current and accrued liabilities of Seller attributable to the Business that Seller excludes, or that Buyer requires Seller to exclude, from the adjustment to the Base Purchase Price contemplated in Section 3.3(a)(ii); (f) any payment obligations of Seller pursuant to the Assigned Agreements accruing prior to the Closing Date, including, but not limited to, rental payments pursuant to the Real Property Leases, in each case to the extent not included among the items included in the adjustment to the Base Purchase Price contemplated in Section 3.3; (g) subject to Section 2.3(f), all Environmental Liabilities of Seller, in each case, to the extent that such liability, responsibility, obligation, Environmental Claim or Remediation is attributable to or arises from an act, event, occurrence or Environmental Condition transpiring, occurring or arising prior to the Closing Date, it being understood and agreed that, subject to Section 2.3(f), a liability, responsibility, obligation, Environmental Claim or Remediation attributable to or arising from an Environmental Condition or Release that commenced or occurred prior to the Closing Date and continued after the Closing Date shall be deemed to be an Retained Liability under this Section 2.4(g) in such proportion as is reasonably allocable to the pre-Closing period taking into account all the relevant facts and circumstances relating thereto; (h) any and all asserted or unasserted liabilities or obligations of Seller with respect to the Iwilei Property; 20 (i) subject to Section 6.12, any liabilities or obligations of Seller, any Seller Subsidiary or any ERISA Affiliate of Seller relating to any Benefit Plan including but not limited to any such liability (i) relating to benefits payable under any Benefit Plan; (ii) relating to the Pension Benefit Guaranty Corporation under Title IV of ERISA; (iii) relating to a multi-employer plan; (iv) with respect to non-compliance with the notice and benefit continuation requirements of COBRA; (v) with respect to any noncompliance with ERISA, the Code or any other applicable laws; or (vi) with respect to any suit, proceeding or claim which is brought against Seller, Buyer, any Benefit Plan, or any fiduciary or former fiduciary of any such Benefit Plan; (j) subject to Section 6.12, any liabilities or obligations arising from facts or circumstances prior to the Closing Date relating to the employment or termination of employment, including discrimination, wrongful discharge, unfair labor practices, or constructive termination by Seller of any individual, attributable to any actions or inactions by Seller prior to the Closing Date other than actions or inactions taken at the written direction of Buyer (it being understood and agreed that Buyer shall have no liability for action taken by Seller pursuant to Section 6.12 except as expressly provided therein); (k) subject to Section 6.12, any obligations of Seller for wages, overtime, employment taxes, severance pay, transition payments in respect of compensation or similar benefits accruing or arising prior to the Closing under any term or provision of any contract, plan, instrument or agreement relating to any of the employees of Seller; (l) all obligations of Seller with respect to the Revenue Bonds and any other indebtedness for money borrowed by Seller (including items due to Seller's Affiliates) other than payment obligations arising on or after the Closing Date under any equipment lease of the kind listed in Schedule 4.11(a) or under any line extension contracts or similar construction arrangements, it being understood and agreed that such leases, contracts and similar arrangements do not create indebtedness for money borrowed; and (m) any liability of Seller arising out of a breach by Seller of any of its obligations under this Agreement or the Ancillary Agreements. 2.5 Control of Litigation. (a) The Parties agree and acknowledge that, from and after the Closing Date, Seller shall be entitled exclusively to control, defend and settle any litigation, administrative or regulatory proceeding, and any investigation or Remediation activity (including without limitation any environmental mitigation or Remediation activities), arising out of or related to any Excluded Liabilities, and Buyer agrees to cooperate reasonably in connection therewith and in connection therewith, shall comply with the provisions of Section 6.2, provided that, in no event shall Seller's exercise of its rights under this Section 2.5(a) either (i) unreasonably interfere with Buyer's conduct or operation of the Business, (ii) place any environmental liens or deed restrictions on the Real Property, (iii) cause Buyer to be responsible for maintaining any institutional or engineering controls that may be part of a Remediation activity, or (iv) cause Buyer to expend any material amount of money that is not subject to reimbursement by Seller. 21 (b) The Parties agree and acknowledge that, from and after the Closing Date, Buyer shall be entitled exclusively to control, defend and settle any litigation, administrative or regulatory proceeding, and any investigation or Remediation activity (including without limitation any environmental mitigation or Remediation activities), arising out of or related to any Assumed Liabilities, and Seller agrees to cooperate reasonably in connection therewith and in connection therewith, shall comply with the provisions of Section 6.2; provided that, in no event shall Buyer's exercise of its rights under this Section 2.5(b) cause Seller to expend any material amount of money that is not subject to reimbursement by Buyer. ARTICLE III THE CLOSING 3.1 Closing. Upon the terms and subject to the satisfaction of the conditions in Article VII of this Agreement, each of (i) the sale, assignment, conveyance, transfer and delivery of the Assets to Buyer by Seller, (ii) the payment of the Purchase Price to Seller by Buyer, (iii) the assumption of the Assumed Liabilities by Buyer, and (iv) the consummation of the other respective obligations of the Parties contemplated by this Agreement to be consummated on the Closing Date shall take place at a closing (the "Closing"), to be held at the offices of Seller's Hawaii regulatory counsel in Honolulu, Hawaii, or another mutually acceptable location, at 9:00 a.m. local time on the Closing Date. 3.2 Closing Payment. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, in consideration of the aforesaid sale, assignment, assumption, conveyance, transfer and delivery of the Assets, Buyer will pay or cause to be paid to Seller at the Closing an aggregate amount in U.S. dollars of one hundred fifteen million dollars ($115,000,000) (the "Base Purchase Price") plus or minus any adjustments pursuant to the provisions of this Agreement (the "Purchase Price"), by wire transfer of immediately available funds denominated in U.S. dollars or by such other means as are agreed upon by Seller and Buyer. 3.3 Adjustment to Base Purchase Price. (a) Subject to Section 3.3(b), at the Closing, the Base Purchase Price shall be adjusted to account for the items set forth in this Section 3.3(a): (i) the Base Purchase Price shall be increased by the aggregate amount of all accounts receivable and earned but unbilled revenues (other than any amounts that are due from any of Seller's Affiliates or that otherwise are Excluded Assets) attributable to the Business as of day immediately preceding the Closing Date net of Seller's reserve for allowance for bad debt (as reflected in Seller's written policy for allowance for bad debt as of the date hereof); (ii) the Base Purchase Price shall be decreased by all accounts payable, other taxes accrued, other current and accrued liabilities, and the financial cost of the accrued vacation time of the Transferred Employees, in each case of Seller and attributable to the Business as of the day immediately preceding the Closing Date (other than any liability that is an Excluded Liability); 22 (iii) the Base Purchase price shall be decreased by the aggregate amount of customer deposits (including interest accrued on customer deposits) relating to the Business outstanding as of the day immediately preceding the Closing Date; (iv) the Base Purchase Price shall be increased by the aggregate amount of Inventories (exclusive of spare parts and net of (x) fifty (50) percent of the aggregate amount of the consumable supplies included in Inventories other than fuel supplies and (y) $22,000 for "line pack") recorded on Seller's books and records in accordance with Seller's historic practice as it relates to the Business as of day immediately preceding the Closing Date; (v) the Base Purchase Price shall be adjusted to account for the net balance payable to or by Seller, if any, for items prorated pursuant to Section 3.4, other than the items addressed in Section 3.4(a); (vi) the Base Purchase Price shall be increased or decreased if and to the extent required by Section 6.13; and (vii) the Base Purchase Price will be increased or decreased, as appropriate, to the extent (A) the aggregate amount of all (i) Capital Expenditures that result from expenditures made by Seller between December 31, 2002 and the latest month-end arising prior to the Closing Date (including expenditures made during such period and recorded in the Construction Work in Progress account of the Business as of the day immediately preceding the Closing Date and relating to such Capital Expenditures), (ii) without duplication, expenditures made during such period to purchase materials, supplies and other capital items that are dedicated to, but as of Closing have not been used in, the construction or improvement of the property, plant or equipment and relating to such Capital Expenditures and (iii) without duplication, other expenditures made during such period and recorded as an asset of the Business as of the day immediately preceding the Closing Date and relating to such Capital Expenditures, is greater than (resulting in an increase to the Base Purchase Price) or is less than (resulting in a decrease to the Base Purchase Price) (B) the amount of depreciation booked by Seller in accordance with prior practice and GAAP with respect to the Assets during such period (pro-rated as appropriate); provided, that for purposes of such adjustment, the following Capital Expenditures and related expenditures and related depreciation shall be disregarded: (x) expenditures in excess of $500,000 in the aggregate that are not included in the Capital Expenditure Schedule and are not otherwise approved in writing by Buyer; (y) expenditures incurred to repair or replace Assets that are affected by any casualty loss or damage; and (z) the amount of depreciation otherwise included in subclause (B) above that relates to any depreciable Assets resulting from the expenditures described in subclause (x) above or, with respect to the Assets described in clause (y) above, to the extent such depreciation exceeds the amount of depreciation that otherwise would have been incurred on the lost or damaged Assets described in subclause (y) above had they not been lost or damaged. (b) At least ten (10), but no more than thirty (30) days prior to the Closing Date, Seller shall prepare in good faith and deliver to Buyer an estimated closing statement (the "Estimated Closing Statement") that shall set forth Seller's best estimate of the estimated adjustments to the Base Purchase Price required by Section 3.3(a) (the "Estimated Adjustment"). Within five (5) Business Days following the delivery of an Estimated Closing Statement to Buyer, Buyer may object in good faith to such Estimated Closing Payment in writing. In the event of any such objection, the Parties shall attempt to resolve their differences by negotiation. If the Parties are unable to do so before three (3) days prior to the Closing Date, then (i) the full amount of the Estimated Adjustment shall be used to adjust the Base Purchase Price at the Closing if the amount in dispute is less than $500,000, or (ii) the undisputed portion of the Estimated Adjustment shall be used to adjust the Base Purchase Price at the Closing if the amount in dispute is $500,000 or more. The disputed portions shall be paid as a Post-Closing Adjustment if and to the extent required by Section 3.3(d). 23 (c) Within sixty (60) days following the Closing Date, Seller shall prepare and deliver to Buyer a final closing statement setting forth the final adjustments to the Base Purchase Price required by Section 3.3(a) (the "Proposed Post-Closing Adjustment"). All calculations of the Proposed Post-Closing Adjustments shall be prepared using the same accounting principles, policies and methods as Seller has historically used in connection with the calculation of the items reflected on such Proposed Post-Closing Adjustments. (d) Within thirty (30) days following the delivery of a Proposed Post-Closing Adjustment to Buyer, Buyer may object to such Proposed Post-Closing Adjustment in writing. Seller agrees to cooperate with Buyer to provide Buyer and Buyer's Representatives information used to prepare the Proposed Post-Closing Adjustments and information relating thereto. If Buyer objects to a Proposed Post-Closing Adjustment, the Parties shall attempt to resolve such dispute by negotiation. If such Parties are unable to resolve such dispute within thirty (30) days of any such objection by Buyer, the Parties shall appoint an Independent Accounting Firm. The fees and expenses of such Independent Accounting Firm shall be allocated between Buyer and Seller so that Seller's share of such fees and expenses shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Buyer to such auditor that is successfully disputed by Buyer (as finally determined by such auditor) bears to the total amount of such remaining disputed amounts so submitted by Buyer to such auditor. The Independent Accounting Firm shall review such Proposed Post-Closing Adjustment and Buyer's written objection thereto and determine the appropriate adjustment to the Base Purchase Price, if any, within thirty (30) days of such appointment. The Parties agree to cooperate with the Independent Accounting Firm and provide it with such information as it reasonably requests to enable it to make such determination. The finding of such Independent Accounting Firm shall be binding on the Parties hereto. Upon determination by agreement of the Parties or by binding determination of the Independent Accounting Firm of the appropriate adjustment to the Base Purchase Price (in either case, the "Post-Closing Adjustment"), if such Post-Closing Adjustment results in a change to the Base Purchase Price, as previously adjusted pursuant to Section 3.3(b), the Party owing the difference shall deliver such difference to the Party owed such amount no later than two (2) Business Days after the determination of such Post Closing Adjustment, in immediately available funds or in any other manner as reasonably requested by the Party owed such amount, plus interest at 6.0% per annum on such determined amount from the Closing Date to (but not including) the date of payment. 24 3.4 Prorations. Buyer and Seller agree that all of the items normally prorated, including those listed below (but not including Income Taxes), relating to the Business and operation of the Assets shall be prorated as of the Closing Date, with Seller liable for such items to the extent such items relate to any time period prior to the Closing Date, and Buyer liable for such items to the extent such items relate to periods commencing with the Closing Date (measured in the same units used to compute the item in question, otherwise measured by calendar days). The Base Purchase Price shall be increased to the extent Buyer will benefit financially due to Seller's payment prior to the Closing Date of the portion of any such item allocable to Buyer under this Section , and (except with respect to the items addressed in clause (a) below) shall be decreased to the extent Seller will benefit financially due to Buyer's payment prior to the Closing Date of the portion of any such item allocable to Seller under this Section. The items subject to proration include the following: (a) Subject to Section 6.10(b), personal property, real estate and occupancy Taxes, assessments and other charges, if any, on or with respect to the Business and operation of the Assets; (b) rent, Taxes (other than Income Taxes) and all other items (including prepaid services or goods not included in Inventories) payable by or to Seller under any of the Assigned Agreements to the extent not included in the account payables and other taxed accrued of the Business outstanding as of the day immediately preceding the Closing Date; (c) any permit, license, registration, compliance assurance fees or other fees with respect to any Transferable Permit or other Asset; (d) sewer rents and charges for water, telephone, electricity and other utilities with respect to the Assets; (e) rent and Taxes payable by or to Seller under the Real Property Leases assigned to Buyer to the extent not included in the account payables and other taxes accrued of the Business outstanding as of the day immediately preceding the Closing Date; (f) deposits made by Seller to the extent transferred to Buyer; (g) prepaid expenses paid by Seller to the extent transferred to Buyer and prepaid employee benefits with respect to Transferred Employees; and (h) petty cash held locally for the benefit of the Business to the extent transferred to Buyer. 3.5 Deliveries by Seller. At the Closing, Seller will deliver, or cause to be delivered, the following to Buyer: (a) The Bill of Sale, duly executed by Seller; (b) Copies (or originals if reasonably feasible) of any and all consents, waivers or approvals obtained or required to be obtained by Seller from Government Authorities or non-governmental Persons with respect to the transfer of the Assets, or the consummation of the transactions contemplated by this Agreement; 25 (c) One or more Special Warranty Deeds conveying title to the Real Property to Buyer, duly executed and acknowledged by Seller and in recordable form; (d) An opinion from Seller's general counsel, dated the Closing Date, substantially in the form of Exhibit D attached hereto, and an opinion from Seller's Bond Counsel, dated the Closing Date, substantially in the form of Exhibit E attached hereto; (e) The Assignment and Assumption Agreement, duly executed by Seller; (f) A FIRPTA Affidavit and a HARPTA Certificate (Form N-289 -- Certificate for Exemption from the Withholding of Tax on Disposition of Hawaii Real Property), each duly executed by Seller; (g) Copies, certified by the Secretary or Assistant Secretary of Seller, of corporate resolutions authorizing the execution and delivery of this Agreement and all of the agreements and instruments to be executed and delivered by Seller in connection herewith, and the consummation of the transactions contemplated hereby; (h) A certificate of the Secretary or Assistant Secretary of Seller identifying the name and title and bearing the signatures of the officers of Seller authorized to execute and deliver this Agreement and the other agreements and instruments contemplated hereby; (i) Certificate of Good Standing with respect to Seller, issued by the Secretary of State of the State of Delaware; (j) To the extent available, originals of all Assigned Agreements, Real Property Leases and Transferable Permits and, if not available, true and correct copies thereof (delivery of the foregoing documents will be deemed made in the case of any such documents then located at any of the offices included in the Assets, but only to the extent that Seller delivers to Buyer a schedule generally identifying each such office and the general categories of documents located in each such office); (k) All such other instruments of assignment, transfer or conveyance and certificates of title or vessel documentation as shall, in the reasonable opinion of Buyer and its counsel, be necessary to transfer the Assets to Buyer or to register Buyer as the owner of the Assets, in accordance with this Agreement and where necessary or desirable in recordable form; (l) Such other agreements, documents, instruments and writings as are required to be delivered by Seller at or prior to the Closing Date pursuant to this Agreement (including a Bulk Sales Tax Clearance Certificate and a Tax Clearance Certificate from the Department of Taxation of the State of Hawaii, as contemplated in Sections 6.8 and 10.12) or otherwise reasonably requested by Buyer in connection herewith; and 26 (m) A certificate dated the Closing Date executed by Seller's President, Public Services Sector, to the effect that, to such officer's Knowledge, the conditions set forth in Sections 7.1(e) and (f) have been satisfied by Seller. 3.6 Deliveries by Buyer. At the Closing, Buyer will deliver, or cause to be delivered, the following: (a) The Purchase Price, as adjusted pursuant to Section 3.3, by wire transfer of immediately available funds denominated in U.S. dollars in accordance with Seller's instructions or by such other means as are agreed upon by Seller and Buyer; (b) The Assignment and Assumption Agreement, duly executed by Buyer; (c) All such other instruments of transfer or assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for the sale, conveyance, assignment and transfer of the Assets to, or the assumption of the Assumed Liabilities by, Buyer in accordance with this Agreement; (d) Copies, certified by the Secretary or Assistant Secretary of Buyer, of resolutions authorizing the execution and delivery of this Agreement and all of the agreements and instruments to be executed and delivered by the Buyer in connection herewith, and the consummation of the transactions contemplated hereby; (e) A certificate of the Secretary or Assistant Secretary of Buyer, identifying the name and title and bearing the signatures of the officers of Buyer authorized to execute and deliver this Agreement and the other agreements and instruments contemplated hereby; (f) An opinion from Buyer's legal counsel reasonably acceptable to Seller, dated the Closing Date, substantially in the form of Exhibit F attached hereto; (g) Certified copies of any and all consents, waivers or approvals obtained or required to be obtained by Buyer from Government Authorities or non-governmental Persons with respect to the transfer of the Assets or the consummation of the transactions contemplated by this Agreement; (h) Such other agreements, documents, instruments and writings as are required to be delivered by Buyer at or prior to the Closing Date pursuant to this Agreement or otherwise reasonably requested by Seller in connection herewith; (i) Certificate of Good Standing with respect to Buyer, issued by the Secretary of State of Hawaii; and (j) A certificate dated the Closing Date executed by Buyer's Chief Financial Officer to the effect that, to such officer's knowledge, the conditions set forth in Sections 7.2(e), (f) and (g) have been satisfied by Buyer. 3.7 Work in Progress. The Parties agree to work together before the Closing Date to effect on the Closing Date an orderly transition with respect to work in progress. 27 ARTICLE IV REPRESENTATIONS, WARRANTIES AND DISCLAIMERS OF SELLER Seller hereby represents and warrants to Buyer as follows: 4.1 Incorporation; Qualification. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease, and operate its material assets and properties and to carry on its business as is now being conducted. Seller is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which its business, as now being conducted, shall require it to be so qualified, except where the failure to be so qualified would not have a Seller Material Adverse Effect. 4.2 Authority. Seller has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which Seller is a signatory and to consummate the transactions contemplated hereby or thereby. The execution and delivery by Seller of this Agreement and each of the Ancillary Agreements to which Seller is a signatory and the consummation by Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Seller and this Agreement has been duly and validly executed and delivered by Seller. Each of this Agreement and the Ancillary Agreements to which Seller is a signatory constitutes the legal, valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 4.3 Consents and Approvals; No Violation. (a) Neither the execution, delivery and performance of this Agreement nor the execution, delivery and performance of the Ancillary Agreements by Seller will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or Bylaws of Seller, (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Seller is a party or by which it, or any of the Assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained and for such rights of termination or cancellation of Permits and Assigned Agreements that purport to be non-transferable by their terms, in each case that would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect or (iii) subject to obtaining the Seller Required Regulatory Approvals, constitute violations of any law, regulation, order, judgment or decree applicable to Seller, which violations, individually or in the aggregate, would result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 28 (b) Except as set forth in Schedule 4.3(b) (the filings and approvals referred to in Schedule 4.3(b) are collectively referred to as the "Seller Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for the execution and delivery of this Agreement and the Ancillary Agreements by Seller or the consummation by Seller of the transactions contemplated hereby and thereby, other than those the failure to obtain which would not result in a Seller Material Adverse Effect or an Asset Material Adverse Effect and would not otherwise result in a material violation of law by Buyer. 4.4 Insurance. Schedule 4.4 lists, as of the date of this Agreement, all material policies of fire, liability, workers' compensation and other forms of insurance (if any) owned or held by, or on behalf of, Seller with respect to the Assets and the Business. Except as set forth in such Schedule, all such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid (other than retroactive premiums which may be payable with respect to auto, general liability and workers' compensation insurance policies), and no notice of cancellation or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation. Except as described in Schedule 4.4, within the thirty-six (36) months preceding the date of this Agreement, Seller has not been refused any insurance with respect to the Assets or the Business nor has its coverage been limited with respect to the Assets or the Business other than due to insurance limitations generally applicable to property or businesses located in Hawaii by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the last twelve (12) months. 4.5 Real Property Leases. Schedule 4.5 lists, as of the date of this Agreement, all material real property leases under which Seller is a lessee or lessor and which relate to the Assets, including all leases of office space used by Seller in the conduct of the Business (the "Real Property Leases"). Seller has delivered to Buyer true, correct and complete copies of each of the Real Property Leases. 4.6 Environmental Matters. Seller has heretofore delivered to Buyer all environmental reports and all environmental site assessments relating to the Assets that have been identified by Seller after diligent inquiry, which reports are identified in a schedule delivered to Buyer on or prior to the date hereof ("Environmental Reports"). Notwithstanding the immediately preceding sentence, Seller shall not be required to make available to Buyer any information regarding the condition or remediation of the Iwilei Property. Except as disclosed in Schedule 4.6 or in the Environmental Reports: (a) Seller holds, and is in substantial compliance with, all Environmental Permits that are required for Seller to conduct the Business and operate the Assets, and Seller is otherwise in compliance with applicable Environmental Laws with respect to the Business and operation of the Assets, except for such failures to hold or comply with required Environmental Permits, or such failures to be in compliance with applicable Environmental Laws, as would not, individually or in the aggregate, result in an Asset Material Adverse Effect; (b) Seller has not received (i) any written request for information, or been notified that it is a potentially responsible party, under CERCLA or any similar state law with respect to any of the Real Property, or (ii) any written notification from a Governmental Authority with respect to pending or ongoing investigations or enforcement actions related to alleged or potential violations of any applicable Environmental Law with respect to any of the Real Property; 29 (c) Seller has not entered into or agreed to any consent decree or order relating to the Assets, and is not subject to any outstanding judgment, decree, or judicial order relating to compliance with any Environmental Law or to Remediation of Regulated Substances under any Environmental Law relating to the Assets; and (d) To Seller's Knowledge, no Release of Regulated Substances has occurred at, from, in, on, or under the Real Property, and, except as legally permitted, no Regulated Substances are present in, on, about or migrating from the Real Property, in each case that would give rise to an Environmental Claim related to the Assets for which Remediation would reasonably be required, except in any such case to the extent that any such Release or Environmental Claim would not, individually or in the aggregate, result in an Environmental Claim in excess of $50,000. 4.7 Labor Matters. Schedule 4.7 sets forth all collective bargaining agreements, and amendments thereto, to which Seller is a party in connection with the Business. Seller has previously delivered to Buyer true and correct copies of all such collective bargaining agreements and amendments thereto. With respect to the Assets and the Business, except to the extent set forth in Schedule 4.7 and except for such matters as would not, individually or in the aggregate, result in an Asset Material Adverse Effect, (a) Seller is in compliance with all applicable laws respecting employment and employment practices, occupational safety and health, plant closing, mass layoffs, terms and conditions of employment and wages and hours; (b) Seller has not received any written notice of any unfair labor practice complaint against Seller pending before the National Labor Relations Board; (c) no arbitration proceeding arising out of or under any collective bargaining agreement is pending against Seller; and (d) Seller has not experienced any work stoppage within the three-year period prior to the date hereof and to Seller's Knowledge none is currently threatened. 4.8 Benefit Plans: ERISA. (a) Schedule 4.8 lists all material Benefit Plans. True and complete copies of all such Benefit Plan documents, amendments and summary plan descriptions have been made available to Buyer. With respect to the Classified Plan, Seller has provided to Buyer true and complete copies of the following documents: (i) all documents embodying or governing the Classified Plan and any funding medium for such plan (including, without limitation, trust agreements) as they may have been amended to the date hereof; (ii) the most recent IRS determination letter; (iii) the most recently filed Form 5500, with all applicable schedules and accountants' opinions attached thereto; and (iv) the summary plan description for such plan (or other descriptions of such plan provided to employees) and all modifications thereto. (b) No liability under Title IV or Section 302 of ERISA has been incurred by Seller or any ERISA Affiliate of Seller that has not been satisfied in full, no condition exists that presents a material risk to Seller or any ERISA Affiliate of Seller of incurring any such liability, other than liability for premiums due to the Pension Benefit Guaranty Corporation (which premiums have been paid when due). Insofar as the representation made in this Section 4.8 applies to Sections 4064, 4069 or 4204 of Title IV of ERISA, it is made with respect to any employee benefit plan, program, agreement or arrangement subject to Title IV of ERISA to which Seller or any ERISA Affiliate of Seller made, or was required to make, contributions during the five (5)-year period ending on the last day of the most recent plan year ended prior to the Closing Date. 30 (c) The Classified Plan is not a "multiemployer plan" as defined in Section 3(37) of ERISA. As of November 30, 2002, the market value of assets under the Classified Plan exceeded the present value of liabilities thereunder (determined under FAS 35 by Deloitte and Touche using the interest crediting rate for the funding standard account as described in Section 412(b)(5)(A) of the Code). Prior to the Closing Date all required contributions to the Classified Plan will be made. The Classified Plan has not incurred an accumulated funding deficiency (whether or not waived) within the meaning of Section 302 of ERISA or Section 412 of the Code. With respect to the Classified Plan there have been no "reportable events," within the meaning of ERISA Section 4043, or the regulations thereunder, for which the notice requirement is not waived under 29 C.F.R. Part 4043. The Classified Plan is not presently under audit or examination (nor has notice been received of a potential audit or examination) by the Internal Revenue Service, the Department of Labor, or any other governmental agency or entity, and no matters are pending under the IRS Employee Plans Compliance Resolution System, the IRS closing agreement program, or other similar program. (d) Except as expressly provided in this Agreement, the consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event, (i) entitle any current or former employee or officer of Seller or any ERISA Affiliate of Seller to severance pay, unemployment compensation or any other payment, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or officer. (e) There has been no material failure of any of the Benefit Plans that is a group health plan (as defined in Section 5000(b)(1) of the Code) to meet the requirements of Section 4980B(f) of the Code with respect to a qualified beneficiary (as defined in Section 4980B(g) of the Code). Neither Seller nor any ERISA Affiliate of Seller has contributed to a nonconforming group health plan (as defined in Section 5000(c) of the Code) and no ERISA Affiliate of Seller has incurred a tax under Section 5000(e) of the Code that is or could become a liability of Buyer. (f) To the Knowledge of Seller, the Classified Plan has been maintained, funded and administered substantially in accordance with the terms of such plan and substantially complies in form and in operation with the applicable requirements of ERISA and the Code. To the Knowledge of Seller, the Classified Plan is qualified under Section 401(a) of the Code. (g) Prior to the Closing Date, full payment will be made of all amounts that the Seller is required to have paid as premiums or contributions, for all periods prior to Closing, to the Hawaii Teamsters Health and Welfare Trust. (h) There are no pending, or to Seller's Knowledge, threatened claims by or on behalf of any Benefit Plans, by any employee or beneficiary covered under any such Benefit Plans, or otherwise involving any such Benefit Plans (other than routine claims for benefits). 31 (i) Seller's Pension Plan, the Classified Plan, and Seller's 401(k) Plan (as such terms are defined in Section 6.12 hereof) are the only Employee Plans which are intended to be qualified under Section 401(a) of the IRC. 4.9 Real Property. Schedule 4.9 contains a description of the Real Property included in the Assets. True and correct copies of any current surveys, abstracts, title commitments and title opinions identified by Seller after diligent inquiry to be in Seller's possession and all policies of title insurance currently in force and identified by Seller after diligent inquiry to be in the possession of Seller with respect to the Real Property have heretofore been made available to Buyer. 4.10 Condemnation. Except as set forth in Schedule 4.10, Seller has not received any written notices of and otherwise has no Knowledge of any pending or threatened proceedings or actions by any Governmental Authority to condemn or take by power of eminent domain all or any part of the Assets. 4.11 Assigned Agreements. (a) Schedule 4.11(a) lists each Assigned Agreement (other than Real Property Leases, line extension agreements and similar construction arrangements, propane and synthetic natural gas supply contracts with customers of the Business, and Easements held by Seller) which is material to the Business, other than those (i) that are listed or described on another Schedule, (ii) that provide for annual payments by Seller after the date hereof of less than $100,000 or (iii) that, when aggregated with all other Assigned Agreements not listed on Schedule 4.5 or 4.11(a), provide for payments by Seller after the date hereof of less than $500,000 in the aggregate. Schedule 4.11(a) also lists each agreement that is material to the Assets or the Business that may expire or that Seller expects to terminate prior to the Closing Date other than any agreement that is an Excluded Asset. (b) Except as disclosed in Schedule 4.11(b), (i) each Assigned Agreement listed on Schedule 4.5 or 4.11(a) constitutes a legal, valid and binding obligation of Seller and, to Seller's Knowledge, constitutes a valid and binding obligation of the other parties thereto, and (ii) may be transferred to Buyer as contemplated by this Agreement without the consent of the other parties thereto and will continue in full force and effect thereafter, unless in any such case the impact of such lack of legality, validity or binding nature, or inability to transfer, would not, individually or in the aggregate, result in an Asset Material Adverse Effect. (c) Except as set forth in Schedule 4.11(c), there is not, under the Assigned Agreements listed on Schedule 4.5 or 4.11(a), any default or event which, with notice or lapse of time or both, would constitute a default on the part of the Seller or to Seller's Knowledge, any of the other parties thereto, except such events of default and other events which would not, individually or in the aggregate, result in an Asset Material Adverse Effect. 4.12 Legal Proceedings. Except as set forth in Schedule 4.12, there is no action or proceeding pending or, to Seller's Knowledge, threatened against Seller before any court, arbitrator or Governmental Authority, which would, individually or in the aggregate, reasonably be expected to result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. Except as set forth in Schedule 4.12 Seller is not subject to any outstanding Order that would, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 32 4.13 Permits. Seller has all Permits (other than Environmental Permits, which are addressed in Section 4.6 hereof) necessary to own and operate the Assets except where the failure to have such Permits would not, individually or in the aggregate, create a Seller Material Adverse Effect or an Asset Material Adverse Effect. Except as disclosed on Schedule 4.13, Seller has not received any written notification that it is in violation of any such Permits, except notifications of violations which would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. Seller is in compliance with all Permits except where such non-compliance would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 4.14 Taxes. (a) Seller has filed or caused to be filed all Tax Returns that are required to be filed by it with respect to any Tax relating to the Assets or the Business, and has paid or caused to be paid all Taxes that have become due as indicated thereon, except where such Tax is being contested in good faith by appropriate proceedings, or where the failure to so file or pay would not result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. Seller has complied in all material respects with all applicable laws, rules and regulations relating to withholding Taxes relating to Transferred Employees. All Tax Returns relating to the Assets or the Business are true, correct and complete in all material respects. There are no liens for Taxes upon the Assets except for liens for Taxes not yet due and Permitted Encumbrances. (b) Except as set forth in Schedule 4.14, no notice of deficiency or assessment has been received from any taxing authority with respect to liabilities for Taxes of Seller in respect of the Assets or the Business, which have not been fully paid or finally settled, and any such deficiency shown in Schedule 4.14 is being contested in good faith through appropriate proceedings. (c) Except as set forth in Schedule 4.14, there are no outstanding agreements or waivers extending the applicable statutory periods of limitation for Taxes associated with the Assets or the Business that will be binding upon Buyer after the Closing. (d) Except as set forth on Schedule 4.14, none of the Assets is property that is required to be treated as being owned by any other person pursuant to the so-called safe harbor lease provisions of former Section 168(f) of the Code, and none of the Assets is "tax-exempt use" property within the meaning of Section 168(h) of the Code. (e) Schedule 4.14 sets forth the taxing jurisdictions in which Seller owns assets or conducts business that require a notification to a taxing authority of the transactions contemplated by this Agreement, if the failure to make such notification, or obtain Tax clearance certificates in connection therewith, would either require Buyer to withhold any portion of the consideration or subject Buyer to any liability for any Taxes of Seller. 33 4.15 Intellectual Property. The Citizens Marks, the Gasco Marks and the software licenses and related contracts described in Schedules 2.2 and 4.11(a) constitute all of the material Intellectual Property necessary for the operation and maintenance of the Assets or the conduct of the Business, each of which Seller either has all right, title and interest in or valid and binding rights under contract to use in connection with the operation of the Assets and the Business. Except as disclosed in Schedule 4.15, (a) Seller is not, nor has it received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default), under any contract to use such Intellectual Property, and (b) to Seller's Knowledge, such Intellectual Property is not being infringed by any other Person. Except as disclosed in Schedule 4.15, Seller has not received notice that it is infringing any Intellectual Property of any other Person in connection with the Assets or the Business, and Seller, to its Knowledge, is not infringing any Intellectual Property of any other Person which, individually or in the aggregate, would have an Asset Material Adverse Effect. 4.16 Capital Expenditures. Seller has heretofore delivered to Buyer a schedule of all Capital Expenditures that, as of the date of this Agreement, are planned by Seller from the date hereof through December 31, 2003 (the "Capital Expenditures Schedule"). 4.17 Compliance With Laws. Seller is in compliance with all applicable laws, rules and regulations with respect to its ownership of the Assets and operation of the Business except where the failure to be in compliance would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 4.18 Title. Seller has, and will have as of the Closing Date, good, valid and indefeasible title to the Real Property and the other Assets owned or purported to be owned by Seller, free and clear of all Encumbrances except Permitted Encumbrances. 4.19 DISCLAIMERS. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE IV, THE ASSETS ARE TRANSFERRED "AS IS, WHERE IS", AND SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AS TO LIABILITIES, OPERATIONS OF THE ASSETS, CONDITION, VALUE OR QUALITY OF THE ASSETS OR THE PROSPECTS (FINANCIAL AND OTHERWISE), RISKS AND OTHER INCIDENTS OF THE ASSETS AND SELLER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE ASSETS, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS, OR THE APPLICABILITY OF ANY GOVERNMENTAL REQUIREMENTS, INCLUDING BUT NOT LIMITED TO ANY ENVIRONMENTAL LAWS, OR WHETHER SELLER POSSESSES SUFFICIENT REAL PROPERTY OR PERSONAL PROPERTY TO OPERATE THE ASSETS. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SELLER FURTHER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING THE ABSENCE OF HAZARDOUS SUBSTANCES OR LIABILITY OR POTENTIAL LIABILITY ARISING UNDER ENVIRONMENTAL LAWS WITH RESPECT TO THE ASSETS. 34 4.20 Financial Statements. (a) Schedule 4.20 sets forth the unaudited balance sheet for the Business as of December 31, 2001 (the "Balance Sheet") and the unaudited statement of income of the Business for the twelve-month period ended December 31, 2001 (collectively, the "Financial Statements"). Except as set forth in Schedule 4.20, the Financial Statements have been prepared on a pre-tax basis in accordance, in all material respects, with GAAP applied on a basis consistent with prior periods except for the omission of full footnotes to such Financial Statements. Except as set forth in Schedule 4.20, the Balance Sheet presents fairly in all material respects the financial condition of the Business as of its date and the income statement included in the Financial Statements presents fairly in all material respects the results of operations of the Business for the periods covered thereby. The books and records of Seller from which the Financial Statements were derived were complete and accurate in all material respects at the time of such preparation. (b) Schedule 4.20 also sets forth property level financial statements for the Business as of and for the period ending September 30, 2002, as extracted from Seller's SAP financial statement software. Such property level reports have been prepared on a basis consistent with prior periods, were derived from the books and records of Seller, and present fairly in all material respects the financial information of the Business presented therein as of the dates and for the periods covered thereby, subject to normal course adjustments and corporate adjustments and consolidations consistent with the corporate adjustments and consolidations made in the Financial Statements. 4.21 SEC Filings; Financial Statements. (a) Seller has filed, or caused to be filed, all forms, reports and documents required to be filed by Seller with the SEC since January 1, 2001, and has heretofore delivered or made available to Buyer in the form filed with the SEC, together with any amendments thereto, its (i) Annual Reports on Form 10-K for the fiscal year ended December 31, 2000 and 2001, (ii) Quarterly Reports on Form 10-Q for the fiscal quarter ended March 31 and June 30, 2002, and (iii) all other reports or registration statements filed by Seller with the SEC since January 1, 2001 (collectively, the "Seller SEC Reports"). The Seller SEC Reports were prepared substantially in accordance with the requirements of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations promulgated under each of such respective acts, and did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The financial statements, including all related notes and schedules, contained in the Seller SEC Reports (or incorporated by reference therein) fairly present the consolidated financial position of Seller as at the respective dates thereof and the consolidated results of operations and cash flows of Seller for the periods indicated in accordance with GAAP applied on a consistent basis throughout the periods involved (except for changes in accounting principles disclosed in the notes thereto) and subject in the case of interim financial statements to normal year-end adjustments. 35 4.22 Sufficiency of Assets. The Assets and the Excluded Assets are the only assets owned, used, or held for use by Seller in, or in connection with, or otherwise necessary for, the conduct of the Business as presently conducted, except for such assets the failure to own, use, or hold for use, as would not have an Asset Material Adverse Effect or a Material Adverse Effect for Buyer. 4.23 Easements. To Seller's Knowledge, except as set forth in Schedule 4.13 (Seller Permit Violations), Seller owns or possesses all Easements necessary to conduct the Business as now being conducted without any known conflict with the right of others, in each case except to the extent that the failure to own or possess such Easements would not have an Asset Material Adverse Effect. 4.24 Tangible Personal Property. Except for normal wear and tear, and with such exceptions as are not, individually or in the aggregate, reasonably likely to have an Asset Material Adverse Effect, the Tangible Personal Property is in normal operating condition and in a state of reasonable maintenance and repair. 4.25 Regulatory Matters. The Gas Franchise Act serves as the operating authority for Seller rather than a Certificate of Public Convenience and Necessity otherwise required of public utilities pursuant to Chapter 269, Hawaii Revised Statutes. The Gas Franchise Act does not obligate Seller to serve the entire area of the State of Hawaii. Seller operates the Business, and the Business is regulated as a public utility, only in the State of Hawaii. As of the date of this Agreement, Seller has no present intention to make any rate filing or take any other action seeking to change the rates, charges, standards of service or accounting of Seller with respect to the regulated portion of the Business from those in effect on the date of this Agreement, or seeking to effect with the HPUC any agreement, commitment, arrangement or consent with respect thereto. Seller is not a "Holding Company," a "Subsidiary Company" or an "Affiliate" of a "Holding Company" within the meaning of the Public Utility Holding Company Act of 1935, as amended ("PUHCA"). ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 5.1 Organization. K-1 USA is a Delaware corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate the Assets and to carry on the Business as is now being conducted. 5.2 Authority. Buyer has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which Buyer is a signatory and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Buyer of this Agreement and the Ancillary Agreements to which Buyer is a signatory and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate and, except as set forth in Schedule 5.3(a), shareholder action required on the part of Buyer and this Agreement and the Ancillary Agreements have been duly and validly executed and delivered by Buyer. Each of this Agreement and the Ancillary Agreements to which Buyer is a signatory, constitute the legal, valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 36 5.3 Consents and Approvals; No Violation. (a) Except as set forth in Schedule 5.3(a), neither the execution, delivery and performance of this Agreement by Buyer nor the execution, delivery and performance of the Ancillary Agreements by Buyer or any of its Affiliates nor the consummation by Buyer of the transactions contemplated hereby and thereby will (i) conflict with or result in any breach of any provision of the organizational and governing documents of Buyer, or any of its Affiliates, or (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Buyer or any of its Affiliates is a party or by which any of their respective assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, have a Buyer Material Adverse Effect or (iii) subject to obtaining the Buyer Required Regulatory Approvals and the assignment of this Agreement to the k1 Designee in accordance with Section 6.8(f), constitute violations of any law, regulation, order, judgment or decree applicable to Buyer, which violations, individually or in the aggregate, would result in a Buyer Material Adverse Effect. (b) Except as set forth in Schedule 5.3(b) (the filings and approvals referred to in such Schedule are collectively referred to as the "Buyer Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for Buyer's execution and delivery of this Agreement and the Ancillary Agreements or the consummation by the k1 Designee, as the Buyer, of the transactions contemplated hereby and thereby, other than such consents, approvals, filings or notices, which, if not obtained or made, will not (i) prevent Buyer from performing its obligations under this Agreement and the Ancillary Agreements or (ii) result in a Buyer Material Adverse Effect. (c) The affirmative votes of a simple majority of the votes entitled to be cast by holders of outstanding ordinary shares of S$0.10 each of k1 Ventures Limited that are present in person or by proxy and voting at a duly convened meeting of shareholders of k1 Ventures Limited at which a quorum is present are the only votes of the holders of any class or series of capital stock of k1 Ventures Limited necessary to approve k1 Ventures Limited's provision of funding to Buyer in connection with this Agreement, participation (directly or indirectly) in the transactions contemplated in this Agreement (including pursuant to the Support Agreement) or taking any other corporate action by any direct or indirect subsidiary of k1 Ventures Limited in connection with such transactions (the "Required Shareholder Actions"). To Buyer's knowledge, the shareholders of k1 Ventures Limited that have executed the Voting Agreements described in clause (ii) of the third recital to this Agreement own or are able to direct the voting of the shares of voting securities of k1 Ventures Limited described in such Voting Agreements and such shares, when voted in favor of the Required Shareholder Actions, will be sufficient to approve the Required Shareholder Actions. The execution and delivery of, and the performance by k1 Ventures Limited of its obligations under the Support Agreement have been duly authorized by all Board action of k1 Ventures Limited, and the Support Agreement constitutes the legal, valid and binding obligation of k1 Ventures Limited, enforceable against k1 Ventures Limited in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 37 5.4 Availability of Funds. Buyer acknowledges and agrees that on the Closing Date, it will have sufficient funds to pay the Purchase Price under this Agreement 5.5 5.5 Public Company Filings; Financial Statements. (a) Buyer heretofore delivered or made available to Seller the Annual Report of k1 Ventures Limited for the fiscal year ended June 30, 2002 (the "k1 Ventures Annual Report"). The k1 Ventures Annual Report did not as of the date of such report contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The financial statements, including all related notes and schedules, contained in the k1 Ventures Annual Report fairly present the consolidated financial position of k1 Ventures Limited as at the date thereof and the consolidated results of operations and cash flows of k1 Ventures Limited for the periods indicated in accordance with the Singapore Companies Act and Singapore Statements of Accounting Standard applied on a consistent basis throughout the periods involved (except for changes in accounting principles disclosed in the notes thereto). 5.6 Legal Proceedings. There are no actions or proceedings pending or, to Buyer's knowledge threatened against Buyer or any of its Affiliates before any court or arbitrator or Governmental Authority, which, individually or in the aggregate, would result in a Buyer Material Adverse Effect. Neither Buyer nor any of its Affiliates is subject to any outstanding Orders, which would, individually or in the aggregate, result in a Buyer Material Adverse Effect. 5.7 No Knowledge of Seller's Breach. Buyer has no knowledge of any breach by Seller of any representation or warranty of Seller or of any other condition or circumstance that would excuse Buyer from its timely performance of its obligations hereunder. Buyer shall notify promptly Seller if any such information comes to Buyer's attention prior to the Closing. 5.8 Qualified Buyer. Buyer will be qualified to obtain any Permits and Environmental Permits necessary for Buyer to own and operate the Assets as of the Closing. 38 5.9 Inspections. Buyer is knowledgeable about the Business as engaged in by Seller and of the usual and customary practices of companies engaged in businesses similar to the Business and has had access to the Assets, the officers and employees of Seller, and the books, records and files of Seller relating to the Business and the Assets. In making its decision to execute this Agreement, and to purchase the Assets, and without derogation to any of Buyer's rights to indemnification under Section 8.2, Buyer has relied on and will continue to rely upon the results of its Inspections, the Environmental Reports and Seller's representations and warranties in Section 4.6. Buyer acknowledges and agrees that the representations and warranties set forth in Article IV of this Agreement constitute the sole and exclusive representations and warranties of Seller to Buyer in connection with the transactions contemplated hereby and by the Ancillary Agreements, and there are no representations, warranties, covenants, understandings or agreements, oral or written, in relation thereto between the Parties other than those incorporated herein, including Section 6.3, and therein. Except for the representations and warranties expressly set forth in Article IV of this Agreement, Buyer disclaims reliance on any representations or warranties, either express or implied, by or on behalf of Seller or its Affiliates or Representatives. Without limiting the generality of the foregoing, Buyer acknowledges and agrees that, except as provided in Section 4.6, there are no representations or warranties of Seller with respect to the Environmental Condition of the Assets, compliance with Environmental Laws and Environmental Permits of the presence or Releases of hazardous material in the fixtures, soils, groundwater, surface water or air on, under or about or emanating from any of the Assets. 5.10 WARN Act. Buyer does not intend to engage in a "Plant Closing" or "Mass Layoff" as such terms are defined in the WARN Act, or to take any action that would require the giving of any notice under Chapter 394B, Hawaii Revised Statutes, as amended, within sixty days after the Closing Date. 5.11 Public Utility Holding Company Status; Regulation as a Public Utility. Following the assignment of this Agreement to the k1 Designee and on the Closing Date, neither Buyer nor any of its "affiliates" (within the meaning of such term in PUHCA) will be a "holding company," a "subsidiary company," or an "affiliate" of a "public utility company" or of a "holding company," within the meaning of such terms in PUHCA and regulations and rules issued by the SEC pursuant to PUHCA. No approval or other action by the SEC will be required under PUHCA for the k1 Designee or any of its "affiliates" (within the meaning of such term in PUCHA) to consummate the transactions contemplated in this Agreement. 5.12 Ownership and Control of Buyer. (a) K-1 USA is a wholly-owned indirect subsidiary of k1 Ventures Limited, a Singapore corporation. The ownership and control of k1 Ventures is as set forth in the k1 Ventures Annual Report. (b) The k1 Designee will be organized, owned and controlled in accordance with the provisions of the Section 6.8(f). ARTICLE VI COVENANTS OF THE PARTIES 6.1 Conduct of Business and Operation of Assets. (a) Except as described in Schedule 6.1(a), as required by an applicable law or by any Governmental Authority, as expressly contemplated by this Agreement or to the extent Buyer otherwise consents in writing (such consent not to be unreasonably withheld), during the period from the date of this Agreement to the Closing Date, Seller shall (i) operate the Assets in the ordinary course of business consistent with its past practices and Good Utility Practices, (ii) use all Commercially Reasonable Efforts to preserve intact the Assets in all material respects, and endeavor to preserve the goodwill and relationships with customers, suppliers and others having business dealings with it, (iii) maintain insurance described in Section 4.4 (or replacements thereto providing for substantially the same coverage), and (iv) comply with all applicable laws relating to the Assets, including without limitation, all Environmental Laws, except where the failure to so comply would not result in an Asset Material Adverse Effect. 39 (b) Without limiting the generality of Section 6.1(a) and, except as contemplated in this Agreement or as described in Schedule 6.1(a), or as required under applicable law or by any Governmental Authority, prior to the Closing Date, without the prior written consent of Buyer (such consent not to be unreasonably withheld), Seller shall not: (i) Make any material change in the levels of Inventories customarily maintained by Seller with respect to the Business, other than changes which are consistent with Good Utility Practices; (ii) Sell, lease (as lessor), encumber, pledge, transfer or otherwise dispose of, any Asset (except for Inventories used, consumed or replaced in the ordinary course of business consistent with past practices of Seller or with Good Utility Practices) other than to encumber any such Asset with Permitted Encumbrances; (iii) Modify, amend or voluntarily terminate, prior to the respective expiration date of any of the Assigned Agreements or Real Property Leases or any of the Permits or Environmental Permits with respect to such Assets in any material respect, other than (A) in the ordinary course of business, to the extent consistent with the past practices of Seller or Good Utility Practices, (B) with cause, to the extent consistent with past practices of Seller or Good Utility Practices, or (C) as may be required in connection with transferring Seller's rights or obligations thereunder to Buyer pursuant to this Agreement; (iv) Except as otherwise provided herein and except for propane sale agreements entered into in the ordinary course of business and containing market terms, enter into any commitment for the purchase, sale, or transportation of fuel for the Business having a term greater than six months and not terminable on or before the Closing Date either (A) automatically, or (B) by option of Seller (or, after the Closing, by Buyer) in its sole discretion, if the aggregate payment under such commitment for fuel and all other outstanding commitments for fuel for the Business not previously approved by Buyer would exceed $1,000,000; (v) Except as otherwise provided herein, enter into any contract, agreement, commitment or arrangement for the Business that individually exceeds $250,000 or in the aggregate exceeds $1,000,000 unless it is terminable by Seller (or, after the Closing Date, by Buyer) without penalty or premium upon no more than sixty (60) days notice; 40 (vi) Except as otherwise required by the terms of the CBA or as otherwise provided in Section 6.12, (A) hire, or transfer any employees of or for the Business prior to the Closing, other than to fill vacancies in existing positions in the reasonable discretion of Seller, (B) materially increase salaries or wages of employees employed in connection with such Asset prior to the Closing, (C) take any action prior to the Closing to affect a material change in the CBA or (D) take any action prior to the Closing to enhance the aggregate benefits payable to the employees (considered as a group), or materially to enhance the aggregate benefits payable to any individual employee, employed in connection with the Business; (vii) Not terminate the employment of any member of the senior management of the Business except for cause; and (viii) Except as otherwise provided herein, enter into any written or oral contract, agreement, commitment or arrangement with respect to any of the proscribed transactions set forth in the foregoing paragraphs (i) through (vii). 6.2 Access to Information. (a) Between the date of this Agreement and the Closing Date, Seller will, at reasonable times and upon reasonable notice, provide Buyer and its Representatives: (i) reasonable access to their respective managerial personnel, to all books, records, plans, equipment, offices and other facilities and properties constituting part of the Assets; (ii) such historical financial and operating data and other information with respect to the Assets or the Business as Buyer may from time to time reasonably request, to the extent reasonably available; (iii) upon request, a copy of each material report, schedule or other document, if any, filed by Seller with respect to the Assets or the Business with the SEC, HPUC or any other Governmental Authority; (iv) access to all Assets for Inspection by Buyer and its Representatives at reasonable times during regular business hours scheduled for such Inspections, and shall provide qualified management, engineering, operations and maintenance and other personnel to make presentations as required, to escort such Persons and to assist in all aspects of conducting the Inspections, provided that each of Buyer and Seller shall bear their own costs of participating in the Inspections; and (v) access to all such other information in the possession or control of Seller as shall be reasonably necessary to enable Buyer or its Representatives to verify the accuracy of the representations and warranties of Seller contained in this Agreement; provided, however, that any such Inspections shall be conducted in such a manner as not to interfere unreasonably with the operation of the Assets. In the event that Seller's provision of information under this Section 6.2 would (A) constitute a waiver of any legal privilege, including the attorney-client privilege or work product privilege, or (B) violate any legal or contractual obligation of Seller to a third party, then Seller shall first notify Buyer with respect to the existence and general nature of the restricted information. If the restricted information relates to the Assets, the Parties shall thereupon mutually agree upon a reasonable procedure in order to provide Buyer with access to the information while protecting the legitimate interests of Seller thereto. The mutually agreed procedure may include, without limitation, a limited waiver by Seller of the relevant privilege, Buyer's agreement to maintain the information in strict confidence, limited review or inspection of the information by specified individuals, or any combination of the foregoing. 41 Notwithstanding anything in this Section 6.2(a) to the contrary, with respect to employee records Seller will only furnish or provide such access to Transferred Employee Records and will not furnish or provide access to other employee personnel records or medical information unless required by law or specifically authorized by the affected employee. (b) The Parties shall cooperate to schedule Buyer's Inspections of the Assets so that, to the extent reasonably feasible, any interference with the operation of the Business is minimized, and Buyer may complete its Inspections of the Assets within ninety (90) working days of commencement of Inspections and within six (6) months after the execution of this Agreement. (c) Until the conclusion of Buyer's next rate case for the Business (or such longer period as may be required by applicable law), each Party and its Representatives shall have reasonable access to all of the books and records relating to the Assets and the Business (for the Seller, only to the extent relating to periods prior to the Closing Date), including all Transferred Employee Records in the possession of Buyer or Seller to the extent that such access may reasonably be required in connection with the Assumed Liabilities or the Excluded Liabilities, or other matters relating to or affected by the operation of the Business or the Assets. Such access shall be afforded by the Party in possession of any such books and records upon receipt of reasonable advance notice and during normal business hours. The Party exercising this right of access shall be solely responsible for any costs or expenses incurred by it or the holder of the information with respect to such access pursuant to this Section 6.2(c). If the Party in possession of such books and records shall desire to dispose of any books and records upon or prior to the expiration of such above-stated period (or any such longer period), such Party shall, prior to such disposition, give the other Party a reasonable opportunity, at the latter's expense, to segregate and remove such books and records as it may select. (d) Buyer agrees that, prior to the Closing Date, neither it nor its Representatives will contact any vendors, suppliers, employees, or other contracting parties of Seller or its Affiliates with respect to any aspect of the Assets or the transactions contemplated hereby, without the prior written consent of Seller, which consent shall not be unreasonably withheld. 6.3 Additional Inspections and Information. (a) Seller will deliver to Buyer by June 30, 2003, a balance sheet for the Business as of December 31, 2002, and a statement of income for the Business for the twelve-month period ending December 31, 2002, together with an auditor's report thereon by KPMG LLP, Seller's independent accounting firm. Seller will bear the cost of such audit. If Buyer requires any additional financial statement(s) of the Business to be prepared and audited, then Seller will deliver to Buyer such additional audited financial statement(s) within a reasonable period of time following Buyer's request therefore, provided that Buyer will reimburse Seller for the costs and expenses incurred by Seller in connection therewith, including reasonable overhead costs of Seller's employees relating to the preparation and audit of such additional financial statement(s). Nothing in this Section 6.3(a) shall obligate Seller to execute or deliver any document that affects, in a manner adverse to Seller, Seller's liability to Buyer as expressed herein. 42 (b) Buyer has conducted various environmental assessment activities with respect to the Assets, including reviewing existing environmental reports, correspondence, permits and related materials regarding the Assets. Seller acknowledges that, between the date of this Agreement and the Closing Date, Buyer will continue to conduct Inspections with respect to environmental matters, including "Phase I" environmental assessments to the extent Buyer reasonably concludes that such assessments are warranted by the Environmental Reports or the findings of Buyer's assessments prior to the date of this Agreement. Any such Inspections shall be conducted as provided in Section 6.2. Buyer may not conduct any "Phase II" environmental assessment activities with respect to the Assets other than the taking and analysis of hand auger soil samples from locations on Real Property that are identified by Buyer's environmental consultant as areas with recognized Environmental Conditions in accordance with the ASTM protocol for Phase I environmental assessments. If, as a result of Buyer's environmental assessment activities, Buyer reasonably concludes that additional "Phase II" environmental assessment activities are required to determine the extent of a recognized Environmental Condition on Real Property, then Seller and Buyer shall design a mutually acceptable Phase II environmental assessment plan and Seller shall engage an environmental consulting firm reasonably acceptable to Buyer to conduct such assessment. Buyer shall reimburse Seller for the fees and expenses of such consultant, and of any laboratory used by such consultant, incurred by Seller in connection with such assessment. Seller will provide to Buyer, promptly following Seller's receipt thereof, copies of all reports, laboratory results and other information composed or compiled by such consultant in connection with any such assessment. (c) Buyer shall provide to Seller, promptly following Buyer's receipt thereof, copies of all audits, reports, studies, assessments and other information composed or compiled, or to be composed or compiled, by Buyer or Buyer's Representatives in connection with environmental assessment activities. Buyer shall treat all such information delivered to, or composed or compiled by, Buyer or Buyer's Representative as Environmental Data in accordance with the procedures of Section 6.3(d). (d) All audits, reports, studies, assessments and other information delivered to or prepared by Buyer and all other information collected and generated as a result of Buyer's environmental due diligence ("Environmental Data") will be subject to the terms and conditions of the Confidentiality Agreement, dated October 14, 2002, between Seller and Buyer (the "Confidentiality Agreement"), except as otherwise expressly provided in this Section 6.3(d). Except to the extent necessary to fulfill any reporting obligation under any Environmental Law, neither Buyer nor its Representatives shall disclose or release any Environmental Data without the prior written consent of Seller and all such information shall be kept strictly confidential. To the extent reasonably practicable, the Environmental Data shall be prepared at the request of counsel to Buyer or Seller, as appropriate, and, to the fullest extent permitted by law, shall be the work product of such counsel and constitute confidential attorney/client communications. The Environmental Data shall be transferred among Buyer and its Representatives in a manner that will preserve, to the extent reasonably practicable, such privileges. Buyer expressly agrees that until the Closing, it will not distribute the Environmental Data to any third party without Seller's prior written consent (such consent not to be unreasonably withheld). After the Closing, Buyer agrees that it will not distribute the Environmental Data to any third party without Seller's prior written consent, except as required by law or by express provisions of Buyer's corporate compliance program if Seller is provided written notice at least ten (10) days prior to such distribution; provided, however, that Buyer may distribute the Environmental Data to any potential purchaser of any of the Assets or an ownership interest therein (either directly or through the purchase of an ownership interest in an entity holding any of the Assets) only after first notifying the Seller. 43 6.4 Confidentiality. (a) Each Party shall, and shall use its reasonable best efforts to cause its Representatives to, (i) keep all Proprietary Information of any other Party confidential and not to disclose or reveal any such Proprietary Information to any person other than such Party's Representatives and (ii) not use such Proprietary Information other than in connection with the consummation of the transactions contemplated hereby. After the Closing Date and except as provided in Section 6.3(d), any Proprietary Information, to the extent related to the Assets acquired by Buyer, shall no longer be subject to the restrictions set forth herein. The obligations of the Parties under this Section 6.4(a) shall be in full force and effect for three (3) years from the date hereof and will survive the termination of this Agreement, the discharge of all other obligations owed by the Parties to each other and the Closing Date. (b) Notwithstanding the terms of Section 6.4(a) above, the Parties agree that prior to the Closing, Buyer may reveal or disclose Proprietary Information to any other Persons in connection with (i) the financing of Buyer's purchase of the Assets or any equity participation in Buyer's purchase of the Assets, (ii) obtaining insurance for the Assets and (iii) performing Inspections; provided that such Persons agree in writing to maintain the confidentiality of the Proprietary Information in accordance with this Agreement and the Confidentiality Agreement. (c) Upon the other Party's prior written approval (which shall not be unreasonably withheld), any of the Parties may provide Proprietary Information of the other Parties to the SEC, HPUC or any other Governmental Authority with jurisdiction or any securities exchange, as may be necessary to obtain Required Regulatory Approvals or to comply generally with any relevant law or regulation. The disclosing Party will seek confidential treatment for the Proprietary Information provided to any Governmental Authority and the disclosing Party will notify the other Party as far in advance as is practicable of its intention to release to any Governmental Authority any Proprietary Information. 6.5 Public Statements. Subject to the requirements imposed by law, any Governmental Authority or securities exchange, prior to the Closing Date, no press release or other public announcement or public statement or comment in response to any inquiry relating to the transactions contemplated by this Agreement shall be issued or made by any Party without the prior approval of the other Party (which approval shall not be unreasonably withheld). The Parties agree to cooperate in preparing any such announcements. 44 6.6 Expenses. Except to the extent specifically provided herein, whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Party incurring such costs and expenses. Notwithstanding anything to the contrary herein, Buyer will be responsible for all filing fees under the HSR Act relating to the Assets it would acquire hereunder. 6.7 Further Assurances. (a) Subject to the terms and conditions of this Agreement, each Party shall use its Commercially Reasonable Efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the purchase, sale, transfer and delivery of the Assets and the assumption of the Assumed Liabilities pursuant to this Agreement. Such actions shall include, without limitation, each Party using its Commercially Reasonable Efforts to ensure satisfaction of the conditions precedent to its obligations hereunder, including obtaining all necessary consents, approvals, and authorizations of third parties and Governmental Authorities required to be obtained in order to consummate the transactions hereunder, and to effectuate a transfer of the Transferable Permits to Buyer. Seller shall cooperate with Buyer in its efforts to obtain all other Permits and Environmental Permits necessary for Buyer to operate the Assets. None of the Parties hereto shall, without prior written consent of the other Party, take or fail to take any action, which might reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement. (b) In the event that any Asset shall not have been assigned, conveyed, transferred and delivered hereunder to Buyer at the Closing, Seller shall, subject to Section 6.7(c), use Commercially Reasonable Efforts to assign, convey, transfer and deliver such Assets to Buyer as promptly as is practicable after the Closing. (c) (i) To the extent that Seller's rights under any Assigned Agreement or Real Property Lease may not be assigned without the consent of another Person which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same, if an attempted assignment would constitute a breach thereof or be unlawful. (ii) Seller agrees that if any consent to an assignment of any Assigned Agreement or Real Property Lease shall not be obtained or if any attempted assignment would be ineffective or would impair the Buyer's rights and obligations under the Assigned Agreement or Real Property Lease in question, so that Buyer would not in effect acquire the benefit of all such rights and obligations, Seller, at the Buyer's option and to the maximum extent permitted by law and such Assigned Agreement or Real Property Lease, shall, after the Closing Date, appoint Buyer to be Seller's agent with respect to such Assigned Agreement or Real Property Lease, or, to the maximum extent permitted by law and such Assigned Agreement or Real Property Lease, enter into such reasonable arrangements with Buyer or take such other actions as are necessary to provide Buyer with the same or substantially similar rights and obligations of such Assigned Agreement or Real Property Lease as Buyer may reasonably request. Seller shall cooperate and shall use Commercially Reasonable Efforts prior to and after the Closing Date to obtain an assignment to Buyer of each Assigned Agreement or Real Property Lease. 45 (d) To the extent that Seller's rights under any warranty or guaranty described in Section 2.1(h) may not be assigned without the consent of another Person, which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same, if an attempted assignment would constitute a breach thereof, or be unlawful. Seller agrees that if any consent to an assignment of any such warranty or guaranty shall not be obtained, or if any attempted assignment would be ineffective or would impair Buyer's rights and obligations under the warranty or guaranty in question, so that Buyer would not in effect acquire the benefit of all such rights and obligations, Seller, at Buyer's option and expense, shall use Commercially Reasonable Efforts, to the extent permitted by law and by such warranty or guaranty, to enforce such warranty or guaranty for the benefit of Buyer so as to provide Buyer to the maximum extent possible with the benefits and obligations of such warranty or guaranty. 6.8 Consents and Approvals. (a) As promptly as advisable after the execution of this Agreement, Buyer and Seller shall each file or cause to be filed with the appropriate Governmental Authority any notifications required to be filed under the HSR Act and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby. Buyer and Seller shall use their respective reasonable best efforts to respond promptly to any requests for additional information made with respect to such HSR Act filings, and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date after the date of filing of such notification. Buyer will pay all filing fees under the HSR Act relating to the Assets, but each of Seller and Buyer will bear its own costs of the preparation of any such filing. (b) The Parties shall cooperate and use all Commercially Reasonable Efforts to promptly prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, approvals and authorizations of all Governmental Authorities necessary or advisable to consummate the transactions contemplated by this Agreement, including, without limitation, the Required Regulatory Approvals and the PUHCA Staff Concurrence. Buyer shall have the right to review and approve in advance all the information relating to Buyer, on the one hand, and Seller shall have the right to review and approve in advance all the information relating to Seller, on the other hand, in either case, which appear in any filing made in connection with the transactions contemplated by this Agreement. Buyer and Seller agree that they will consult and cooperate with each other with respect to the obtaining of all such necessary permits, consents, approvals and authorizations of Governmental Authorities and the PUHCA Staff Concurrence. (c) In connection with applications and other filings for the Required Regulatory Approvals, and the prosecution of any pending regulatory proceedings material to the Business Buyer and Seller shall jointly, and on an equal basis, coordinate the overall development of the positions to be taken and the regulatory actions to be requested in such applications and filings for approval of the sale by the Seller and the purchase by the Buyer of the Assets and the Business, of all other matters contemplated by this Agreement which require regulatory approval and of all other regulatory matters incidental thereto which are to be addressed in such applications and filings. Efforts to obtain any necessary approvals (including from the HPUC) shall be prosecuted by counsel mutually agreed upon by the Parties, and acting as joint counsel to the Parties, it being understood, however, that (i) all positions taken in the filings with such Governmental Authorities shall be consistent with the mutual understandings of the Parties, including the Parties' agreement that their joint application filed with the HPUC shall seek, among other things, permission for Buyer to republish and file, in Buyer's name, Seller's existing rates and tariffs for the Business to be effective upon Closing, and (ii) Buyer's efforts to obtain the PUHCA Staff Concurrence shall be the responsibility of Buyer's counsel, with Seller's special PUHCA counsel providing such support and assistance as may be appropriate taking into account all relevant facts and circumstances. 46 (d) Seller and Buyer shall cooperate with each other and promptly prepare and file notifications with, and request Tax clearances from, state and local taxing authorities in any jurisdictions in which a portion of the Purchase Price may be required to be withheld or in which Buyer would otherwise be liable for any Tax liabilities of Seller pursuant to such state and local Tax law. (e) Seller shall have the primary responsibility for securing the transfer and assignment of the Transferable Permits, effective as of the Closing Date. Buyer shall have the primary responsibility for securing the transfer, reissuance or procurement of the Permits and Environmental Permits (other than Transferable Permits) effective as of the Closing Date. Seller shall cooperate with Buyer's efforts in this regard and assist in any transfer or reissuance of a Permit or Environmental Permit held by Seller, or the procurement of any other Permit or Environmental Permit when so requested by Buyer. (f) (i) As soon as reasonably practicable, but in any event by the date the Parties' joint application is filed with the HPUC, K-1 USA will assign this Agreement to a newly formed limited liability company organized under the Hawaii limited liability company statute and owned, controlled and governed in a manner consistent with this Section 6.8 (the "k1 Designee"), pursuant to assignment and assumption documentation reasonably acceptable to Seller and its counsel. Upon the effective time of such assignment, (x) the kl Designee will be deemed to have assumed, ratified and agreed to be bound by and to perform all obligations of Buyer in this Agreement, (y) all references in this Agreement and in any Ancillary Agreement to "Buyer" shall thereafter be deemed to be references to the k1 Designee, in each case without the necessity for further act or evidence by the Parties hereto or the k1 Designee and (z) K-1 USA shall be released from Buyer's obligation to pay the Purchase Price at Closing; provided, however, that except as provided in the foregoing clause (z), no such assignment shall relieve or discharge K-1 USA from any of its obligations under this Agreement arising on or before the Closing Date or k1 Ventures Limited from its obligations under that certain letter agreement with Seller dated as of the date of this Agreement wherein k1 Ventures Limited agrees to provide such financial support to Buyer as may be required to enable Buyer to pay the Purchase Price at Closing or the liquidated damages payment if required by Section 9.3(b). (ii) As soon as reasonably practicable, but not later than January 17, 2003, K-1 USA shall review with the staff of the SEC which administers PUHCA the proposed ownership, control and governance of the k1 Designee and any other facts relevant to PUHCA compliance by the k1 Designee and its "affiliates" (within the meaning of such term in PUHCA) and seek the verbal concurrence or non-objection of such SEC staff that, based on the information presented to such SEC staff, (x) no approval from the SEC is required for Buyer and its "affiliates" (within the meaning of such term under PUHCA) to consummate the transactions contemplated in this Agreement and (y) that either the PUHCA "holding company" provisions are inapplicable, or one or more exemptions under PUHCA are available, to the k1 Designee and such "affiliates" of the k1 Designee (the "PUHCA Staff Concurrence"). If the PUHCA Staff Concurrence is not obtained at the time of such SEC review, then K-1 USA promptly (and in event within ten (10) Business Days after the date of such SEC review) will reformulate the proposed arrangements regarding the k1 Designee to satisfy the concerns expressed by such SEC staff (and taking into account any guidance provided by such SEC staff or by Seller's special PUHCA counsel) and review with such SEC staff such reformulation in another attempt to receive the PUHCA Staff Concurrence. K-1 USA agrees not to participate , or to permit its Affiliates or representatives to participate, in any substantive meeting or discussion, either in person or by telephone, with such SEC staff in connection with the PUHCA Staff Concurrence unless it consults with Seller in advance and, to the extent not prohibited by such SEC staff, gives Seller the opportunity to attend and participate with counsel. The k1 Designee shall be owned, controlled and governed in a manner consistent with the information presented to such SEC staff on which the PUHCA Staff Concurrence was based. 47 (iii) As soon as reasonably practicable after the date on which the PUHCA Staff Concurrence is obtained, the organizational documents of the k1 Designee, including its operating agreement, will be amended to the extent necessary or desirable to be consistent with the information forming the basis for obtaining the PUHCA Staff Concurrence and pursuant to documentation reasonably acceptable to Seller and its counsel. (iv) Buyer agrees that the k1 Designee shall be owned, controlled and governed such that the k1 Designee and its "affiliates" (within the meaning of such term under PUHCA), either singly or collectively, either will not be deemed a "holding company" under PUHCA or will be entitled to one or more exemptions from the registration requirements of PUHCA. Accordingly, none of such "affiliates" of the k1 Designee shall own five percent (5%) or more, directly or indirectly, of the outstanding voting securities of any other "public utility company" (within the meaning of such term under PUHCA). (v) K-1 USA presently intends that the Persons identified in the letter from Buyer's counsel to Mr. Jim R. Yates dated October 25, 2002, will own and/or hold the voting interests, beneficial ownership interests and governing interests or other positive or negative control rights described in such letter. K-1 USA may make such changes to such proposed k1 Designee structure as may be necessary or desirable to obtain or to facilitate the obtaining of the PUHCA Staff Concurrence and the approval of the HPUC and such other changes as are not prohibited by the next succeeding sentence. K-1 USA may not change such proposed k1 Designee structure in any way that Seller reasonably concludes is reasonably likely either (w) to affect adversely the legal validity, enforceability or binding nature of the Support Agreement or to result in any breach of the representations and warranties made by k1 Ventures Limited in the Support Agreement, (x) to cause a delay in obtaining the PUHCA Staff Concurrence or the HPUC approval, (y) to require any approval by the SEC under PUHCA or (z) to result in the k1 Designee or any of its "affiliates" either singly or collectively being deemed a "holding company" (within the meaning of such terms under PUHCA), and not entitled to an exemption from the registration requirements of PUHCA. 48 6.9 Fees and Commissions. Each of Seller and Buyer represent and warrant to the other that, except for Morgan Stanley & Co. Incorporated, which is acting for and at the expense of Seller, and Credit Suisse First Boston Corporation, which is acting for and at the expense of Buyer, no broker, finder or other Person is entitled to any brokerage fees, commissions or finder's fees in connection with the transactions contemplated hereby by reason of any action taken by the Party making such representation. Each of Seller and Buyer will pay to the others or otherwise discharge, and will indemnify and hold the others harmless from and against, any and all claims or liabilities for all brokerage fees, commissions and finder's fees (other than the fees, commissions and finder's fees payable to the party listed above) incurred by reason of any action taken by the indemnifying party. 6.10 Tax Matters. (a) All Transfer Taxes incurred in connection with this Agreement and the transactions contemplated hereby, including, without limitation, (A) Hawaii sales tax; (B) the Hawaii transfer tax, conveyance fees or conveyances of interests in real and/or personal property; and (C) Hawaii sales tax and transfer tax on deeds shall be borne as follows: fifty percent (50%) by the Buyer and fifty percent (50%) by the Seller. Seller shall file, to the extent required by, or permissible under, applicable law, all necessary Tax Returns and other documentation with respect to all such Transfer Taxes, and, if required by applicable law, Buyer shall join in the execution of any such Tax Returns and other documentation. Prior to the Closing Date, to the extent applicable, Buyer shall provide to Seller appropriate certificates of Tax exemption from each applicable taxing authority. (b) With respect to Taxes to be prorated in accordance with Section 3.4 of this Agreement and except as provided in Section 6.10(c), Buyer shall prepare and timely file all Tax Returns required to be filed after the Closing Date with respect to the Assets and the Business, and shall duly and timely pay all such Taxes shown to be due on such Tax Returns. Buyer's preparation of any such Tax Returns shall be subject to Seller's approval, which approval shall not be unreasonably withheld. Buyer shall make such Tax Returns available for Seller's review and approval no later than fifteen (15) Business Days prior to the due date for filing each such Tax Return. Upon receipt by Buyer of the tax bill, invoice or other statement regarding such real and personal property Taxes, Buyer shall calculate the pro rata share of such tax bill, invoice or other statement attributable to Buyer and Seller. Buyer shall then forward, as soon as possible, to Seller a copy of such tax bill, invoice or statement along with the supporting documentation relating to the calculation of the pro rata share to Seller and Seller will promptly pay to Buyer Seller's pro rata share of such tax bill, invoice or statement. In the event Seller first receives a tax bill, invoice or statement relating to the Assets from a taxing authority, Seller shall promptly forward such tax bill, invoice or statement to Buyer. (c) All Taxes arising with respect to the Assets and the Business that as of the day immediately preceding the Closing Date are accrued for by Seller in its SAP financial reporting system account styled "Other Taxes Accrued" shall be included in the calculation of Adjusted Working Capital and shall be Assumed Liabilities. Upon receipt by Buyer of the tax bill, invoice or other statement regarding such Taxes, Buyer promptly shall forward to Seller a copy of such tax bill, invoice or statement. In the event Seller first receives a tax bill, invoice or statement relating to such Taxes, Seller shall immediately forward such tax bill, invoice or statement to Buyer. Buyer will pay the full amount of the tax bill, invoice or statement to the applicable taxing authority no later than the due date of the tax bill, invoice or statement and in time to avoid the incurrence of penalties or interest.\ 49 (d) Buyer and Seller shall provide the other with such assistance as may reasonably be requested by the other Party in connection with the preparation of any Tax Return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to liability for Taxes, and each shall retain and provide the requesting Party with any records or information which may be relevant to such return, audit, examination or proceedings. Any information obtained pursuant to this Section 6.10(d) or pursuant to any other Section hereof providing for the sharing of information or review of any Tax Return or other instrument relating to Taxes shall be kept confidential by the Parties hereto. (e) In the event that a dispute arises between Buyer and Seller, with respect to Taxes in Sections 6.10(a) and 6.10(b), or concerning any amount due under this Section 6.10, the Parties shall attempt in good faith to resolve such dispute and any agreed upon amount shall be paid to the appropriate Party. If such dispute is not resolved within thirty (30) days, the Parties to such dispute shall submit the dispute to the Independent Accounting Firm for resolution, which resolution shall be final, conclusive and binding on such Parties. Notwithstanding anything in this Agreement to the contrary, the fees and expenses of such Independent Accounting Firm shall be allocated between the Parties so that the non-disputing Party's share of such fees and expenses shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by the disputing Party to such auditor that is successfully disputed by the disputing Party (as finally determined by such auditor) bears to the total amount of such remaining disputed amount so submitted by the disputing Party to such auditor. Any payment required to be made as a result of the resolution of the dispute by the Independent Accounting Firm shall be made within ten days after such resolution, together with any interest determined by the Independent Accounting Firm to be appropriate. (f) Buyer agrees that Seller may, at Seller's election prior to the Closing Date, direct that all or a portion of the Purchase Price be delivered to a "qualified intermediary" (as defined in Treasury Regulation Section 1.1031(k) - (g)(4)) as to enable Seller's relinquishment of the Assets to qualify as part of a like-kind exchange of property covered by Section 1031 of the Code. If Seller so elects, Buyer shall cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the Code (including any actions required to facilitate the use of a "qualified intermediary"), and Buyer agrees that Seller may assign all or part of its rights and delegate all or part of its obligations under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of like-kind exchange of property covered by Section 1031 of the Code. Any such assignment shall not reduce Seller's obligations under this Agreement. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts are not required to include an unreasonable delay in the consummation of the transactions contemplated by this Agreement. 50 (g) Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Base Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Code. If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the Parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any Proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all Tax Returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of such Party's good faith Allocations, unless otherwise required because of a change in any applicable law. 6.11 Advice of Changes. Prior to the Closing, each Party will timely advise the other in writing with respect to any matter arising after execution of this Agreement which becomes known to that Party and which either constitutes a breach of such Party's covenants in this Agreement or, if existing or occurring at the date of this Agreement, would have been required to be set forth in this Agreement, including any of the Schedules or Exhibits hereto. Any such written notice will not be deemed to have amended this Agreement, including the appropriate Schedule or Exhibit, or to have qualified any representation or warranty contained in this Agreement, or to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the development. 6.12 Seller Employees. (a) On a date reasonably prior to the Closing Date, Buyer shall give Qualifying Offers of employment to all employees of Seller who are covered by the Hawaii Teamsters and Allied Workers Union Local 996 collective bargaining agreement with Seller (the "CBA") and are employed in positions relating to the Business (collectively, "Union Employees"). Each such person who becomes employed by Buyer pursuant to this section shall be referred to herein as a "Transferred Union Employee". (b) On a date reasonably prior to the Closing Date, Buyer shall give Qualifying Offers of employment to all salaried employees of Seller who are employed in positions relating to the Business (collectively, "Non-Union Employees"). Each such person who becomes employed by Buyer pursuant to this section shall be referred to herein as a "Transferred Non-Union Employee." (c) All offers of employment made by Buyer pursuant to Sections 6.12(a) and (b) shall be made in accordance with all applicable laws and regulations, and for Union Employees, in accordance with the CBA, shall remain open for a period of ten (10) working days, and shall specify that employment by Buyer shall commence on the Closing Date. Any such offer which is accepted within such ten (10) working day period shall thereafter be irrevocable, except for good cause, until the earlier of the Closing Date or the termination of this Agreement pursuant to its terms. Following acceptance of such offers, Buyer shall provide written notice thereof to Seller and Seller shall provide Buyer with access to the files and records of employees accepting such offers, to the extent permitted by contract, the CBA and/or applicable law. 51 (d) The following shall be applicable with respect to Transferred Employees: (i) From and after the Closing Date, Transferred Employees shall accrue no additional benefits under any employee benefit plan, policy, program or arrangement of Seller or its Affiliates. (ii) For such Transferred Union Employees, Buyer shall recognize the HTAWU as the exclusive collective bargaining representative and shall assume the terms and conditions of the CBA, to the extent applicable to such Transferred Union Employees, until the expiration of said agreement, and will further comply with all applicable legal obligations with respect to collective bargaining under federal labor law thereafter. (iii) As of the Closing Date, Buyer shall include each Transferred Non-Union Employee in a benefit package providing benefits (including a cash incentive compensation plan) that are in the aggregate substantially similar to those provided by Seller to such Transferred Employees as of the Closing Date, and shall cause Transferred Union Employees to be provided with benefits that are consistent with the terms of the CBA or are otherwise acceptable to the applicable union. The commitments under this paragraph shall require the following: (A) Buyer shall take all action necessary and appropriate to ensure that, as of the Closing Date, Buyer maintains medical, health, dental, flexible spending account, accident, life, short-term disability, long-term disability and other employee welfare benefit plans for the benefit of Transferred Non-Union Employees that are substantially similar to those benefits provided by Seller under the corresponding non-union welfare benefit plans maintained by the Seller as in effect as of the Closing Date. (B) With respect to health care plans, Buyer agrees to waive or to cause the waiver of all limitations as to pre-existing conditions and actively-at-work exclusions and waiting periods for such employees, except that Buyer may require the employee or his/her dependents who, on the Closing Date, is then in the process of satisfying any similar exclusion or waiting period under the Seller health care plans to satisfy fully the balance of the applicable time period for such exclusion or waiting period under the applicable Buyer plan. With respect to the calendar year in which the Closing Date occurs, all health care expenses incurred by any such employees and/or any eligible dependent thereof, including without limitation any alternate recipient pursuant to qualified medical child support orders, in the portion of the calendar year preceding the Closing Date that were qualified to be taken into account for purposes of satisfying any deductible or out-of-pocket limit under any Seller health care plans shall be taken into account for purposes of satisfying any deductible or out-of-pocket limit under the health care plan of Buyer for such calendar year. 52 (C) With respect to service and seniority, Buyer shall recognize each such employee's service and seniority with Seller and any affiliate of Seller for all non-pension purposes, including the determination of eligibility and extent of service or seniority-related welfare benefits such as vacation and sick pay benefits. From and after the Closing Date, Buyer shall provide to each Transferred Employee vacation in an amount equal to the Transferred Employee's vacation entitlement for the year of the Closing reduced by the number of vacation days for the year of the Closing that such Transferred Employee has taken before the Closing Date. (D) As of the Closing Date, Buyer shall assume the Pension Plan for Classified Employees of GASCO, Inc. (the "Classified Plan") and continue to accrue benefits thereunder pursuant to the terms of any applicable collective bargaining agreement. Thereafter, Seller shall have no obligation or liability (contingent or otherwise) to provide pension benefits to any participant in the Classified Plan. Buyer and Seller shall cooperate in causing such steps to be taken as may be necessary to effect the provisions of this Section 6.12(d)(iii)(D), including without limitation the transfer of the Classified Plan's assets currently held in a master trust to a separate trust of which Buyer is the grantor. (E) The Citizens Pension Plan ("Seller's Pension Plan") shall retain all liabilities and assets for pension benefits accrued by Transferred Non-Union Employees through the day immediately preceding the Closing Date, and Seller shall cause all such accrued benefits to become fully vested as of the Closing Date. Seller shall, within 90 days following the Closing Date, notify Transferred Non-Union Employees who are entitled to deferred vested benefits under Seller's Pension Plan of the amount of such benefits. (F) On and after the Closing Date, Buyer shall perform all obligations imposed on the employer by Articles 26 and 27 of the collective bargaining agreement between Seller and Hawaii Teamsters and Allied Workers Union, Local 996 with respect to the provision of health care and group life insurance coverage for Transferred Union Employees and retired union employees of the Business. (G) Buyer shall assume all liabilities, obligations and responsibilities with respect to providing post-retirement life insurance benefits ("Post-Retirement Life Insurance Benefits") to (i) non-union retirees of the Business as of the Closing Date (the "Current Retirees") and (ii) Transferred Non-Union Employees who as of the Closing Date have satisfied the age and service eligibility requirements for Post-Retirement Life Insurance Benefits under the applicable Seller plans (the "Grandfathered Active Employees" and, together with the Current Retirees, the "Grandfathered Individuals"). The Grandfathered Individuals are listed in Schedule 6.12(d)(iii)(G). Buyer shall continue to provide to the Current Retirees Post-Retirement Life Insurance Benefits that are comparable to those Post-Retirement Life Insurance Benefits provided to such Current Retirees immediately prior to the Closing Date, under cost-sharing structures that are at least as favorable as the cost-sharing structures in effect for and available to the Current Retirees immediately prior to the Closing Date. Buyer shall provide to the Grandfathered Active Employees Post-Retirement Life Insurance Benefits that are comparable to those Post-Retirement Life Insurance Benefits provided to such Grandfathered Active Employees immediately prior to the Closing Date, commencing at the time such Grandfathered Active Employees retire. 53 (H) With respect to the Seller's 401(k) Savings Plan (the "Savings Plan"), Seller shall vest Transferred Employees in their Savings Plan account balances as of the Closing Date. Seller hereby represents to Buyer that the Savings Plan is intended to be qualified within the meaning of Section 401 of the Code. Buyer shall take all actions necessary to ensure that, as of the Closing Date, it includes all Transferred Employees in a qualified 401(k) plan ("Buyer's 401(k) Plan") providing for matching contributions (if any) at least equivalent in value to those provided to the Transferred Employee under the Savings Plan immediately prior to the Closing Date. Buyer shall take all actions necessary to cause Buyer's 401(k) Plan (x) to recognize the service that the Transferred Employees had in the Savings Plan for purposes of determining such Transferred Employees' eligibility to participate, vesting, attainment of retirement dates, contribution levels, and, if applicable, eligibility for optional forms of benefit payments, and (y) to accept direct-rollover transfers of Transferred Employees' account balances in the Savings Plan, including transfers of loan balances and related promissory notes, provided that such loans would not be treated as taxable distributions at any time prior to such transfer. (I) Within sixty (60) days after the Closing Date, Seller shall transfer to Buyer's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the day immediately preceding the Closing Date. As soon as practicable after the Closing Date, Seller shall provide to Buyer a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such account, and balances standing to their credit as of the day immediately preceding the Closing Date. (e) With respect to severance benefits, Buyer shall provide to any Transferred Non-Union Employee who is terminated by Buyer (other than for cause) prior to the date which is one year following the Closing Date, severance benefits at the level set forth in a schedule provided to Buyer prior to the date hereof. Any employee provided severance benefits under this section may be required to execute a release of claims against Seller and Buyer, in such form as Buyer shall prescribe, as a condition for the receipt of such benefits. 54 (f) Each Transferred Non-Union Employee who is initially assigned, or assigned within twelve (12) months of the Closing Date, by Buyer to a principal place of work that requires such employee to relocate his residence will be reimbursed by Buyer for all relocation expenses in accordance with the relocation benefits plans set forth in a schedule provided to Buyer prior to the date hereof. For purposes of the foregoing a required relocation of residence shall include a change in the principal place of work that is more than 30 miles farther from such employee's principal place of work immediately prior to the Closing Date and requires an average commute from his current residence of at least one hour in each direction. (g) Seller shall be responsible, with respect to the Business, for performing and discharging all requirements under the WARN Act and under applicable state and local laws and regulations for the notification of its employees of any "employment loss" within the meaning of the WARN Act which occurs on or prior to the Closing Date. Seller shall give all notices required to be given by Seller under Chapter 394B, Hawaii Revised Statutes, as amended. (h) Buyer shall not be responsible for, but Seller shall be responsible for, extending COBRA Continuation Coverage to any employees and former employees of Seller, or to any qualified beneficiaries of such employees and former employees, who become or became entitled to COBRA Continuation Coverage on or before the Closing Date, including those for whom the Closing Date occurs during their COBRA election period. (i) Seller or its Affiliates shall pay or cause to be paid to all Transferred Employees, all compensation (excluding vacation pay), workers' compensation or other employment benefits to which they are entitled under the terms of the applicable compensation or Seller benefit plans or programs as of the Closing Date. Buyer shall pay to each Transferred Employee all unpaid salary or other compensation or employment benefits which have accrued to such employees following the Closing Date, at such times as provided under the terms of the applicable compensation or benefit programs. Notwithstanding the foregoing, Seller and Buyer shall pro-rate the obligation to pay any bonuses declared by Seller on or after the Closing Date (but prior to March 1 of the calendar year following the year in which the Closing Date occurs) that would have been payable to the Transferred Employees had the Transferred Employees remained employed by Seller or its Affiliates throughout the calendar year in which the Closing Date occurs, in accordance with the provisions of the cash incentive compensation plan of Seller under which such bonus would have been paid. Buyer shall be obligated to pay that portion of each such bonus determined by multiplying the amount of such bonus by a fraction, the numerator of which is the number of days from and after the Closing Date through the end of the calendar year in which the Closing Date occurs, and the denominator of which is 365. (j) Seller shall be responsible for maintaining workers' compensation coverage for all Union Employees and Non-Union Employees for claims relating to occurrences prior to the Closing Date. (k) Individuals who are otherwise Union Employees or Non-Union Employees but who on any date are not actively at work due to a leave of absence covered by the Family and Medical Leave Act (FMLA), or due to any other authorized leave of absence, including, without limitation, short-term disability, or who are on long-term disability, shall nevertheless be treated as "Union Employees" or as "Non-Union Employees", as the case may be, on such date if they are able (i) to return to work within the protected period under the FMLA or such other leave (which in any event shall not extend more than twelve (12) weeks after the Closing Date), whichever is applicable, and (ii) to perform the essential functions of their job, with or without a reasonable accommodation. 55 (l) Buyer shall be responsible, with respect to the Business, for performing and discharging all requirements under the WARN Act and under applicable state and local laws and regulations (including Chapter 394B, Hawaii Revised Statutes, as amended) for the notification of its employees of any "employment loss" within the meaning of the WARN Act or as required by Hawaii law which occurs following the Closing Date. (m) Buyer is responsible for extending and continuing to extend COBRA Continuation Coverage to all Transferred Employees, and qualified beneficiaries of such employees who become entitled to such COBRA Continuation Coverage following the Closing Date. (n) The provisions of this Section 6.12 shall not be construed as being for the benefit for any person other than the Parties hereto, and shall not be enforceable by persons other than such Parties (including, without limitations, the Transferred Employees). 6.13 Risk of Loss. (a) From the date hereof through the Closing Date, all risk of loss or damage to the assets included in the Assets shall be borne by Seller, other than loss or damage caused by the acts or negligence of Buyer or any Buyer Representative, which loss or damage shall be the responsibility of Buyer. (b) If, before the Closing Date, all or any portion of the Assets are taken by eminent domain, municipalization or condemnation or are the subject of a pending taking which has not been consummated, (such event being called, in either case, a "Taking"), then Seller shall notify Buyer promptly in writing of such Taking. (i) If such Taking relates to Assets of Seller having an aggregate net book value in excess of $10,000,000, then such Taking shall be a "Material Taking." Upon a Material Taking, Seller and Buyer shall negotiate to settle the loss, if any, resulting from such Material Taking (and such negotiation shall include, without limitation, the negotiation of a fair and equitable reduction in the Base Purchase Price to offset such loss, if any, based on consideration of all relevant circumstances). If Seller and Buyer shall fail to agree to settle the loss, if any, resulting from said Material Taking, said Material Taking shall be conclusively deemed to be an Asset Material Adverse Effect. (ii) If such Taking is not a Material Taking, then (A) Buyer may elect to, in the name of Seller, negotiate for, claim, contest and receive the portion of the award properly allocable to those Assets that are the subject of the Taking, (B) to the extent the Taking shall have been consummated prior to the Closing, Seller shall be relieved of its obligation to convey to Buyer those Assets that were the subject of the Taking, (C) at the Closing, Seller will assign to Buyer all of its rights to damages payable as a result of the Taking, and will pay to Buyer all damages previously paid to it in connection with the Taking, in each case to the extent properly allocable to those Assets that are the subject of the Taking, and (D) following the Closing, Seller will give to Buyer any further assurances of such rights and assignment with respect to the Taking as Buyer reasonably may request from time to time. 56 (c) (i) If any casualty loss or damage to the Assets shall occur before the Closing Date, then the Base Purchase Price shall be reduced, to the extent such loss or damage is not remedied prior to the Closing Date, by an amount mutually acceptable to the Parties, which amount shall be equal to the estimated out-of-pocket costs and expenses which Buyer reasonably can be expected to incur to repair or replace, in accordance with Good Utility Practices, such lost or damaged Assets after Closing. If the actual out-of-pocket costs and expenses which Buyer reasonably incurred to repair or replace, in accordance with Good Utility Practices, such lost or damaged Assets exceeds such estimated amount, Seller shall reimburse Buyer for such excess costs. If the Parties do not agree to an adjustment to the Base Purchase Price in respect of the casualty loss, then the Closing shall be postponed for such period of time (not to exceed six (6) months), and Seller shall repair or replace the lost or damaged Assets in accordance with Good Utility Practices and Buyer or its Representatives will have the right to inspect and observe and approve, all repairs or replacements made by Seller to remedy such casualty loss. (ii) Notwithstanding anything to the contrary in Section 6.13(c)(i) above, if Seller shall have failed to remedy, cure or otherwise reverse by the Closing Date any casualty loss or damage to the Assets such that the estimated out-of-pocket costs and expenses that Buyer reasonably can be expected to incur to repair or replace such lost or damaged Assets exceeds $10,000,000, such loss or damage shall be conclusively deemed to be an Asset Material Adverse Effect. 6.14 Tax Exempt Financing (a) Seller represents that: (i) The Exempt Facilities have been financed, in whole or in part, with the proceeds of the issuance and sale by the Department of Budget and Finance of the State of Hawaii of private activity bonds the interest on which, with certain exceptions, is excluded from gross income for purposes of Federal income taxation (such bonds, as currently outstanding, the "Revenue Bonds"); and Seller is the economic obligor in respect of such Revenue Bonds; (ii) The Revenue Bonds are described in Schedule 6.14(a); (iii) The basis for the exclusion of interest on the Revenue Bonds from gross income for Federal income tax purposes is the use of the Exempt Facilities for "the local furnishing of electric energy or gas" under Sections 142(a)(8) and 142(f) of the Code and the applicable Treasury Regulations (the "Regulations") thereunder; (iv) The use of the Exempt Facilities for a purpose other than a qualifying purpose indicated in subsection (iii) above could impair (A) such exclusion from gross income of the interest on the Revenue Bonds, possibly with retroactive effect, unless appropriate remedial action were taken (which could include prompt defeasance or redemption of the Revenue Bonds) and/or (B) the deductibility of payments by Seller or Buyer of interest based on the restrictions in Section 150(b) of the Code; 57 (v) After August 20, 1996, at least the following bonds exempt from tax under Section 103 of the Code and in whole or in part described in Section 142(a)(8) of the Code have been issued with respect to facilities of Seller for the "local furnishing of electric energy or gas": $19,600,000 Department of Budget and Finance of the State of Hawaii Special Purpose Revenue Bonds (The Gas Company Project) Series 2000; and (vi) Any breach by Buyer of its obligations under this Section 6.14 could result in the incurrence by Seller of additional costs and expenses with respect to the Revenue Bonds, including, without limitation, increased interest costs, loss of the interest deduction for tax purposes and transaction costs relating to any refinancing, redemption and/or defeasance of all or part of the Revenue Bonds (cumulatively, the "Tax Impact"). (b) Buyer agrees that Buyer will indemnify Seller for costs incurred by Seller in respect of any Tax Impact that would not have arisen but for Buyer's breach of its obligations under Section 6.14(c) (except as excused elsewhere in this Section 6.14). (c) Buyer represents that it has not made an election pursuant to Section 142(f)(4)(B) of the Code to terminate tax exempt bond financing by Buyer of facilities described by Section 142(a)(8) of the Code. So long as any Revenue Bonds remain outstanding with respect to Exempt Facilities in any county, Buyer agrees that it shall not (I) use, or take any deliberate act to permit the use of, or fail to take any act within its control that would prevent the use of, the Exempt Facilities within that county for any purpose or in any manner other than as shall be consistent with the Exempt Facility Operating Protocol (as such Exempt Facility Operating Protocol may have been updated, amended or corrected by Seller for the purpose of its accuracy on or before the Closing Date; provided that such changes do not materially impact Buyer's operation of the Assets) delivered by Seller to Buyer on or before the date of this Agreement, or (II) make an election pursuant to Section 142(f)(4)(B) of the Code to terminate tax exempt bond financing by Buyer of facilities described by Section 142(a)(8) of the Code, unless in either case Buyer: (i) has obtained at its own expense an opinion addressed to Seller of nationally recognized bond counsel reasonably acceptable to Seller ("Bond Counsel") that such use will not impair (x) the exclusion from gross income of the interest on any issue of Revenue Bonds for Federal income tax purposes and (y) the deductibility of Seller's payments of interest based on the restrictions in Section 150(b) of the Code; or (ii) has provided written notice to Seller of any election, act or failure to act not later than 45 days after the effective date of such action ("Sufficient Notice"). (Reference is made to Schedule 6.14(a) for the optional redemption provisions applicable to the Revenue Bonds.) (d) Notwithstanding any other provision of this Agreement, it is expressly understood and agreed that the provisions of Section 6.14(c) shall not prohibit Buyer from (and Buyer shall incur no liability to Seller for or in connection with Buyer) suspending the operation of the Exempt Facilities (in whole or in part) on a temporary basis, or from terminating the operation of the Exempt Facilities (in whole or in part) on a permanent basis and shutting down, retiring, abandoning and/or decommissioning the Exempt Facilities (in whole or in part); provided, however, that if the Exempt Facilities, in whole or in part, are dismantled and sold, including any sale for scrap, at any time when any Revenue Bonds remain outstanding, then the proceeds of such sale of Exempt Facilities shall within six months from the date of sale be expended to acquire replacement property to be used as described in the Exempt Facility Operating Protocol, unless (I) Buyer has obtained at its own expense an opinion addressed to Seller of Bond Counsel that the failure to take this action will not impair (x) the exclusion from gross income of the interest on any issue of Revenue Bonds for Federal income tax purposes and (y) the deductibility of Seller's payments of interest based on the restrictions in Section 150(b) of the Code; (II) the proceeds of such sales are less than $50,000 in a calendar year; or (III) Buyer has provided Sufficient Notice of such action to Seller. 58 (e) Buyer agrees that it shall not issue, or have issued on its behalf, any tax-exempt bonds to finance or refinance its acquisition of the Exempt Facilities, provided that it is expressly understood and agreed that this clause (e) shall not prohibit Buyer's use of tax-exempt bonds to finance or refinance any improvement to the Exempt Facilities made after the date of acquisition or to any assets other than the Exempt Facilities. (f) Buyer agrees to provide prompt written notice to Seller of any condemnation of, or casualty loss with respect to, the Exempt Facilities, in whole or in substantial part, to cooperate in good faith with Seller in Seller's efforts to ascertain the consequences of any such eminent domain proceeding or casualty loss for the (A) exclusion of interest on the Revenue Bonds from gross income for Federal income tax purposes and (B) the deductibility of Seller's payments of interest based on the restrictions in Section 150(b) of the Code. (g) Seller hereby represents that it has performed all duties and obligations of "Company" under the documents relating to the Revenue Bonds, that the representations and warranties under the documents relating to the Revenue Bonds remain true and correct, and that there has been no breach of any covenant or agreement by Seller under the documents relating to the Revenue Bonds. Seller hereby covenants that, until all of the Revenue Bonds have been paid upon the stated maturity thereof or have been redeemed in advance of the stated maturity date, Seller will perform all duties and obligations of "Company" under the documents relating to the Revenue Bonds, that Seller's representations and warranties under such documents will remain true and correct and that Seller will not breach any covenant or agreement of Seller under such documents; provided that Seller's covenant in this sentence shall not extend to any such duties, obligations, representations, warrantees, covenants or agreements the necessary predicate for which is Seller's actual ownership, possession or control of the Exempt Facilities from and after the Closing Date. Seller acknowledges and agrees that although Seller from and after the Closing Date will not own, possess or control the Exempt Facilities, Seller shall remain primarily obligated under the documents relating to the Revenue Bonds and, as between itself and each issuer of the Revenue Bonds, shall remain subject to each of Seller's representations, warranties, covenants and agreements thereunder. Buyer shall have no liability under this Section 6.14 unless interest on the Revenue Bonds would be excluded from gross income for Federal income tax purposes absent an act or failure to act by Buyer in contravention of the terms of Section 6.14(c). 59 (h) In any case where Buyer has provided notice to Seller under this Section 6.14, Buyer agrees that it will join and cooperate with Seller with respect to any request by Seller to the Internal Revenue Service to obtain a private letter ruling regarding any Tax Impacts of the act or failure to act by Buyer that prompted such notice. Seller will join and cooperate with Buyer with respect to any request by Buyer to the Internal Revenue Service to obtain a private letter ruling regarding any Tax Impacts. The Party seeking the private letter ruling shall bear all costs of the filing, legal and related out-of-pocket expenses incurred in the course of such request. (i) Seller agrees that it has sole responsibility to make any required payments of principal and interest on the Revenue Bonds and that Buyer has no responsibility to make such payments. Seller agrees that it will indemnify, protect, defend and hold harmless Buyer from and against any claim that Buyer owes any payment of principal or interest on the Revenue Bonds. Seller agrees that Buyer shall retain any payments with respect to any casualty event or any condemnation of the Exempt Facilities and that, except as Buyer has otherwise agreed under Section 6.14(c), Buyer shall not be restricted in its use of any such proceeds. (j) If Buyer shall sell, exchange, transfer or otherwise dispose of the Exempt Facilities in whole or substantial part (aggregate price of $500,000 or more in a calendar year) to one or more third parties, Buyer shall cause to be included in the documentation relating to such transaction covenants and agreements on the part of such third party substantially identical to those on the part of Buyer contained in this Section 6.14, and effective upon the consummation of such disposition Buyer shall have no further obligations under this Section 6.14 with respect to the Exempt Facilities which have been so disposed. (k) The covenants and agreements on the part of Buyer and Seller contained in this Section 6.14 shall continue in effect so long as any of the Revenue Bonds shall remain outstanding. Seller shall notify Buyer promptly when there shall be no Revenue Bonds outstanding. (l) Buyer acknowledges and agrees that Seller's bond counsel may rely on Buyer's representations, warranties and covenants as hereinabove provided for the purpose of rendering a legal opinion or opinions, as required by the Indenture of Trust, the Loan Agreement and the Tax Regulatory Agreement relating to the Revenue Bonds ("IDRB Documents") as a precondition to the sale by Seller of such Exempt Facilities, to the effect that the sale of such Exempt Facilities will not result in (I) the inclusion of the interest on the Revenue Bonds in the gross income of the recipient for purposes of Federal income taxation, and (II) disallowance of interest expense to Seller under Section 150(b) of the Code. Seller acknowledges and agrees that Buyer shall be an addressee of the above-described opinion letters of Seller's bond counsel or shall receive a reliance letter from Seller's bond counsel authorizing Buyer to rely on such opinion letters. (m) Nothing in this Agreement is intended to nor shall it be interpreted as (i) an assignment to, and assumption by, Buyer of any of the IDRB Documents, or (ii) as an undertaking or agreement by Buyer to assume, guarantee or pay any of Seller's loan or other payment obligations pursuant to the IDRB Documents. Other than as stated in this Section 6.14, Buyer shall have no liability in respect of the Revenue Bonds. 60 (n) Each of Buyer and Seller shall use its Commercially Reasonable Efforts, and shall cooperate with the other Party in the other Party's efforts, to obtain all consents, bond counsel opinions and IRS rulings as may be required under the IDRB Documents and the Code to enable Seller, at its option, to defease, prepay, redeem or retain until the stated maturity date the IDRB Indebtedness and to sell the Assets to Buyer without the result that the interest on the Revenue Bonds will be included in the gross income of the recipient for purposes of Federal income taxation; provided, however, that Buyer shall have no obligation in respect of its ownership or operation of the Exempt Facilities (including but not limited to rates imposed by Buyer in respect of utility service provided by the Exempt Facilities or by any other facilities of Buyer or affiliates of Buyer) other than to comply with the Exempt Facility Operating Protocol. 6.15 Seller Guarantees and Surety Instruments. Buyer shall use Commercially Reasonable Efforts to assist Seller in obtaining full and complete releases of the guarantees, letters of credit, bonds and other surety instruments listed in Schedule 6.15. In this connection, Buyer agrees to provide a guaranty, letter of credit, bond or other surety instrument at Closing to replace those listed in Schedule 6.15. 6.16 Citizens and Gasco Marks. (a) Buyer acknowledges and agrees with Seller that Seller has the absolute and exclusive proprietary right to the Citizens Marks, all rights to which and the goodwill represented thereby and pertaining thereto are being retained by Seller. Within ninety (90) days after the Closing Date, Buyer shall cease using any Citizens Mark and shall remove from the Assets any and all Citizens Marks. Thereafter, Buyer shall not use any Citizens Mark in connection with the sale of any products or services or otherwise in the conduct of the businesses. In the event that Buyer breaches this Section 6.16(a), Seller shall be entitled to specific performance and to injunctive relief against further violations, as well as any other remedies at law or in equity available to Seller. (b) The parties acknowledge and agree that the Assets include the absolute and exclusive proprietary right to all names, marks, trade names, trademarks and corporate symbols and logos incorporating "The Gas Company," "TGC," or "Honolulu Gas Equipment Company" (collectively, the "Gasco Marks"). All rights to the Gasco Marks and the goodwill represented thereby and pertaining thereto shall be assigned and transferred to Buyer at Closing. After the Closing Date, neither Seller nor any of its Affiliates shall use any of the Gasco Marks in any corporate name or in connection with the sale of any products or services or otherwise in the operation of any business. This Section 6.16(b) shall not be construed to prohibit Seller from using the name "Gasco" or "The Gas Company" in connection with the filing of any Tax Returns for periods prior to the Closing Date or the filing of any other documents required by any Governmental Body. 6.17 Title Commitments. Prior to Closing, Seller shall cooperate with Buyer and use Commercially Reasonable Efforts to assist Buyer if Buyer desires to obtain American Land Title Association ("ALTA") title insurance commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final form, from one or more title insurance companies (collectively, the "Title Company"), committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment) to issue ALTA (or its local equivalent) form of title insurance policies in an amount acceptable to the Buyer and the Title Company insuring good, valid, indefeasible fee simple title to the Real Property in Buyer, in all cases, at Buyer's sole expense and in the respective amounts that Buyer requests prior to Closing, subject to no Encumbrances or other exceptions to title other than Permitted Encumbrances (collectively the "Title Policies"). On or prior to the Closing Date, Seller shall execute and deliver, or cause to be executed and delivered, to the Title Company, at no cost to Seller, any customary affidavits, standard gap indemnities, evidence of corporate existence and authority, and similar documents reasonably requested by the Title Company in connection with the issuance of the Title Commitments or the Title Policies; provided that such efforts and Buyer's request for Title Policies or Title Commitments shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement, except to the extent caused by or resulting from Seller's breach of this Agreement; and provided further, that nothing in this Section 6.17 shall obligate Seller to execute or deliver any document that affects, in a manner adverse to Seller, Seller's liability to Buyer as expressed herein and in the Special Warranty Deed. 61 6.18 Post-Execution Delivery of Schedules. By March 31, 2003, Seller shall deliver to Buyer a schedule, to be identified as Schedule 6.18, which sets forth all of the following identified by Seller after reasonable investigation (i) all Permits, (ii) all material items of Tangible Personal Property (other than Inventories), (iii) quantities of Inventories recorded in Seller's books and records for the Business as of the last day of the month preceding the date of this Agreement, together with the net book values of such Inventories as of such date, (iv) all Easements held by Seller in connection with the Business, and (v) all line extension agreements and similar construction arrangements. Schedule 6.18 will also (x) designate those Permits that require the consent of the respective Governmental Authority to transfer and those that purport to be non-transferable and (y) describe the current status of each such Permit. 6.19 Transition Plan. Within 30 days after the execution date of this Agreement, Buyer shall deliver to Seller a list of its proposed representatives to a joint transition team, which shall include individuals with expertise from various functional specialties associated or involved in providing billing, payroll and other support services provided to the Business by any automated or manual process using facilities or employees that are not included among the Assets or Transferred Employees. Seller will add its representatives to such team within 15 days after receipt of Buyer's list. Such team will be responsible for preparing as soon as reasonably practicable after the execution date of this Agreement and at least 60 days prior to the Closing Date, and timely implementing, a transition plan which will identify and describe substantially all of the various transition activities that the parties will cause to occur before and after the Closing and any other transfer of control matters that any party reasonably believes should be addressed in such transition plan. If requested by either party, the terms and conditions governing such transition activities will be more fully set forth in a Transition Agreement reasonably satisfactory to the parties. Buyer and Seller shall use their Commercially Reasonable Efforts to cause their Representatives on such transition team to cooperate in good faith and take all reasonable steps necessary to develop a mutually acceptable transition plan by no later than 120 days after the date of this Agreement. 6.20 Certain Transactions. Buyer shall not, and shall not permit any of its Affiliates to, acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of or equity in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets if the entering into of a definitive agreement relating to, or the consummation of such acquisition, merger or consolidation would reasonably be expected to (i) impose any material delay in the obtaining of, or significantly increase the risk of not obtaining, any authorizations, consents, orders, declarations or approvals of any Governmental Authority necessary to consummate the transactions contemplated by this Agreement or the expiration or termination of any applicable waiting period, (ii) significantly increase the risk of any Governmental Authority entering an order prohibiting the consummation of the transactions contemplated by this Agreement, (iii) significantly increase the risk of not being able to remove any such order on appeal or otherwise or (iv) materially delay or prevent the consummation of the transactions contemplated by this Agreement. 62 ARTICLE VII CONDITIONS 7.1 Conditions to Obligations of Buyer. The obligation of Buyer to effect purchase of the Assets and the other transactions contemplated by this Agreement shall be subject to the fulfillment of the following conditions, or waiver thereof, by Buyer at or prior to the Closing Date: (a) The waiting period under the HSR Act applicable to the consummation of the sale of the Assets contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any Governmental Authority which prevents the consummation of the sale of the Assets contemplated herein shall have been issued and remain in effect (each Party agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted) and no statute, rule or regulation shall have been enacted by any state or federal government or Governmental Authority prohibiting the consummation of the sale of the Assets; (c) Buyer shall have received all of Buyer's Required Regulatory Approvals by Final Order, and such Required Regulatory Approvals shall not contain terms and conditions that would result in a Regulatory Material Adverse Effect for Buyer or an Asset Material Adverse Effect; (d) Seller shall have received all of Seller's Required Regulatory Approvals by Final Order, and such Required Regulatory Approvals shall not contain terms and conditions that would result in a Regulatory Material Adverse Effect for Buyer or an Asset Material Adverse Effect; (e) Seller shall have performed and complied with each of its covenants and agreements contained in this Agreement which are required to be performed and complied with by Seller on or prior to the Closing Date except where the failure to so perform or comply, when taken in the aggregate, would not have a Buyer Material Adverse Effect or an Asset Material Adverse Effect; 63 (f) The representations and warranties of Seller set forth in this Agreement shall be true and correct as of the Closing Date as though made at and as of the Closing Date, except (i) subject to Section 6.11, to the extent due to changes expressly permitted by this Agreement or otherwise in writing by Buyer, (ii) that representations and warranties made as of, or in respect of, only a specified date or period shall be true and correct as of, or in respect of, such date or period and (iii) to the extent that any failure of such representations and warranties to be true and correct as aforesaid when taken in the aggregate would not have a Buyer Material Adverse Effect or an Asset Material Adverse Effect; (g) No Asset Material Adverse Effect shall have occurred and be continuing; (h) Seller shall have delivered, caused to be delivered, or be standing ready to deliver, to Buyer at the Closing, Seller's closing deliveries described in Section 3.5; and (i) Buyer shall have received consents of third parties required for the assignment to Buyer of the Assigned Agreements described in a schedule delivered by Buyer to Seller prior to the execution of this Agreement and entitled, "Third Party Consent Required for Closing," and such consents shall be in form and substance reasonably acceptable to Buyer, it being understood and agreed that no such third party consent shall be unacceptable to Buyer because it requires commercially reasonably security arrangements for Buyer's payment obligations. 7.2 Conditions to Obligations of Seller. The obligations of Seller to effect the sale of the Assets and the other transactions contemplated by this Agreement shall be subject to the fulfillment of the following conditions, or the waiver thereof, by Seller at or prior to the Closing Date: (a) The waiting period under the HSR Act applicable to the consummation of the sale of the Assets contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any Governmental Authority which prevents the consummation of the sale of the Assets contemplated herein shall have been issued and remain in effect (each of Seller and Buyer agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted) and no statute, rule or regulation shall have been enacted by any state or federal government or Governmental Authority in the United States prohibiting the consummation of the sale of the Assets; (c) Seller shall have received all of Seller's Required Regulatory Approvals by Final Order, and such Required Regulatory Approvals shall not contain terms and conditions that would have an Asset Material Adverse Effect or a Seller Material Adverse Effect; 64 (d) Seller shall have received any consents of third parties required for the assignment to Buyer of any of the Assigned Agreements other than consents that, if not obtained, would not have a Seller Material Adverse Effect; (e) Buyer shall have performed and complied with each of its covenants and agreements contained in this Agreement which are required to be performed and complied with by Buyer on or prior to the Closing Date except where the failure to so perform or comply, when taken in the aggregate, would not have a Seller Material Adverse Effect; (f) The representations and warranties of Buyer set forth in this Agreement shall be true and correct as of the Closing Date as though made at and as of the Closing Date, except (i) subject to Section 6.11, to the extent due to changes expressly permitted by this Agreement or otherwise in writing by Seller, (ii) that representations and warranties made as of, or in respect of, only a specified date or period shall be true and correct as of, or in respect of, such date or period and (iii) to the extent that any failure of such representations and warranties to be true and correct as aforesaid when taken in the aggregate would not have a Seller Material Adverse Effect; (g) Buyer shall have assumed, as set forth in and subject to Section 6.12, all of the applicable obligations under the CBA; (h) Buyer shall have delivered, caused to be delivered or standing ready to deliver, to Seller at the Closing, Buyer's closing deliveries described in Section 3.6; and (i) Seller shall have received an opinion letter from Seller's Bond Counsel, dated the Closing Date, substantially in the form attached hereto as Exhibit E. ARTICLE VIII POST-CLOSING INDEMNIFICATION 8.1 Indemnification of Seller by Buyer. After Closing, and subject to Section 8.3, Buyer shall indemnify, defend and hold harmless Seller, its officers, directors, employees, shareholders, Affiliates and agents (each, a "Seller Indemnitee") from and against any and all Losses asserted against or paid or incurred by any Seller Indemnitee (each, a "Seller Indemnifiable Loss") in any way relating to, resulting from or arising out of or in connection with (i) any breach by Buyer of any covenant or agreement of Buyer contained in this Agreement or any failure or inaccuracy of any representation or warranty of Buyer contained in this Agreement, (ii) the Assumed Liabilities, (iii) any loss or damages resulting from or arising solely out of any Inspection of the Assets, and (iv) any Third Party Claims against a Seller Indemnitee to the extent arising out of or in connection with Buyer's ownership or operation of the Assets on or after the Closing Date. 8.2 Indemnification of Buyer by Seller. After Closing, and subject to Section 8.3, Seller shall indemnify, defend and hold harmless Buyer, its officers, directors, employees, shareholders, Affiliates and agents (each, a "Buyer Indemnitee") from and against any and all Losses asserted against or paid or incurred by any Buyer Indemnitee (each, a "Buyer Indemnifiable Loss") in any way relating to, resulting from or arising out of or in connection with (i) any breach by Seller of any covenant or agreement of Seller contained in this Agreement or failure or inaccuracy of any representation or warranty of Seller contained in this Agreement, (ii) the Excluded Liabilities, (iii) noncompliance by Seller with any bulk sales or transfer laws as provided in Section 10.12, and (iv) any Third Party Claims against a Buyer Indemnitee arising out of or in connection with Seller's ownership or operation of the Excluded Assets on or after the Closing Date. 65 8.3 Certain Limitations on Indemnification. (a) Notwithstanding anything to the contrary contained herein: (i) any Indemnitee shall use Commercially Reasonable Efforts to mitigate all Losses relating to a claim under these indemnification provisions, including availing itself of any defenses, limitations, rights of contribution, claims against third persons and other rights at law or equity. The Indemnitee's Commercially Reasonable Efforts shall include the reasonable expenditure of money to mitigate or otherwise reduce or eliminate any Loss for which indemnification would otherwise be due, and the Indemnifying Party shall reimburse the Indemnitee for the Indemnitee's reasonable expenditures in undertaking the mitigation; and (ii) any indemnifiable Loss shall be net of the dollar amount of any insurance or other proceeds actually received by the Indemnitee or any of its Affiliates with respect to the indemnifiable Loss. Any Party seeking indemnity hereunder shall use Commercially Reasonable Efforts to seek coverage (including both costs of defense and indemnity) under applicable insurance policies with respect to any such indemnifiable Loss. (b) Except as otherwise provided in this Section 8.3(b), the representations, warranties, covenants and agreements of the Parties set forth in this Agreement shall survive the Closing Date for a period of eighteen (18) months, and all representations, warranties, covenants and agreements of the Parties under this Agreement and the related indemnities granted in this Article VIII shall terminate at 5:00 p.m., local time in New York City, New York, on the day that is eighteen (18) months after the Closing Date; provided, however, that (i) Seller's representations and warranties set forth in Section 4.8 (Benefit Plans; ERISA) and Section 4.14 (Taxes) shall survive the Closing Date until the expiration of the statute of limitations applicable to such ERISA matters or applicable for each Tax and taxable year, as the case may be; (ii) Seller's indemnification obligation arising under Section 8.2(ii) relating to Excluded Liabilities (other than the Excluded Liabilities referred to in Sections 2.4(g) and 2.4(m), which are the subject of Section 8.3(b)(iii), and the Excluded Liabilities referred to in Sections 2.4(h), which are the subject of Section 8.3(b)(iv)) shall terminate and be extinguished on the day that is thirty-six (36) months after the Closing Date; (iii) Seller's indemnification obligations arising under Section 8.2(ii) and relating to the Excluded Liabilities referred to in Section 2.4(g) or in Section 2.4(m) shall terminate and be extinguished on the day that is eighteen (18) months after the Closing Date; 66 (iv) Seller's indemnification obligations arising under Section 8.2(iv) or under Section 8.2(ii) and relating to the Excluded Liabilities referred to in Section 2.4(h) relating to the Iwilei Property shall not terminate or be extinguished at any time and will survive Closing in perpetuity; and (v) Buyer's indemnification obligations arising under Section 8.1(ii) or Section 8.1(iv) shall not terminate or be extinguished at any time and will survive Closing in perpetuity. Notwithstanding the foregoing clauses (ii) and (iii), if after the relevant date of termination and extinguishment, a Buyer Indemnitee successfully defends against a Third Party Claim relating to the Excluded Liabilities that are the subject of such clauses on the basis that the matter giving rise to such Third Party Claim was not an Assumed Liability, then Seller, regardless of when such Third Party Clause was asserted or resolved, promptly shall reimburse such Buyer Indemnitee for the reasonable attorneys' fees and reasonable disbursements paid by such Buyer Indemnitee in connection with such defense, but no other Losses with respect to such Third Party Claim or the matter giving rise to such Third Party Claim shall be indemnifiable by Seller. The expiration, termination or extinguishment of any representation, warranty, covenant or agreement shall not affect the Parties' obligations under Section 8.1 or 8.2 hereof if the Indemnitee provided the Indemnifying Party with proper notice of the claim or event for which indemnification is sought prior to such expiration, termination or extinguishment. Notwithstanding the foregoing provisions of this Section 8.3(b), the representations, warranties, covenants and agreements contained in Sections 3.3(e), 6.2(c), 6.3(d), 6.4(a), 6.10, 6.12, 6.14, 6.16, 8.3, 8.4, 8.5 and in Article X, will survive the Closing in accordance with their terms. (c) Notwithstanding anything to contrary in this Agreement, in no event shall Buyer indemnify Seller Indemnitees or Seller indemnify Buyer Indemnitees, or otherwise be liable in any way whatsoever to said Indemnitees, for any Losses otherwise subject to indemnification by the Indemnifying Party (determined after giving effect to the other provisions of this Section 8.3) until the Buyer Indemnitees or the Seller Indemnitees, as the case may be, have incurred otherwise indemnifiable Losses that in the aggregate exceed a deductible amount equal to $1,150,000 (the "Deductible"), after which Buyer or Seller, as the case may be, shall then be liable for all Losses in excess of the Deductible incurred by the Seller Indemnitees or the Buyer Indemnitees, as applicable. The limitations on indemnification set forth in this Section 8.3(c) shall not apply to any Losses asserted against or suffered by an Indemnitee in any way relating to, resulting from or arising out of or in connection with the failure of (i) the appropriate Party to make the payment required to be made by it in accordance with Section 3.3(d), (ii) Buyer to discharge Assumed Liabilities, (iii) Seller to discharge Excluded Liabilities other than those specified in Sections 2.4(g) and 2.4(m), and (iv) Seller to make any payment to Buyer if and to the extent required by Section 6.10(b) or 6.13(c), and any such Losses also shall be disregarded when determining whether the Deductible has been exceeded. Losses incurred by Buyer in the performance or satisfaction of the Assumed Liabilities described in Section 2.3(f) shall be included when determining whether the Deductible has been exceeded. (d) Losses of a Buyer Indemnitee relating to a particular breach of Seller's representations and warranties or any performance, satisfaction or discharge of a particular Excluded Liability described in Section 2.4(g) shall not constitute indemnifiable Losses, and therefore shall not be applied towards the Deductible or be indemnifiable by Seller hereunder (and, as a consequence, shall constitute an Assumed Liability under Section 2.3(f) to the extent such Losses relate to a breach of Section 4.6 (Environmental Matters) or an Excluded Liability described in Section 2.4(g)), unless such Losses relating to such particular breach or Excluded Liability described in Section 2.4(g) exceed $50,000. 67 (e) Notwithstanding anything to the contrary in this Agreement, in no event shall Seller indemnify the Buyer Indemnitees or Buyer indemnify Seller Indemnitees, or be otherwise liable in any way whatsoever to said Indemnitees, for any Losses otherwise subject to indemnification by the Indemnifying Party (determined after giving effect to the other provisions of this Section 8.3) that in the aggregate exceed an amount equal to sixty-five percent (65%) of the Purchase Price; provided, however, that the limitation set forth in this Section 8.3(e) shall not apply to Losses of a Buyer Indemnitee relating to a breach by Seller of Section 6.14 (Revenue Bonds), and therefore such Losses shall be fully indemnifiable by Seller hereunder. (f) For purposes of this Article VIII only and except as provided below, the existence of a breach of a Party's representation or warranty in this Agreement and the calculation of Losses arising out of a Party's breach of a representation or warranty in this Agreement shall be determined without giving effect to any exception or qualification of such representation or warranty as to the Asset Material Adverse Effect of such breach or the Material Adverse Effect on any Person of such breach; provided that this Section 8.3(f) shall not apply to a breach of Seller's representations and warranties set forth in Section 4.22 or Section 4.24. Notwithstanding the foregoing, the Parties acknowledge and agree that effect shall be given to any exception or qualification of any representation or warranty in this Agreement of either Party that is based on use of the term "materiality" or the phrase "in all material respects" and similar undefined terms and phrases. (g) Except to the extent otherwise provided in Section 3.3 (relating to adjustments to the Base Purchase Price), Section 6.10(b) (relating to post-Closing reimbursements for Taxes), Section 6.13(c) (relating to post-Closing reimbursement of excess costs and expenses of repairing lost or damaged Assets), and Section 6.16 (relating to specific performance and injunctive relief with respect to Citizens Marks and Gasco Marks), after Closing the rights and remedies of Seller and Buyer under this Article VIII are exclusive and in lieu of any and all other rights and remedies which each of Seller and Buyer may have under this Agreement or otherwise for monetary relief, with respect to (i) all post-Closing claims relating to this Agreement, the events giving rise to this Agreement and the transactions provided for herein or contemplated hereby or thereby, or (ii) the Assumed Liabilities or the Excluded Liabilities, as the case may be. Notwithstanding any language contained in any Ancillary Agreement (including the Special Warranty Deed), the representations and warranties of Seller set forth in this Agreement will not be merged into any such Ancillary Agreement and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement shall control. No provision set forth in any such Ancillary Agreement shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. (h) Notwithstanding anything to the contrary contained herein, no Party (including an Indemnitee) shall be entitled to recover from any other Party (including an Indemnifying Party) for any liabilities, damages, obligations, payments, losses, costs, or expenses under this Agreement any amount in excess of the actual compensatory damages, court costs and reasonable attorney's and other advisor fees suffered by such Party. Each of Buyer and Seller waive any right to recover punitive, incidental, special, exemplary and consequential damages arising in connection with or with respect to this Agreement. The provisions of this Section 8.3(h) shall not apply to indemnification for a Third Party Claim. 68 (i) The limitations set forth in this Section 8.3 do not apply to fraud or willful misconduct of a Party. (j) No amount shall be recovered from a Party for the breach or untruth of any of such Party's representations, warranties, covenants or agreements, or for any other matter, to the extent that the other Party had knowledge of such breach, untruth or other matter at or prior to the Closing, nor shall the other Party be entitled to rescission with respect to any such matter. 8.4 Defense of Claims. (a) If any Indemnitee receives notice of the assertion or commencement of any Third Party Claim made or brought by any Person who is not a Party to this Agreement or any Affiliate of a Party to this Agreement with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee shall give such Indemnifying Party reasonably prompt written notice thereof, but in any event such notice shall not be given later than ten (10) calendar days after the Indemnitee's receipt of notice of such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in reasonable detail (as it is then known to the Indemnitee) and shall indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third Party Claim at such Indemnifying Party's expense and by such Indemnifying Party's own counsel, provided that the counsel for the Indemnifying Party who shall conduct the defense of such Third Party Claim shall be reasonably satisfactory to the Indemnitee. The Indemnitee shall cooperate in good faith in such defense at such Indemnitee's own expense. If an Indemnifying Party elects not to assume or to participate in the defense of any Third Party Claim, the Indemnitee may compromise or settle such Third Party Claim over the objection of the Indemnifying Party, which settlement or compromise shall conclusively establish the Indemnifiable Loss for which the Indemnified Party may seek indemnification from the Indemnifying Party pursuant to this Agreement. (b) (i) If, within ten (10) calendar days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claims, the Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in Section 8.4(a), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if the Indemnifying Party shall fail to take reasonable steps necessary to defend diligently such Third Party Claim within twenty (20) calendar days after receiving notice from the Indemnitee that the Indemnitee believes the Indemnifying Party has failed to take such steps, the Indemnitee may assume its own defense and the Indemnifying Party shall be liable for all reasonable expenses thereof. 69 (ii) Without the prior written consent of the Indemnitee, the Indemnifying Party shall not enter into any settlement of any Third Party Claim which would lead to liability, constitute an admission of a criminal act or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability, the admission of criminal fault or liability or the creation of a financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to the Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer within ten (10) calendar days after its receipt of such notice, the Indemnifying Party shall be relieved of its obligations to defend such Third Party Claim and the Indemnitee may contest or defend such Third Party Claim at its own expense. In such event, the maximum liability of the Indemnifying Party as to such Third Party Claim will be the amount of such settlement offer plus reasonable costs and expenses paid or incurred by Indemnitee up to the date of said notice. (c) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct Claim") shall be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event such notice shall not be given later than ten (10) calendar days after the Indemnitee becomes aware of such Direct Claim, and the Indemnifying Party shall have a period of thirty (30) calendar days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such thirty (30) calendar day period, the Indemnifying Party shall be deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its right to indemnification under this Agreement. (d) If the amount of any indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage or pursuant to any claim, recovery, settlement or payment by, from or against any other entity, the amount of such reduction (less any out-of-pocket costs incurred in connection therewith and the cost of any adjusted premium charges to the extent directly relating to the claim for such indemnifiable Loss ("Recovery Costs"), together with interest thereon from the date of payment thereof at the publicly announced prime rate then in effect of Citibank, shall promptly be repaid by the Indemnitee to the Indemnifying Party. (e) A failure to give timely notice as provided in this Section 8.4 shall not affect the rights or obligations of any Party hereunder except if, and only to the extent that, as a result of such failure, the Party which was entitled to receive such notice was actually prejudiced as a result of such failure. 70 8.5 BHP Indemnity Arrangements. Seller acquired Gasco, Inc., the predecessor owner and operator of the Business, from BHP Hawaii, Inc. pursuant to a Stock Sale Agreement between Seller and BHP Hawaii, Inc., dated as of January 9, 1997, as amended on October 30, 1997 (as amended, the "BHP Stock Sale Agreement"). In Section 9.2 of the BHP Stock Sale Agreement, BHP agreed to indemnify the "Buyer Indemnified Parties" for a "Buyer Loss" (as such terms are defined in Section 9.2 of the BHP Stock Sale Agreement) arising out of or resulting from the environment matters described in Sections 9.2(c), (d), (e) and (g) of the bhp Stock Sale Agreement. Upon Closing, Buyer will become the successor and assign of Seller with respect to the Business and the Assets and one of the "Buyer Indemnified Parties" (as defined in Section 9.2 of the BHP Stock Sale Agreement). Buyer has agreed to assume the environmental liabilities, responsibilities and obligations described in Sections 2.3(e) and (f), some of which may be covered by BHP's indemnity. The parties' intent with respect to the foregoing is that to the extent any Losses incurred by Buyer may be reduced by recovery, settlement or otherwise under or pursuant to any claim, recovery, settlement or payment by or against BHP under Section 9.2 of the BHP Stock Sale Agreement, then appropriate action under and consistent with the BHP Stock Sale Agreement should be taken to seek to obtain the benefits of BHP's indemnity under the BHP Stock Sale Agreement. Buyer shall use its Commercially Reasonable Efforts to give timely and effective written notice to Seller of any occurrence or circumstances that have given or could give rise to a claim against BHP under Section 9.2 of the BHP Stock Sale Agreement. Buyer and Seller, acting jointly, or Buyer and/or Seller acting separately, as the Parties may determine from time to time, then shall use their respective Commercially Reasonable Efforts to give BHP timely and effective notice in accordance with Section 9.4(b) of the BHP Stock Sale Agreement. To the extent a Buyer Indemnitee also is an "Indemnitee" as defined in Section 9.4(b) of the BHP Stock Sale Agreement, then Buyer shall, and shall cause each other Buyer Indemnitee that may be such an "Indemnitee" under the BHP Stock Sale Agreement, to comply with the pertinent provisions of the BHP Stock Sale Agreement relating to any claim notice submitted to BHP by or on behalf of such Buyer Indemnitee, including the provisions of Sections 9.4(b) and 9.5(c) of the BHP Stock Sale Agreement, and to cooperate with Seller in connection with Seller's compliance with such provisions and the submission and prosecution of any such claim notice submitted to BHP. In the submission and prosecution of any claim made by or on behalf of a Buyer Indemnitee against BHP under Sections 9.2, 9.4(b) and/or 9.5(c) of the BHP Stock Sale Agreement, the Parties in good faith will endeavor mutually to select counsel, to control the prosecution of such claim and to make decisions concerning the settlement of such claim, provided that if the Parties fail to mutually agree on any such matter, Buyer will have the exclusive right to select counsel, to control such prosecution and to make such settlement decisions after consultation with Seller and with the understanding that Buyer will keep Seller timely and fully informed of any plans or developments regarding such matters. Subject to Section 9.5(c) of the BHP Stock Sale Agreement, Losses relating to the underlying occurrence or circumstances giving rise to any such claim and to the prosecution and settlement of any such claim shall be borne by Buyer (directly or, if necessary or desirable to preserve better the Parties' ability to recover against BHP, by loan advances to Seller on terms mutually acceptable to the Parties, it being understood that a Party shall not be required to enter into such loan arrangements if such Party would incur adverse financial or tax consequences as a result) until such time, if ever, that such Losses become indemnifiable by Seller in accordance with this Agreement. Each Party agrees to cooperate with the other Party in providing assistance and access to personnel and records to facilitate either Party's prosecution of claims against BHP under the BHP Stock Sale Agreement, and neither Party will take any action to hinder the other Party's efforts to submit and to prosecute claims for indemnification by BHP under the BHP Stock Sale Agreement. 71 ARTICLE IX TERMINATION 9.1 Termination. (a) This Agreement may be terminated at any time prior to the Closing Date by mutual written consent of Seller and Buyer. (b) This Agreement may be terminated by Seller or Buyer if (i) any federal or state court of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappeallable; (ii) any statute, rule, nonappeallable order or regulation shall have been enacted or issued by any Governmental Authority which prohibits the consummation of the Closing; or (iii) the Closing shall have not occurred on or before the day which is fifteen (15) months from the date of this Agreement, subject to such extensions (not to exceed six months) as may be required by Seller to repair or replace lost or damaged Assets in accordance with Section 6.13(c) (the "Termination Date"); provided that the right to terminate this Agreement under this Section 9.1(b)(iii), and any other Section, shall not be available to any Party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in the event giving rise to the applicable termination right. (c) Except as otherwise provided in this Agreement, this Agreement may be terminated by Buyer if any of the Buyer Required Regulatory Approvals, the receipt of which is a condition to the obligation of Buyer to consummate the Closing as set forth in Section 7.1(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied) or, if such Required Regulatory Approval is obtained, contains terms or conditions that would have a Regulatory Material Adverse Effect for Buyer or an Asset Material Adverse Effect (after Buyer's petition for rehearing objecting to such terms and conditions has been denied), in either case that is not cured or otherwise addressed in a manner reasonably acceptable to Buyer by the Closing Date. (d) Except as otherwise provided in this Agreement, this Agreement may be terminated by Seller if any of the Seller Required Regulatory Approvals, the receipt of which is a condition to the obligation of Seller to consummate the Closing as set forth in Section 7.2(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied) or, if such Required Regulatory Approval is obtained, contains terms or conditions that would have a Regulatory Material Adverse Effect for Seller (after Seller's petition for rehearing objecting to such terms and conditions has been denied), in either case that is not cured or otherwise addressed in a manner reasonably acceptable to Seller by the Closing Date. (e) This Agreement may be terminated by Buyer if there has been a violation or breach by Seller of any covenant, representation or warranty contained in this Agreement provided that such violation or breach would have an Asset Material Adverse Effect or a Buyer Material Adverse Effect that is not cured or otherwise addressed by Seller in a manner reasonably acceptable to Buyer by the Closing Date and such violation or breach has not been waived by Buyer. 72 (f) This Agreement may be terminated by Seller, if there has been a violation or breach by Buyer of any covenant, representation or warranty contained in this Agreement provided that such violation or breach would have a Seller Material Adverse Effect (it being agreed by Buyer that Buyer's failure to pay the Purchase Price on the Closing Date shall be deemed to have a Seller Material Adverse Effect) and such violation or breach is not cured or otherwise addressed by Buyer in a manner reasonably acceptable to Seller by the Closing Date, and such violation or breach has not been waived by Seller. (g) This Agreement may be terminated by either Party if either (i) a special meeting of the shareholders of k1 Ventures Limited is duly convened and the requisite vote of such shareholders required to approve the Required Shareholder Actions is not obtained at such special meeting or any adjournment thereof or (ii) a special meeting of the shareholders of k1 Ventures Limited called for the purpose of voting upon the Required Shareholder Actions is not duly convened by April 30, 2003. 9.2 Procedure and Effect of Termination. In the event of termination of this Agreement by either or both Seller and Buyer pursuant to this Article IX, written notice thereof shall forthwith be given by the terminating Party to the other Party, whereupon the liabilities of the Parties hereunder will terminate, except as otherwise expressly provided in this Agreement (including Section 9.3), and thereafter none of the Parties shall have any recourse against any other Party by reason of this Agreement. If prior to Closing either Party resorts to legal proceedings to enforce this Agreement, the prevailing Party in such proceedings shall be entitled to recover all costs incurred by such Party, including reasonable attorney's fees, in addition to any other relief to which such Party may be entitled; provided, however, and notwithstanding anything to the contrary in this Agreement, in no event shall either Party be entitled to receive any punitive, indirect or consequential damages 9.3 Liquidated Damages. (a) Seller shall pay to Buyer $5,750,000 if Buyer terminates this Agreement pursuant to Section 9.1(e). (b) Buyer shall pay to Seller $5,750,000 if (i) Seller terminates this Agreement pursuant to Section 9.1(f), (ii) Seller terminates this Agreement pursuant to Section 9.1(d) because the requisite Required Regulatory Approval from the HPUC has not been obtained due in whole or in substantial part to the HPUC's findings about Buyer's financial, legal or operational qualifications or capabilities, (iii) Buyer terminates this Agreement pursuant to Section 9.1(c), because the requisite Required Regulatory Approval from the HPUC has not been obtained, due in whole or in substantial part to the HPUC's findings about Buyer's financial, legal or operational qualifications or capabilities, or (iv) either Party terminates this Agreement pursuant to Section 9.1(g). 73 (c) In view of the difficulty of determining the amount of damages which may result from a termination pursuant to Sections 9.3(a) or 9.3(b) or pursuant to any of the Sections of this Agreement referenced in Section 9.3(a) or 9.3(b), and the failure to consummate the transactions contemplated by this Agreement, Buyer and Seller have mutually agreed that each of the payments set forth in Sections 9.3(a) and 9.3(b) shall be made to the appropriate Party as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. In the event of any such termination, the Parties have agreed that each of the payments set forth in Sections 9.3(a) and 9.3(b) shall be the sole and exclusive remedy of the Party entitled to receive any such payment. ACCORDINGLY, THE PARTIES HEREBY ACKNOWLEDGE THAT (1) THE EXTENT OF DAMAGES TO A PARTY CAUSED BY THE FAILURE OF THIS TRANSACTION TO BE CONSUMMATED WOULD BE IMPOSSIBLE OR EXTREMELY DIFFICULT TO ASCERTAIN, (2) THE AMOUNT OF THE LIQUIDATED DAMAGES PROVIDED FOR IN EACH OF SECTIONS 9.3(a) AND 9.3(b) ARE FAIR AND REASONABLE ESTIMATES OF SUCH DAMAGES UNDER THE CIRCUMSTANCES AND (3) RECEIPT OF SUCH LIQUIDATED DAMAGES BY THE APPROPRIATE PARTY DOES NOT CONSTITUTE A PENALTY. THE PARTIES HEREBY FOREVER WAIVE AND AGREE TO FOREGO TO THE FULLEST EXTENT UNDER APPLICABLE LAW ANY AND ALL RIGHTS THEY HAVE OR IN THE FUTURE MAY HAVE TO BRING ANY ACTION OR ARBITRAL PROCEEDING DISPUTING OR OTHERWISE OBJECTING TO ANY OR ALL OF THE FOREGOING PROVISIONS OF THIS SECTION 9.3. (d) All payments under this Section 9.3 shall be from payor to payee by wire transfer of immediately available funds to a bank account in the United States of America designated in writing by payee not later than three (3) business days following payor's receipt of such account designation from payee. ARTICLE X MISCELLANEOUS 10.1 Amendment and Modification. This Agreement may be amended, modified or supplemented only by written agreement of the Parties. 10.2 Waiver of Compliance; Consents. Except as otherwise provided in this Agreement, any failure of any of the Parties to comply with any obligation, covenant, agreement or condition herein may be waived by the Party entitled to the benefits thereof only by a written instrument signed by the Party granting such waiver, but any such waiver of such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent failure to comply therewith. 10.3 [Intentionally Omitted] 10.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission with completed transmission acknowledgment, or mailed by overnight delivery via a nationally recognized courier or registered or certified first class mail (return receipt requested), postage prepaid, to the recipient Party at its address (or at such other address or facsimile number for a Party as shall be specified by like notice; provided; however, that notices of a change of address shall be effective only upon receipt thereof): 74 (a) If to Seller, to: Citizens Communications Company High Ridge Park Stamford, CT 06905 Attention: Jerry Elliott Telephone: (203) 614-6722 Telecopier: (203) 614-4661 with a copy to: Citizens Communications Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten Telephone: (203) 614-5047 Telecopier: (203) 614-4651 and: Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telephone: (202) 939-7914 Telecopier: (202) 387-3467 (b) if to Buyer, to: c/o K-1 USA Ventures, Inc. 2601 Bayshore Drive Suite 1775 Coconut Grove, FL 33133 Attention: Jeff Safchik Telephone: (305) 858-4225 Telecopier: (305) 858-2334 75 with a copy to: K-1 USA Ventures, Inc. 1880 Century Park East Suite 213 Los Angeles, CA 90067 Attention: Cary Meadow Telephone: (310) 201-6861 Telecopier: (310) 201-6858 and: Jones Walker Waechter Poitevent Carrere & Denegre 201 St. Charles Avenue New Orleans, LA 70170 Attention: Curtis R. Hearn Telephone: (504) 582-8308 Telecopier: (504) 589-8308 10.5 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns, but, except to the extent permitted by this Section 10.5, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party hereto, including by operation of law, without the prior written consent of each other Party, nor is this Agreement intended to confer upon any other Person except the Parties hereto any rights, interests, obligations or remedies hereunder; provided, however, in the event of any such assignment by a Party by operation of law without the consent of the other Party, this Agreement and all the provisions hereof shall be binding upon the Person receiving such assignment by operation of law. Notwithstanding the foregoing, (i) K-1 USA shall assign this Agreement to the k1 Designee in accordance with Section 6.8(f), and such assignment shall have the legal effect provided in Section 6.8(f), and (ii) Buyer may make a security assignment to any lender providing financing in respect of Buyer's acquisition of the Assets. 10.6 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Hawaii (without giving effect to conflict of law principles) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies (except to such matters of real estate law that must be governed by the law of the State of Hawaii). THE PARTIES HERETO AGREE THAT VENUE IN ANY AND ALL ACTIONS AND PROCEEDINGS RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE IN THE STATE AND FEDERAL COURTS IN AND FOR HONOLULU, HAWAII, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION FOR SUCH PURPOSE, AND THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING. SERVICE OF PROCESS MAY BE MADE IN ANY MANNER RECOGNIZED BY SUCH COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 76 10.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.8 Interpretation. The articles, section and schedule headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement. 10.9 Schedules and Exhibits. Except as otherwise provided in this Agreement, all Exhibits and Schedules referred to herein are intended to be and hereby are specifically made a part of this Agreement. Any matter or item disclosed on any Schedule shall not be deemed to give rise to circumstances which result in an Asset Material Adverse Effect or a Material Adverse Effect solely by reason of it being so disclosed. Any matter or item disclosed pursuant to any Schedule shall be deemed to be disclosed for all purposes under this Agreement reasonably related thereto and any matter disclosed in one Schedule will be deemed disclosed with respect to another Schedule if such disclosure is made in such a way as to make its relevance with respect to such other Schedule readily apparent. 10.10 Entire Agreement. This Agreement, the Ancillary Agreements and the Exhibits, Schedules, documents, certificates and instruments referred to herein or therein, embody the entire agreement and understanding of the Parties hereto in respect of the transactions contemplated by this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or therein. This Agreement and the Ancillary Agreements supersede all prior agreements and understandings between the Parties other than the Confidentiality Agreement with respect to such transactions. 10.11 U.S. Dollars. Unless otherwise stated, all dollar amounts set forth herein are United States (U.S.) dollars. 10.12 Bulk Sales Laws. Buyer acknowledges that, notwithstanding anything in this Agreement to the contrary and except for Seller's delivery of the certificates specified in Section 3.5(l), Seller will not comply with the provision of the bulk sales laws of any jurisdiction in connection with the transactions contemplated by this Agreement. Buyer hereby waives compliance by Seller with the provisions of the bulk sales laws of all applicable jurisdictions to the extent permitted by law. 10.13 Construction of Agreement. The terms and provisions of this Agreement represent the results of negotiations between Buyer and Seller, each of which has been represented by counsel of its own choosing, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Accordingly, the terms and provisions of this Agreement shall be interpreted and construed in accordance with their usual and customary meanings, and Buyer and Seller hereby waive the application in connection with the interpretation and construction of this Agreement of any rule of law to the effect that ambiguous or conflicting terms or provisions contained in this Agreement shall be interpreted or construed against the Party whose attorney prepared the executed draft or any earlier draft of this Agreement. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the Parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the Parties as to whether any obligation, item or matter is or is not material for purposes hereof. 77 10.14 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the greatest extent possible. 10.15 Third Party Beneficiary. No provision of this Agreement shall create any third party beneficiary rights in any employee or former employee of Seller (including any beneficiary or dependant thereof) in respect of continued employment or resumed employment, and no provision of this Agreement shall create any rights in any such Persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement. 78 IN WITNESS WHEREOF, Buyer and Seller have caused this Agreement to be signed by their respective duly authorized officers as of the date first above written. K-1 USA VENTURES, INC. CITIZENS COMMUNICATIONS COMPANY By: /s/ Jeffrey A. Satchik By: /s/ Michael A. Zarrella ----------------------- -------------------------- Name: Jeffrey A. Satchik Name: Michael A. Zarrella -------------------- ----------------------- Title: Chief Executive Officer Title: Vice President Corporate ----------------------- Development ------------------------ 79 LIST OF EXHIBITS AND SCHEDULES ------------------------------ EXHIBITS Exhibit A Form of Assignment and Assumption Agreement Exhibit B Form of Bill of Sale Exhibit C Special Warranty Deed Exhibit D Form of Seller General Counsel Opinion Exhibit E Form of Seller Bond Counsel Opinion Exhibit F Form of Buyer General Counsel Opinion SCHEDULES 1.1 Seller Employees on Whose Knowledge Buyer May Rely 2.1(k) Certain Seller Insurance Policies 2.2 Excluded Assets 2.3(h) Governmental Orders 2.3(j) Assumed Actions and Proceedings 4.3(b) Seller Required Regulatory Approvals 4.4 Seller Insurance 4.5 Seller Real Property Leases 4.6 Seller Environmental Matters 4.7 Seller Labor Matters 4.8 Seller Benefit Plans 4.9 Seller Real Property 4.10 Seller Condemnation Matters 4.11(a) Certain Seller Material Agreements 4.11(b) Certain Seller Material Agreements Requiring Consent to Transfer 4.11(c) Defaults Under Certain Material Agreements 4.12 Legal Proceedings Involving Seller 4.13 Seller Permit Violations 4.14 Seller Tax Matters 4.15 Seller Intellectual Property Exceptions 4.20 Seller Financial Statements 5.3(a) Buyer's Conflicts, Defaults and Violations 5.3(b) Buyer Required Regulatory Approvals 6.1(a) Exceptions to Conduct of Business and Operation of the Assets 6.12(d)(iii)(D) Retirees 6.14(a) Seller Revenue Bonds 6.15 Seller Surety Instruments EX-10.13 6 azgasassetpurchagree.txt ARIZONA GAS ASSET PURHCASE AGREEMENT ARIZONA GAS EXECUTION VERSION ================================================================================ Exhibit 10.13 ------------- ASSET PURCHASE AGREEMENT by and between CITIZENS COMMUNICATIONS COMPANY, as SELLER, and UNISOURCE ENERGY CORPORATION, as BUYER, Dated October 29, 2002 --------------------------------- Relating to Purchase by Buyer of Seller's Gas Utility Business in the State of Arizona ================================================================================
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.............................................................................................1 1.1 Definitions...................................................................................1 1.2 Certain Interpretive Matters.................................................................14 ARTICLE II PURCHASE AND SALE.....................................................................................14 2.1 Transfer of Assets...........................................................................14 2.2 Excluded Assets..............................................................................15 2.3 Assumed Liabilities..........................................................................17 2.4 Excluded Liabilities.........................................................................18 2.5 Control of Litigation........................................................................20 ARTICLE III THE CLOSING..........................................................................................21 3.1 Closing......................................................................................21 3.2 Closing Payment..............................................................................21 3.3 Adjustment to Base Purchase Price............................................................21 3.4 Prorations...................................................................................24 3.5 Deliveries by Seller.........................................................................24 3.6 Deliveries by Buyer..........................................................................26 3.7 Work in Progress.............................................................................26 ARTICLE IV REPRESENTATIONS, WARRANTIES AND DISCLAIMERS OF SELLER.................................................27 4.1 Incorporation; Qualification.................................................................27 4.2 Authority....................................................................................27 4.3 Consents and Approvals; No Violation.........................................................27 4.4 Insurance....................................................................................28 4.5 Real Property Leases.........................................................................28 4.6 Environmental Matters........................................................................28 4.7 Labor Matters................................................................................29 4.8 Benefit Plans: ERISA........................................................................29 i 4.9 Real Property................................................................................30 4.10 Condemnation.................................................................................30 4.11 Assigned Agreements..........................................................................30 4.12 Legal Proceedings............................................................................31 4.13 Permits......................................................................................31 4.14 Taxes........................................................................................31 4.15 Intellectual Property........................................................................32 4.16 Capital Expenditures.........................................................................32 4.17 Compliance With Laws.........................................................................32 4.18 Title........................................................................................32 4.19 DISCLAIMERS..................................................................................32 4.20 Financial Statements.........................................................................33 4.21 SEC Filings; Financial Statements............................................................33 4.22 Sufficiency of Assets........................................................................33 ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER................................................................34 5.1 Organization.................................................................................34 5.2 Authority....................................................................................34 5.3 Consents and Approvals; No Violation.........................................................34 5.4 Availability of Funds........................................................................35 5.5 SEC Filings; Financial Statements............................................................35 5.6 Legal Proceedings............................................................................35 5.7 No Knowledge of Seller's Breach..............................................................36 5.8 Qualified Buyer..............................................................................36 5.9 Inspections..................................................................................36 5.10 WARN Act.....................................................................................36 ARTICLE VI COVENANTS OF THE PARTIES..............................................................................37 6.1 Conduct of Business and Operation of Assets..................................................37 6.2 Access to Information........................................................................38 ii 6.3 Environmental Inspections and Information....................................................40 6.4 Confidentiality..............................................................................41 6.5 Public Statements............................................................................42 6.6 Expenses.....................................................................................42 6.7 Further Assurances...........................................................................42 6.8 Consents and Approvals.......................................................................43 6.9 Fees and Commissions.........................................................................44 6.10 Tax Matters..................................................................................45 6.11 Advice of Changes............................................................................47 6.12 Seller Employees.............................................................................47 6.13 Risk of Loss.................................................................................52 6.14 Tax Exempt Financing.........................................................................53 6.15 Seller Guarantees and Surety Instruments.....................................................58 6.16 Citizens Marks...............................................................................58 6.17 Title Commitments............................................................................58 6.18 Joint Use Agreement re: Easements............................................................58 6.19 [Intentionally Omitted]......................................................................58 6.20 Post-Execution Delivery of Schedules.........................................................59 ARTICLE VII CONDITIONS...........................................................................................59 7.1 Conditions to Obligations of Buyer...........................................................59 7.2 Conditions to Obligations of Seller..........................................................60 ARTICLE VIII INDEMNIFICATION.....................................................................................61 8.1 Indemnification of Seller by Buyer...........................................................61 8.2 Indemnification of Buyer by Seller...........................................................61 8.3 Certain Limitations on Indemnification.......................................................62 8.4 Defense of Claims............................................................................64 ARTICLE IX TERMINATION...........................................................................................66 9.1 Termination..................................................................................66 iii 9.2 Procedure and Effect of Termination..........................................................67 9.3 Liquidated Damages; Termination Fees.........................................................68 ARTICLE X MISCELLANEOUS PROVISIONS...............................................................................69 10.1 Amendment and Modification...................................................................69 10.2 Waiver of Compliance; Consents...............................................................69 10.3 [Intentionally Omitted]......................................................................69 10.4 Notices......................................................................................69 10.5 Assignment...................................................................................71 10.6 Governing Law................................................................................71 10.7 Counterparts.................................................................................71 10.8 Interpretation...............................................................................71 10.9 Schedules and Exhibits.......................................................................71 10.10 Entire Agreement.............................................................................72 10.11 U.S. Dollars.................................................................................72 10.12 Bulk Sales Laws..............................................................................72 10.13 Construction of Agreement....................................................................72 10.14 Severability.................................................................................72 10.15 Third Party Beneficiary......................................................................73
iv ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated October 29, 2002 (this "Agreement"), by and among Citizens Communications Company, a Delaware corporation ("Seller") and UniSource Energy Corporation, an Arizona corporation ("Buyer"). Seller and Buyer are referred to, individually, as a "Party" and, together, as the "Parties." W I T N E S S E T H ------------------- WHEREAS, Seller owns all of the Assets (as defined below); and WHEREAS, Buyer desires to purchase and assume, and Seller desires to sell and assign, the Assets, and certain associated liabilities, upon the terms and conditions hereinafter set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements hereinafter set forth, and intending to be legally bound hereby, the Parties agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Agreement, the following terms have the meanings specified in this Section 1.1. "ACC" means the Arizona Corporation Commission and any successor agency thereto. "ADEQ" means the Arizona Department of Environmental Quality and any successor agency thereto. "Advances" has the meaning set forth in Section 3.3(e). "Adverse Environmental Condition" has the meaning set forth in Section 6.3(c). "Affiliate" of any Person means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. "Agreement" means this Asset Purchase Agreement together with the Schedules and Exhibits attached hereto, as the same may be from time to time amended. "Allocation" has the meaning set forth in Section 6.10(f). "ALTA" has the meaning set forth in Section 6.17. "Ancillary Agreements" means the agreements, contracts, documents, instruments and certificates provided for in this Agreement to be entered into by one or more of the Parties or any of their Affiliates in connection with the transactions contemplated by this Agreement. "APBO" has the meaning set forth in Section 6.12(d)(iii)(D). "Approved Capital Expenditures" means the Capital Expenditures that have been expressly approved by Buyer in writing and that are identified in said writing as Approved Capital Expenditures for purposes of this Agreement. "Arizona Electric Purchase Agreement" has the meaning set forth in Section 7.1(j). "Assets" has the meaning set forth in Section 2.1. "Asset Material Adverse Effect" means any occurrence or condition, arising after the date hereof, that has or would reasonably be expected to have a material adverse effect with an aggregate economic impact, taking into account all relevant considerations, in excess of $10,000,000 (except as provided otherwise in Sections 6.3(c), 6.13(b)(i) or 6.13(c)(ii)) on the condition of the Assets, taken as a whole, or on the business, operations, financial condition or results of operations of the Business, taken as a whole, other than any such occurrence or condition (a) arising from business, economic or financial market conditions, considered generally, (b) arising from the conditions in the gas utility industry, considered generally and not specifically as to the Business, (c) which is remedied, cured or otherwise reversed (including by the payment of money or application of insurance proceeds) before the Termination Date, or (d) arising from entering into this Agreement or the announcement of the transactions contemplated by this Agreement; it being understood that the occurrences and/or conditions which could, depending on the nature and extent thereof, be deemed to result in an Asset Material Adverse Effect shall include, without limitation, (x) the terms or conditions of a Final Order with respect to any Required Regulatory Approval, considered individually or together with any other such Final Order(s) with respect to any other Required Regulatory Approval(s), other than Regulatory Exceptions, and (y) facts or circumstances relating to the Assets and/or the Business which come to the attention of Buyer between the date of this Agreement and the Closing Date, whether as a result of Buyer's Inspection of the Assets or its examination of information and data relating to the Assets and/or the Business, as contemplated by Section 6.2 or 6.3, or otherwise. "Assigned Agreements" means any contracts, agreements, software licenses and related contracts, Easements, Real Property Leases and personal property leases entered into by Seller or any of its Affiliates with respect to the ownership, operation or maintenance of the Assets or the Business, including those disclosed on Schedules 4.5 and 4.11(a) and excluding those disclosed on Schedule 2.2, including without limitation, the IBEW CBA. 2 "Assignment and Assumption Agreement" means the Assignment and Assumption Agreement between Seller and Buyer substantially in the form of Exhibit A attached hereto. "Assumed Liabilities" has the meaning set forth in Section 2.3. "Arizona Electric Purchase Agreement" has the meaning set forth in Section 7.1(j). "Balance Sheet" has the meaning set forth in Section 4.20. "Base Purchase Price" has the meaning set forth in Section 3.2. "Benefit Plans" means each of Seller's deferred compensation and each bonus or other incentive compensation, stock purchase, stock option and other equity compensation plan, program, agreement or arrangement; each severance or termination pay, medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program (within the meaning of Section 3(1) of ERISA); each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); each employment, termination or severance agreement; and each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by such Party or by any ERISA Affiliate, in any case maintained for employees of Seller connected with the Business, or in which such employees participate. "Bill of Sale" means the Bill of Sale, substantially in the form of Exhibit B attached hereto, to be delivered at the Closing by Seller with respect to the Tangible Personal Property included in the Assets transferred to Buyer. "Bond Counsel" has the meaning set forth in Section 6.14(c)(i). "Business" means, collectively, (a) the regulated natural gas distribution business conducted by Seller within the State of Arizona through its Arizona Gas divisions, (b) the natural gas transportation business conducted by Seller within the State of Arizona through its Arizona Gas divisions and (c) the provision of related services and products and the engagement in related activities, including financing of conversions to gas and agreements as to appliances, by Seller within the State of Arizona through its Arizona Gas divisions. "Business Day" means any day other than Saturday, Sunday and any day which is a day on which banking institutions in the States of Arizona and New York are authorized by law or other governmental action to remain closed. "Buyer" has the meaning set forth in the Preamble. "Buyer Indemnifiable Loss" has the meaning set forth in Section 8.2. 3 "Buyer Indemnitee" has the meaning set forth in Section 8.2. "Buyer Material Adverse Effect" means a Material Adverse Effect with respect to Buyer. "Buyer Required Regulatory Approvals" means the Required Regulatory Approvals set forth in Schedule 5.3(b). "CERCLA" means the federal Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as amended. "Capital Expenditures" means capital additions to or replacements of property, plants and equipment included in the Assets or otherwise relating to the Business and other expenditures or repairs on property, plants and equipment included in the Assets or otherwise relating to the Business that would be capitalized by Seller in accordance with its normal accounting policies. "Capital Expenditures Schedule" has the meaning set forth in Section 4.16. "Citizens Marks" has the meaning set forth in Section 2.2(c). "Closing" has the meaning set forth in Section 3.1. "Closing Date" means one minute after 11:59 p.m. on the date which is five (5) Business Days following the date on which the last of the conditions precedent to the Closing set forth in Article VII of this Agreement have been either satisfied or waived by the Party for whose benefit such conditions precedent exist, subject to such extensions (not to exceed six (6) months) as may be required by Seller to repair or replace lost or damaged Assets in accordance with Section 6.13(c), or such other date as the Parties may mutually agree. "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1984. "COBRA Continuation Coverage" means the requirements of Section 4980B(f) of the Code. "Code" means the Internal Revenue Code of 1986, as amended. "Commercially Reasonable Efforts" means efforts by a Party which are reasonably within the contemplation of the Parties at the time of executing this Agreement and which do not require the performing Party to expend any funds other than expenditures which are customary and reasonable in transactions of the kind and nature contemplated by this Agreement in order for the performing Party to satisfy its obligations hereunder. "Current Retirees" has the meaning set forth in Section 6.12(d)(iii)(D). "Direct Claim" has the meaning set forth in Section 8.4(c). 4 "Easements" means all easements, rights of way, permits, licenses, prescriptive rights and other ways of necessity, and other similar real property grants, whether or not of record, relating to real property. "Encumbrances" means any mortgages, pledges, liens, security interests, conditional and installment sale agreements, activity and use limitations, conservation easements, deed restrictions, encumbrances and charges of any kind. "Environmental Claim" means any and all pending and/or threatened administrative or judicial actions, suits, orders, claims, liens, notices, notices of violations, investigations, complaints, requests for information, proceedings, or other written communication, whether criminal or civil, pursuant to or relating to any applicable Environmental Law or pursuant to a common law theory, by any Person (including, but not limited to, any Governmental Authority, private person and citizens' group) based upon, alleging, asserting, or claiming any actual or potential (a) violation of, or liability under any Environmental Law, (b) violation of any Environmental Permit, or (c) liability for investigatory costs, cleanup costs, removal costs, remedial costs, response costs, natural resource damages, property damage, personal injury, fines, or penalties arising out of, based on, resulting from, or related to any Environmental Condition or any Release or threatened Release into the environment of any Regulated Substances at any location related to the Assets, including, but not limited to, any Off-Site Location to which Regulated Substances, or materials containing Regulated Substances, were sent for handling, storage, treatment, or disposal. "Environmental Condition" means the presence or Release of a Regulated Substance (other than a naturally-occurring substance) on or in environmental media, or structures on Real Property, at an Off-Site Location or other property (including the presence in surface water, groundwater, soils or subsurface strata, or air), including the subsequent migration of any such Regulated Substance, regardless of when such presence or Release occurred or is discovered. "Environmental Data" has the meaning set forth in Section 6.3(e). "Environmental Laws" means all federal, state, local, provincial, foreign and international civil and criminal laws, regulations, rules, ordinances, codes, decrees, judgments, directives, or judicial or administrative orders relating to pollution or protection of the environment, natural resources or human health and safety, including, without limitation, laws relating to Releases or threatened Releases of Regulated Substances (including, without limitation, Releases to ambient air, surface water, groundwater, land, surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport, disposal or handling of Regulated Substances. "Environmental Laws" include: (a) with respect to federal law, CERCLA, the Hazardous Materials Transportation Act (49 U.S.C.ss.ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.ss.ss. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C.ss.ss. 1251 et seq.), the Clean Air Act (42 U.S.C.ss.ss. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. ss.ss. 2601 et seq.), the Oil Pollution Act (33 U.S.C.ss.ss. 2701 et seq.), the Emergency Planning and Community Right-to-Know Act (42 U.S.C.ss.ss. 11001 et seq.), the Occupational Safety and Health Act (29 U.S.C.ss.ss. 651 et seq.), the Safe Drinking Water Act (42 U.S.C.ss. 300f et. seq.), the Surface Mine Conservation and Reclamation Act (30 U.S.C.ss.ss. 1251-1279), and regulations adopted pursuant thereto, and counterpart state and local laws, regulations adopted pursuant thereto; and (b) with respect to Arizona law, laws comparable to such federal statutes and regulations adopted pursuant thereto. 5 "Environmental Permits" means any permits, registrations, certificates, certifications, licenses and authorizations, consents and approvals of Governmental Authorities issued under Environmental Laws held by Seller with respect to the Assets. "Environmental Price Adjustment" has the meaning set forth in Section 6.3(c). "Environmental Reports" has the meaning set forth in Section 4.6. "Environmental Threshold" has the meaning set forth in Section 6.3(c). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means a trade or business, whether or not incorporated, that together with a Party would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA. "Estimated Adjustment" has the meaning set forth in Section 3.3(b). "Estimated Closing Statement" has the meaning set forth in Section 3.3(b). "Excluded Assets" has the meaning set forth in Section 2.2. "Excluded Liabilities" has the meaning set forth in Section 2.4. "Exempt Facilities" means those facilities listed in Exhibit A to each Loan Agreement included in the IDRB Documents. "FERC" means the Federal Energy Regulatory Commission or any successor agency thereto. "Final Order" means an action by the relevant Governmental Authority that has not been reversed, stayed, enjoined, set aside, annulled or suspended and/or with respect to which any waiting period prescribed by law before the transactions contemplated hereby may be consummated has expired and the time period permitted by statute or regulation for filing any request for a stay, petition for rehearing, reconsideration or application for review of the action or for filing a court appeal has passed. "Financial Statements" has the meaning set forth in Section 4.20. 6 "FIRPTA Affidavit" means the Foreign Investment in Real Property Tax Act Certification and Affidavit to be executed by Seller. "GAAP" means U.S. generally accepted accounting principles. "Good Utility Practices" means any practices, methods, standards, guides, or acts, as applicable, that (a) are generally accepted in the region during the relevant time period for use in the gas, transmission and distribution industry, (b) are commonly used in prudent gas, transmission and distribution engineering, construction, project management and operations, and (c) would be expected if the Business is to be conducted at a reasonable cost in a manner consistent with laws, rules and regulations applicable to the Business and the objectives of reliability, safety, environmental protection, economy and expediency. Good Utility Practice is intended to be acceptable practices, methods, or acts generally accepted in the region, and is not intended to be limited to the optimum practices, methods, or acts to the exclusion of all others. "Governmental Authority" means any foreign, federal, state, local or other governmental, regulatory or administrative agency, court, commission, department, board, or other governmental subdivision, legislature, rulemaking board, court, tribunal, arbitrating body or other governmental authority. "Grandfathered Active Employees" has the meaning set forth in Section 6.12(d)(iii)(D). "Grandfathered Individuals" has the meaning set forth in Section 6.12(d)(iii)(D). "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "IBEW" means International Brotherhood of Electrical Workers. "IBEW CBA" has the meaning set forth in Section 6.12(a). "IDRB Documents" has the meaning set forth in Section 6.14(m). "IDRB Indebtedness" means the indebtedness of Seller owing to the issuers of the Revenue Bonds and arising under the Loan Agreements included among the IDRB Documents. "Income Tax" means any federal, state, local or foreign Tax (a) based upon, measured by or calculated with respect to gross or net income, profits or receipts (including, without limitation, capital gains Taxes and minimum Taxes) or (b) based upon, measured by or calculated with respect to multiple bases (including, without limitation, corporate franchise taxes) if one or more of the bases on which such Tax may be based, measured by or calculated with respect to, is described in clause (a), in each case together with any interest, penalties, or additions to such Tax. 7 "Indemnifiable Loss" means any claim, demand, suit, loss, liability, damage, obligation, payment, cost or expense (including, without limitation, the cost and expense of any action, suit, proceeding, assessment, judgment, settlement or compromise relating thereto and reasonable attorneys' fees and reasonable disbursements in connection therewith). "Indemnifying Party" means a Party obligated to provide indemnification under this Agreement. "Indemnitee" means a Person entitled to receive indemnification under this Agreement. "Independent Accounting Firm" means such independent accounting firm of national reputation as is mutually appointed by the Buyer and Seller. "Inspection" means all tests, reviews, examinations, inspections, investigations, interviews, verifications, samplings and similar activities conducted by Buyer or its Representatives prior to the Closing with respect to the Assets, including "Phase I" and/or "Phase II" environmental assessments. "Intellectual Property" means patents and patent rights, trademarks and trademark rights, inventions, copyrights and copyright rights, and all pending applications for registrations of patents, trademarks, and copyrights. "Inventories" means materials, spare parts, consumable supplies, fuel supplies and chemical inventories relating to the Assets or the operation of the Business. "Knowledge" means the actual knowledge, as of the date hereof or, with respect to any certificate delivered pursuant to this Agreement, the date of delivery of such certificate, of the Persons identified on Schedule 1.1 and successors to each such Person's employment responsibilities. "Material Adverse Effect" means any occurrence or condition, arising after the date hereof, that has or would reasonably be expected to have a material adverse effect with an aggregate an adverse economic impact, taking into account all relevant considerations, in excess of $10,000,000 on the business, operations, properties, financial condition or results of operations of any Party (including its Affiliates, taken as a whole) or on the ability of either Party to perform in all material respects its obligations under this Agreement and the Ancillary Agreements. "Material Taking" has the meaning set forth in Section 6.13(b). "Non-Union Employees" has the meaning set forth in Section 6.12(b). "Off-Site Location" means any real property other than the Real Property. "Order" means any award, decision, injunction, judgment, order, consent order, writ, decree, consent decree, ruling, subpoena, or verdict entered, issued, made or rendered by any court, administrative agency, other Governmental Authority, or by an arbitrator, each of which possesses competent jurisdiction. 8 "Party" has the meaning set forth in the Recitals. "Permitted Encumbrances" means any of the following: (a) mechanics', carriers', workers' and other similar liens arising in the ordinary course of business for charges that are not delinquent or that are being contested in good faith and have not proceeded to judgment; (b) liens for current Taxes and assessments not yet due and payable; (c) with respect to the Real Property, usual and customary nonmonetary Encumbrances, covenants, Easements, restrictions and other title matters (whether or not recorded) that do not and are not expected to materially interfere with the operation of that portion of the Business conducted on such Real Property or the Business as a whole; (d) Encumbrances securing the payment or performance of any of the Assumed Liabilities; (e) all applicable zoning ordinances and land use restrictions in effect as of the date of this Agreement and all changes to or new adoptions of zoning ordinances and land use restrictions prior to the Closing Date that do not and are not expected to materially interfere with the operation of that portion of the Business conducted on such Real Property or the Business as a whole; (f) with respect to any Asset which consists of a leasehold or other possessory interests in real property, all Encumbrances, covenants, Easements, restrictions and other title matters (whether or not recorded) to which the underlying fee estate in such real property is subject that do not or will not interfere materially with the operation of that portion of the Business currently conducted on such property or the Business as a whole; and (g) any other Encumbrances, obligations, defects or irregularities of any kind whatsoever affecting title to the Assets that will be terminated, released or waived on or before the Closing Date or that are not, individually or in the aggregate, reasonably likely to materially interfere with the present use of the Assets or to materially increase the cost of conducting the Business. "Permits" means any permits, licenses, registrations, franchises and other authorizations, consents and approvals of Governmental Authorities held by Seller with respect to the Assets or the Business. "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, or governmental entity or any department or agency thereof. 9 "Post-Closing Adjustment" has the meaning set forth in Section 3.3(d). "Post-Retirement Welfare Benefits" has the meaning set forth in Section 6.12(d)(iii)(D). "Proposed Post-Closing Adjustment" has the meaning set forth in Section 3.3(c). "Proprietary Information" of a Party means all information about the Party or its Affiliates, including their respective properties or operations, furnished to the other Party or its Representatives by the Party or its Representatives, before or after the date hereof, regardless of the manner or medium in which it is furnished and all analyses, reports, tests or other information created or prepared by, or on behalf of, a Party during the performance of "Phase I" or "Phase II" environmental site assessments. Proprietary Information does not include information that: (a) is or becomes generally available to the public, other than as a result of a disclosure by the other Party or its Representatives; (b) was available to the other Party on a nonconfidential basis prior to its disclosure by the Party or its Representatives; (c) becomes available to the other Party on a nonconfidential basis from a person, other than the Party or its Representatives, who is not otherwise bound by a confidentiality agreement with the Party or its Representatives, or is not otherwise under any obligation to the Party or any of its Representatives not to transmit the information to the other Party or its Representatives; or (d) is independently developed by the other Party. "Purchase Price" has the meaning set forth in Section 3.2. "Qualifying Offer" means an offer to a Transferred Non-Union Employee of the same or similar job that is at least 100% of such employee's current total cash compensation at the time the offer was made (consisting of base salary and target incentive bonus), and does not require, as a condition of acceptance, a relocation of residence as described in Section 6.12(f). "Real Property" has the meaning set forth in Section 2.1(a). Any reference to the Real Property includes, by definition, Seller's right, title and interest in and to the surface and subsurface elements, including the soils and groundwater present at the Real Property, and any reference to items "at the Real Property" includes all items "at, on, in, upon, over, across, under and within" the Real Property. "Real Property Leases" has the meaning set forth in Section 4.5. "Recovery Costs" has the meaning set forth in Section 8.4(d). "Regulated Substances" means (a) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and dielectric fluid containing polychlorinated biphenyls; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "hazardous constituents," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants," "pollutants," "toxic pollutants" or words of similar meaning and regulatory effect under any applicable Environmental Law; and (c) any other chemical, material or substance, exposure to which or whose discharge, emission, disposal or Release is prohibited, limited or regulated by any applicable Environmental Law. 10 "Regulations" has the meaning set forth in Section 6.14(a)(iii). "Regulatory Exceptions" means any of the following: (a) a refusal by the ACC or the FERC to authorize an increase in base rates for the Business, an imposition by the ACC or the FERC of a rate moratorium for the Business, or a requirement by the ACC or the FERC of the filing of a rate case for the Business; (b) an imposition by the ACC requiring Buyer to provide service, or to improve service, to Persons located in any authorized service area of the Business, provided such requirement has a corresponding rate recovery opportunity; (c) an imposition by the ACC of performance, safety or reliability standards for Buyer's operation of the Business that are substantially equivalent to those standards being met by Buyer or its Affiliates in their other utility operations in Arizona, provided (i) Buyer is given a reasonable period of time after Closing to meet such imposed standards and (ii) such imposed standards have a corresponding rate recovery opportunity; and (d) terms and conditions imposed by any Governmental Authority that is required to issue a Required Regulatory Approval that are either (i) usual and customary; (ii) applicable to the Business or to Buyer or any Affiliate of Buyer as of the date of this Agreement; or (iii) contemplated by this Agreement, including the understandings of the Parties referenced in Section 6.8(c)(i). "Regulatory Material Adverse Effect" means, with respect to any Party, a Material Adverse Effect resulting from the effect on such Party of the terms and conditions of a Final Order with respect to any Required Regulatory Approval other than Regulatory Exceptions. "Release" means release, spill, leak, discharge, dispose of, pump, pour, emit, empty, inject, leach, dump or allow to escape into or through the environment. "Remediation" means any action taken in the investigation, removal, confinement, cleanup, treatment, or monitoring of a Release or an Environmental Condition on Real Property or Off-Site Location, including, without limitation, (a) obtaining any Permits or Environmental Permits required for such remedial activities, and (b) implementation of any engineering controls and institutional controls. The term "Remediation" includes, without limitation, any action which constitutes "removal action" or "remedial action" as defined by Section 101 of CERCLA, Section 6901(23) and (24); or any action which constitutes "remediation" or "remedial action" as defined by Arizona Revised Statutes Sections 49-151(4), 49-171(8) and 49-282.02(C)(2). 11 "Representatives" of a Party means such Party's authorized representatives, including without limitation, its professional and financial advisors. "Required Regulatory Approvals" means with respect to a Party, any consent or approval of, filing with, or notice to, any Governmental Authority that is necessary for the execution and delivery of this Agreement and the Ancillary Agreements by such Party or the consummation thereby of the transactions contemplated hereby, other than such consents, approvals, filings or notices (i) which are not required in the ordinary course to be obtained or made prior to the Closing and the transfer of the Assets, (ii) which, if not obtained or made, will not prevent such Party from performing its material obligations hereunder, or (iii) that relate to a Permit that is not material to the Business, taken as a whole. "Revenue Bonds" has the meaning set forth in Section 6.14(a)(i). "Savings Plan" has the meaning set forth in Section 6.12(d)(iii)(E). "SEC" means the Securities and Exchange Commission and any successor agency thereto. "Seller" has the meaning set forth in the Preamble. "Seller Indemnifiable Loss" has the meaning set forth in Section 8.1. "Seller Indemnitee" has the meaning set forth in Section 8.1. "Seller Material Adverse Effect" means a Material Adverse Effect with respect to Seller. "Seller Required Regulatory Approvals" means the Required Regulatory Approvals set forth in Schedule 4.3(b). "Seller SEC Reports" has the meaning set forth in Section 4.21. "Seller's Pension Plan" has the meaning set forth in Section 6.12(d)(iii)(C). "Severance Cost" has the meaning set forth in Section 6.12(b). "Special Warranty Deed" means a special warranty deed substantially in the form of Exhibit C attached hereto. "Subsidiary" when used in reference to any Person means any entity of which outstanding securities having ordinary voting power to elect a majority of the Board of Directors or other Persons performing similar functions of such entity are owned directly or indirectly by such Person. "Sufficient Notice" has the meaning set forth in Section 6.14(c)(ii). 12 "Taking" has the meaning set forth in Section 6.13(b). "Tangible Personal Property" has the meaning set forth in Section 2.1(c). "Taxes" means all taxes, charges, fees, levies, penalties or other assessments imposed by any federal, state, local or foreign taxing authority, including, but not limited to, income, excise, property, sales, transfer, franchise, payroll, withholding, social security, gross receipts, license, stamp, occupation, employment or other taxes, including any interest, penalties or additions attributable thereto. "Tax Impact" has the meaning set forth in Section 6.14(a)(vi). "Tax Return" means any return, report, information return, declaration, claim for refund or other document (including any schedule or related or supporting information) required to be supplied to any taxing authority with respect to Taxes including amendments thereto. "Termination Date" has the meaning set forth in Section 9.1(b). "Third Party Claim" means any claim, action, or proceeding made or brought by any Person who is not (a) a Party to this Agreement, or (b) an Affiliate of a Party to this Agreement. "Title Commitment" has the meaning set forth in Section 6.17. "Title Company" has the meaning set forth in Section 6.17. "Title Policies" has the meaning set forth in Section 6.17. "Transfer Taxes" means any real property transfer or gains tax, sales tax, conveyance fee, use tax, stamp tax, stock transfer tax or other similar tax, including any related penalties, interest and additions to tax. "Transferable Permits" means those Permits and Environmental Permits with respect to the Assets or the Business which may be transferred to Buyer with or without a filing with, notice to, consent of or approval of any Governmental Authority, and excluding those Permits and Environmental Permits with respect to the Assets or the Business which are non-transferable to Buyer and with respect to which Buyer must apply for and obtain replacements. "Transferred Employees" means Transferred Non-Union Employees and Transferred Union Employees. "Transferred Employee Records" means records related to Seller's employees who become employees of Buyer but only to the extent such records pertain to (A) skill and development training and biographies, (B) seniority histories, (C) salary and benefit information, (D) Occupational, Safety and Health Administration reports, or (E) subject to the limitation of the Health Insurance Portability and Accountability Act of 1996 and any applicable state privacy legislation and regulations, active medical restriction forms. 13 "Transferred Non-Union Employees" has the meaning set forth in Section 6.12(b). "Transferred Union Employees" has the meaning set forth in Section 6.12(a). "Union Employees" has the meaning set forth in Section 6.12(a). "UniSource" means UniSource Energy Corporation, an Arizona corporation and a direct or indirect parent corporation of Buyer. "UniSource Designee" means a wholly-owned subsidiary, direct or indirect, of either UniSource or Tucson Electric Power Company, an Arizona corporation named in the approvals by the ACC and the FERC as an entity that may acquire the Assets. "UniSource SEC Reports" has the meaning set forth in Section 5.5. "WARN Act" means the Federal Worker Adjustment Retraining and Notification Act of 1988, as amended. "1954 Code" has the meaning set forth in Section 6.14(a)(iii). 1.2 Certain Interpretive Matters. In this Agreement, unless the context otherwise requires, the singular shall include the plural, the masculine shall include the feminine and neuter, and vice versa. The term "includes" or "including" shall mean "including without limitation." The terms "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement. References to a Section, Article, Exhibit or Schedule shall mean a Section, Article, Exhibit or Schedule of this Agreement, and reference to a given agreement or instrument shall be a reference to that agreement or instrument as modified, amended, supplemented or restated through the date as of which such reference is made. ARTICLE II PURCHASE AND SALE 2.1 Transfer of Assets. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, at the Closing, Seller will sell, assign, convey, transfer and deliver to Buyer or the UniSource Designee, and Buyer or such UniSource Designee will purchase, assume and acquire from Seller, free and clear of all Encumbrances (except for Permitted Encumbrances), all of Seller's right, title and interest in and to all the assets (except for Excluded Assets), real, personal or mixed, tangible, or intangible, used or held for use by Seller in or in connection with, or otherwise necessary for, the conduct of the Business, including, without limitation, those assets described below, each as in existence on the Closing Date (such assets, collectively, the "Assets"): 14 (a) those certain parcels of real property owned by Seller together with all buildings, facilities, and other improvements thereon and all appurtenances thereto as described in Schedule 4.9 (the "Real Property"); (b) all accounts receivable and earned but unbilled revenues attributable to the Business, and all Inventories; (c) all machinery (mobile or otherwise), equipment (including communications equipment and computers), vehicles, tools, furniture and furnishings and other personal property related to the Business, owned by Seller and located on the Real Property on the Closing Date, together with all the personal property of Seller used principally in the operation of the Business that are in the possession of Seller and whether or not located on the Real Property (collectively, the "Tangible Personal Property"); (d) subject to the provisions of Section 6.7(c), all Assigned Agreements; (e) subject to the provisions of Section 6.7(c), all Real Property Leases; (f) all Transferable Permits; (g) all books, customer lists and customer information databases, meter reading and service data, accounts payable and receivable data, operating and maintenance records, warranty information, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures and similar items of Seller relating specifically to the Assets and necessary for the operation of the Assets and the Business (subject to the right of Seller to retain copies of same for its use) other than such items which are proprietary to third parties and accounting records; (h) all unexpired, transferable warranties and guarantees from third parties with respect to any Asset as of the Closing Date; (i) Seller prepaid expenses; and (j) petty cash held locally for the benefit of the Business. 2.2 Excluded Assets. Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement will constitute a transfer to Buyer or a UniSource Designee of, or be construed as conferring on Buyer or a UniSource Designee, and neither Buyer nor said UniSource Designee is acquiring, any right, title or interest in or to the following specific assets which are associated with the Assets or the Business, but which are hereby specifically excluded from the sale and the definition of Assets herein (the "Excluded Assets"): (a) assets that Seller uses in both the Business and Seller's electric or communications businesses, the material items of which are identified in Schedule 2.2 hereto and any contracts or agreements regarding the procurement of goods or services by Seller for use in its electric or communications businesses; 15 (b) cash and cash equivalents (including checks) in transit, in hand or in bank accounts, other than petty cash held locally for the benefit of the Business; (c) the rights of Seller and its Affiliates to the names "Citizens Communications Company", "Citizens Utilities", "CZN" or "Citizens" or any other trade names, trademarks, service marks, corporate names, corporate symbols or logos or any part, derivative or combination thereof (the "Citizens Marks"); (d) the stock record and minute books of Seller, duplicate copies of all books and records transferred to Buyer, all records prepared in connection with the sale of the Business (including bids received from third parties and analyses relating to the Business and all original documents relating to the Revenue Bonds (provided that copies of such documents relating to the Revenue Bonds have been furnished to Buyer); (e) assets disposed of by Seller after the date of this Agreement to the extent such dispositions are not prohibited by this Agreement; (f) except in the case of causes of action against third parties (including indemnification and contribution) relating to an Environmental Condition or Regulated Substance or arising under Environmental Laws and not relating to a Retained Liability, the rights of Seller in and to any causes of action against third parties (including indemnification and contribution) relating to any Real Property or Tangible Personal Property, Permits, Environmental Permits, Taxes, Real Property Leases or the Assigned Agreements, if any, and not relating to the Assumed Liabilities, including any claims for refunds, prepayments, offsets, recoupment, insurance proceeds (subject to Section 6.13(c)), condemnation awards (subject to Section 6.13(b)), judgments and the like, whether received as payment or credit against future liabilities, relating specifically to the Real Property or any improvements thereon and relating to any period prior to the Closing Date; (g) all personnel records of Seller and its Affiliates relating to the Transferred Employees other than Transferred Employee Records or other records, the disclosure of which is required by law or legal or regulatory process or subpoena; (h) any and all of Seller's rights and interests in any contract that is not an Assigned Agreement or that is an intercompany transaction between Seller and an Affiliate of Seller and all accounts owing by and among Seller and any of its Affiliates, whether or not any such intercompany transaction or account relates to the provision of goods and services, payment arrangements, intercompany charges or balances, or the like; (i) except to the extent set forth in Section 3.4, rights to refunds of Taxes payable with respect to the Business, the Assets, or any other assets, properties or operations of Seller or any Affiliate thereof; (j) all deferred tax assets or collectibles; (k) any insurance policy, bond, letter of credit or similar item, and any cash surrender value in regard thereto; 16 (l) except as otherwise set forth in Section 6.12, assets attributable to or related to a Benefit Plan; and (m) all other assets listed in Schedule 2.2 hereto. 2.3 Assumed Liabilities. On the Closing Date, Buyer or the UniSource Designee acquiring the Assets shall deliver to Seller the Assignment and Assumption Agreement pursuant to which Buyer or such UniSource Designee shall assume and agree to discharge when due, without recourse to Seller, in accordance with the respective terms and subject to the respective conditions thereof, all of the Assumed Liabilities. All of the following liabilities and obligations of Seller or Buyer which relate to, or arise by virtue of Seller's or Buyer's ownership of the Assets or operation of the Business (other than Excluded Liabilities) are referred to collectively as the "Assumed Liabilities": (a) all liabilities and obligations of Seller or Buyer arising on or after the Closing Date under the Assigned Agreements, the Real Property Leases, and the Transferable Permits in accordance with the terms thereof, including, without limitation, the Assigned Agreements entered into by Seller (i) prior to the date hereof and (ii) after the date hereof consistent with the terms of this Agreement, except in each case to the extent such liabilities and obligations, but for a breach or default by Seller, would have been paid, performed or otherwise discharged on or prior to the Closing Date and are not otherwise included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3 or to the extent the same arise out of any such breach or default or out of any event which after the giving of notice or passage of time or both would constitute a default by Seller; (b) all liabilities and obligations of Seller for accounts payable to the extent included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3; (c) all liabilities and obligations associated with the Assets or the Business in respect of Taxes for which Buyer is liable pursuant to Section 3.4 or 6.10(a) hereof; (d) all liabilities and obligations of Seller or Buyer with respect to the Transferred Employees incurred on or after the Closing Date for which Buyer is responsible pursuant to Section 6.12; (e) all liabilities, responsibilities and obligations of Seller or Buyer arising under Environmental Laws or relating to Environmental Conditions or Regulated Substances (including common law liabilities relating to Environmental Conditions and Regulated Substances), whether such liability, responsibility or obligation is known or unknown, contingent or accrued as of the Closing Date, including but not limited to: (i) costs of compliance (including capital, operating and other costs) relating to any violation or alleged violation of Environmental Laws occurring prior to, on or after the Closing Date, with respect to the ownership of the Assets or operation of the Business; (ii) property damage or natural resource damage (whether such damages were manifested before or after the Closing Date) arising from Environmental Conditions or Releases of Regulated Substances at, on, in, under, adjacent to, or migrating from any Assets prior to, on or after the Closing Date; (iii) any Remediation (whether or not such Remediation commenced before the Closing Date or commences after the Closing Date) of Environmental Conditions or Regulated Substances that are present or have been Released prior to, on or after the Closing Date, at, on, in, adjacent to or migrating from the Assets; (iv) any violations or alleged violations of Environmental Laws occurring on or after the Closing Date with respect to the ownership of any Assets or operation of the Business; (v) any bodily injury or loss of life arising from Environmental Conditions or Releases of Regulated Substances at, on, in, under, adjacent to or migrating from any Asset on or after the Closing Date; (vi) any bodily injury, loss of life, property damage, or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, on or after the Closing Date, of Regulated Substances generated in connection with the ownership of the Assets or the operation of the Business; and (vii) any Remediation of any Environmental Condition or Release of Regulated Substances arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, on or after the Closing Date, of Regulated Substances generated in connection with the ownership or operation of the Assets; provided, that nothing set forth in this Section 2.3 shall require Buyer to assume any liabilities, responsibilities or obligations that are expressly excluded in Section 2.4; 17 (f) any Tax that may be imposed by any federal, state or local government on the ownership, sale (except as otherwise provided in Section 3.4 or 6.10(a)), operation of the Business or use of the Assets on or after the Closing Date, except for any Income Taxes attributable to the income of Seller; (g) all liabilities and obligations of Seller or Buyer arising on and after the Closing Date under those Orders specifically relating to the Assets or the Business issued by or entered into with any Governmental Authority and listed in Schedule 2.3(g) or imposed on Buyer in any Required Regulatory Approval; (h) customer advances, customer deposits and construction advances, unperformed service obligations, Easement relocation obligations, and engineering and construction required to complete scheduled construction, construction work in progress, and other capital expenditure projects, in each case directly related to the Business and outstanding on or arising after the Closing Date; and (i) actions and proceedings based on conduct, actions, circumstances or conditions arising or occurring on or after the Closing Date, actions and proceedings described in Schedule 2.3(i), actions and proceedings arising from or directly related to any other Assumed Liability, and generic or industry-wide actions and proceedings outstanding on or arising on or after the Closing Date that are applicable to the Business. 2.4 Excluded Liabilities. Notwithstanding anything to the contrary in this Agreement, Buyer shall not assume or be obligated to pay, perform or otherwise discharge the following liabilities or obligations of Seller (collectively, the "Excluded Liabilities"): (a) any liabilities or obligations of Seller in respect of any Excluded Assets or other assets of Seller that are not Assets; 18 (b) any liabilities or obligations with respect to Taxes attributable to Seller's ownership, or use of the Assets or operation of the Business for taxable periods, or portions thereof, ending before the Closing Date, except for Taxes for which Buyer is liable pursuant to Section 3.4 or 6.10(a) hereof; (c) any liabilities or obligations of Seller accruing under any of the Assigned Agreements prior to the Closing Date or any liability, other than an Assumed Liability, underlying a Permitted Encumbrance, in each case to the extent not included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3; (d) any and all asserted or unasserted liabilities or obligations to third parties (including employees) for injuries or damages, whether arising from tortious conduct or otherwise, or similar causes of action relating to the Assets or the Business arising during or attributable to the period prior to the Closing Date, other than such that relate to liabilities or obligations assumed by Buyer; (e) any fines, penalties and associated costs for defending related enforcement actions, resulting from any violation or alleged violation of Environmental Laws with respect to the ownership of the Assets or the operation of the Business occurring prior to the Closing Date; (f) any payment obligations of Seller pursuant to the Assigned Agreements for goods delivered or services rendered prior to the Closing Date, including, but not limited to, rental payments pursuant to the Real Property Leases, in each case to the extent not included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3; (g) any liabilities, responsibilities and obligations of Seller arising under Environmental Laws or relating to Environmental Conditions or Regulated Substances (including common law liabilities relating to Environmental Conditions and Regulated Substances), whether such liability, responsibility or obligation was known or unknown, contingent or accrued, which relates to (i) any bodily injury, loss of life, property damage or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release of Regulated Substances generated in connection with the ownership of the Assets or the operation of the Business at any Off-Site Location, or arising from the arrangement for such activities, prior to the Closing Date; or (ii) any Remediation of any Environmental Condition or Regulated Substance at any Off-Site Location, arising from the storage, transportation, treatment, disposal, discharge, recycling or Release of Regulated Substances generated in connection with the ownership of the Assets or the operation of the Business at such Off-Site Location, or arising from the arrangement for such activities, prior to the Closing Date; provided, that for purposes of this paragraph, "Off-Site Location" does not include any location to which Regulated Substances disposed of or Released at the site of any Asset may have migrated; (h) any liability to third parties (including employees) for personal injury or loss of life, to the extent caused (or allegedly caused) by Environmental Conditions or the Release of Regulated Substances at, on, in, under, or adjacent to, or migrating from, the Assets prior to the Closing; 19 (i) subject to Section 6.12, any liabilities or obligations of Seller, any Seller Subsidiary or any ERISA Affiliate of Seller relating to any Benefit Plan including but not limited to any such liability (i) relating to benefits payable under any Benefit Plan; (ii) relating to the Pension Benefit Guaranty Corporation under Title IV of ERISA; (iii) relating to a multi-employer plan; (iv) with respect to non-compliance with the notice and benefit continuation requirements of COBRA; (v) with respect to any noncompliance with ERISA or any other applicable laws; or (vi) with respect to any suit, proceeding or claim which is brought against Seller, Buyer, any Benefit Plan, or any fiduciary or former fiduciary of any such Benefit Plan; (j) subject to Section 6.12, any liabilities or obligations arising from facts or circumstances prior to the Closing Date relating to the employment or termination of employment, including discrimination, wrongful discharge, unfair labor practices, or constructive termination by Seller of any individual, attributable to any actions or inactions by Seller prior to the Closing Date other than actions or inactions taken at the written direction of Buyer (it being understood and agreed that Buyer shall have no liability for action taken by Seller pursuant to Section 6.12 except as expressly provided therein); (k) subject to Section 6.12, any obligations of Seller for wages, overtime, employment taxes, severance pay, transition payments in respect of compensation or similar benefits accruing or arising prior to the Closing under any term or provision of any contract, plan, instrument or agreement relating to any of the employees of Seller; (l) all obligations of Seller with respect to the Revenue Bonds and any other indebtedness for money borrowed by Seller (including items due to Seller's Affiliates) other than payment obligations arising on or after the Closing Date under any equipment lease of the kind listed in Schedule 4.11(a) or under any line extension contracts or similar construction arrangements, it being understood and agreed that such leases, contracts and similar arrangements do not create indebtedness for money borrowed; and (m) all obligations and liabilities included in Seller's "other current and accrued liabilities" account; and (n) any liability of Seller arising out of a breach by Seller or any of its Affiliates of any of their respective obligations under this Agreement or the Ancillary Agreements. 2.5 Control of Litigation. (a) The Parties agree and acknowledge that, from and after the Closing Date, Seller shall be entitled exclusively to control, defend and settle any litigation, administrative or regulatory proceeding, and any investigation or Remediation activity (including without limitation any environmental mitigation or Remediation activities), arising out of or related to any Excluded Liabilities, and Buyer agrees to cooperate fully in connection therewith and in connection therewith, shall comply with the provisions of Section 6.2, provided that, in no event shall Seller's exercise of its rights under this Section 2.5 (i) unreasonably interfere with Buyer's conduct or operation of the Business, (ii) place any environmental liens or deed restrictions on the Real Property, or (iii) cause Buyer to be responsible for maintaining any institutional or engineering controls that may be part of a Remediation activity. 20 (b) The Parties agree and acknowledge that, from and after the Closing Date, Buyer shall be entitled exclusively to control, defend and settle any litigation, administrative or regulatory proceeding, and any investigation or Remediation activity (including without limitation any environmental mitigation or Remediation activities), arising out of or related to any Assumed Liabilities, and Seller agrees to cooperate fully in connection therewith and in connection therewith, shall comply with the provisions of Section 6.2. ARTICLE III THE CLOSING 3.1 Closing. Upon the terms and subject to the satisfaction of the conditions in Article VII of this Agreement, each of (i) the sale, assignment, conveyance, transfer and delivery of the Assets to Buyer by Seller, (ii) the payment of the Purchase Price to Seller by Buyer, (iii) the assumption of the Assumed Liabilities by Buyer, and (iv) the consummation of the other respective obligations of the Parties contemplated by this Agreement to be consummated on the Closing Date shall take place at a closing (the "Closing"), to be held at the offices of Seller in Phoenix, Arizona, or another mutually acceptable location, at 9:00 a.m. local time on the Closing Date. 3.2 Closing Payment. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, in consideration of the aforesaid sale, assignment, assumption, conveyance, transfer and delivery of the Assets, Buyer will pay or cause to be paid to Seller at the Closing an aggregate amount in U.S. dollars of one hundred thirty-eight million dollars ($138,000,000) (the "Base Purchase Price") plus or minus any adjustments pursuant to the provisions of this Agreement (the "Purchase Price"), by wire transfer of immediately available funds denominated in U.S. dollars or by such other means as are agreed upon by Seller and Buyer. 3.3 Adjustment to Base Purchase Price. (a) Subject to Section 3.3(b), at the Closing, the Base Purchase Price shall be adjusted to account for the items set forth in this Section 3.3(a): (i) the Base Purchase Price shall be decreased by six million dollars ($6,000,000) if the Closing occurs on or before July 28, 2003; (ii) [intentionally omitted] (iii) the Base Purchase Price shall be increased by three million dollars ($3,000,000) in the event the Closing occurs after the first anniversary of the date hereof; (iv) the Base Purchase Price shall be increased by the aggregate amount of all accounts receivable and earned but unbilled revenues (other than any amounts that are due from any of Seller's Affiliates or that otherwise are Excluded Assets) attributable to the Business as of day immediately preceding the Closing Date net of Seller's reserve for allowance for bad debt (as reflected in Seller's written policy for allowance for bad debt as of the date hereof); 21 (v) the Base Purchase Price shall be decreased by all accounts payable attributable to the Business as of the day immediately preceding the Closing Date (other than any liability included in Seller's "other current and accrued liabilities" account, which shall be an Excluded Liability or that otherwise is an Excluded Liability); (vi) the Base Purchase price shall be decreased by (A) the aggregate amount of customer advances for construction times 25% and (B) the aggregate amount of customer deposits, in each case to the extent relating to the Business outstanding as of the day immediately preceding the Closing Date (other than any amounts due to any of Seller's Affiliates or that otherwise is an Excluded Liability); (vii) the Base Purchase Price shall increased by the aggregate amount of Inventories recorded on Seller's books and records as of day immediately preceding the Closing Date; (viii) the Base Purchase Price shall be adjusted to account for the net balance payable to or by Seller, if any, for items prorated pursuant to Section 3.4, other than the items addressed in Section 3.4(a); (ix) the Base Purchase Price shall be increased or decreased if and to the extent required by Sections 6.3(c), 6.12(b), 6.12(d)(iii)(D) and 6.13; (x) the Base Purchase Price will be increased by the aggregate amount of all (i) Approved Capital Expenditures that are accrued by Seller between the date of this Agreement and the Closing Date (including expenditures recorded in the Construction Work in Progress account of the Business as of the day immediately preceding the Closing Date and relating to the Approved Capital Expenditures), (ii) without duplication, expenditures to purchase materials, supplies and other capital items that are dedicated to, but as of Closing have not been used in, the construction or improvement of the property, plant or equipment and relating to the Approved Capital Expenditures) and (iii) without duplication, other expenditures recorded as an asset of the Business as of the day immediately preceding the Closing Date and relating to such Approved Capital Expenditures; and (xi) The Base Purchase Price shall be increased or decreased by the amount of the Seller's Purchased Gas Adjustment account balance outstanding on the day immediately preceding the Closing Date. (b) At least ten (10), but no more than thirty (30) days prior to the Closing Date, Seller shall prepare and deliver to Buyer an estimated closing statement (the "Estimated Closing Statement") that shall set forth Seller's best estimate of the estimated adjustments to the Base Purchase Price required by Section 3.3(a) (regardless of whether notice of such Base Purchase Price adjustments have been previously delivered to Buyer) (the "Estimated Adjustment"). Within five (5) days following the delivery of an Estimated Closing Statement to Buyer, Buyer may object in good faith to such Estimated Closing Payment in writing. In the event of any such objection, the Parties shall attempt to resolve their differences by negotiation. If the Parties are unable to do so before three (3) days prior to the Closing Date, then (i) the full amount of the Estimated Adjustment shall be made at the Closing if the amount in dispute is less than $1,000,000, or (ii) the undisputed portion of the Estimated Adjustment shall be made at the Closing if the amount in dispute is $1,000,000 or more. The disputed portions shall be paid as a Post-Closing Adjustment if and to the extent required by Section 3.3(d). 22 (c) Within sixty (60) days following the Closing Date, Seller shall prepare and deliver to Buyer a final closing statement setting forth the final adjustments to the Base Purchase Price required by Section 3.3(a) (the "Proposed Post-Closing Adjustment"). All calculations of the Proposed Post-Closing Adjustments shall be prepared using the same accounting principles, policies and methods as Seller has historically used in connection with the calculation of the items reflected on such Proposed Post-Closing Adjustments. (d) Within thirty (30) days following the delivery of a Proposed Post-Closing Adjustment to Buyer, Buyer may object to such Proposed Post-Closing Adjustment in writing. Seller agrees to cooperate with Buyer to provide Buyer and Buyer's Representatives information used to prepare the Proposed Post-Closing Adjustments and information relating thereto. If Buyer objects to a Proposed Post-Closing Adjustment, the Parties shall attempt to resolve such dispute by negotiation. If such Parties are unable to resolve such dispute within thirty (30) days of any such objection by Buyer, the Parties shall appoint an Independent Accounting Firm. The fees and expenses of such Independent Accounting Firm shall be allocated between Buyer and Seller so that Seller's share of such fees and expenses shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Buyer to such auditor that is successfully disputed by Buyer (as finally determined by such auditor) bears to the total amount of such remaining disputed amounts so submitted by Buyer to such auditor. The Independent Accounting Firm shall review such Proposed Post-Closing Adjustment and determine the appropriate adjustment to the Base Purchase Price, if any, within thirty (30) days of such appointment. The Parties agree to cooperate with the Independent Accounting Firm and provide it with such information as it reasonably requests to enable it to make such determination. The finding of such Independent Accounting Firm shall be binding on the Parties hereto. Upon determination by agreement of the Parties or by binding determination of the Independent Accounting Firm of the appropriate adjustment to the Base Purchase Price (in either case, the "Post-Closing Adjustment"), if such Post-Closing Adjustment results in a change to the Base Purchase Price, the Party owing the difference shall deliver such difference to the Party owed such amount no later than two (2) Business Days after the determination of such Post Closing Adjustment, in immediately available funds or in any other manner as reasonably requested by the Party owed such amount, plus interest at 6.0% per annum on such determined amount from the Closing Date to (but not including) the date of payment. (e) If at any time following the Closing Date Buyer actually returns to customers greater than thirty-five percent (35%) of the aggregate customer advances for construction directly relating to the Business and outstanding as of the Closing Date ("Advances"), Seller shall reimburse Buyer for all amounts returned to customers to the extent said returns exceed twenty-five percent (25%) of Advances. Buyer may, at any time within seven (7) years from the Closing Date, provide notice to Seller of a reimbursement claim under this Section 3.3(e), which notice shall include reasonable documentary substantiation of returns to customers of Advances. In the event Seller agrees with said determination, it shall promptly pay such reimbursement to Buyer. In the event Seller disputes said determination, it shall initiate the dispute resolution procedures with regard to the Post-Closing Adjustment, as provided in Section 3.3(d), which shall be binding on the Parties. 23 3.4 Prorations. Buyer and Seller agree that all of the items normally prorated, including those listed below (but not including Income Taxes), relating to the Business and operation of the Assets shall be prorated as of the Closing Date, with Seller liable for such items to the extent such items relate to any time period prior to the Closing Date, and Buyer liable for such items to the extent such items relate to periods commencing with the Closing Date (measured in the same units used to compute the item in question, otherwise measured by calendar days). The Base Purchase Price shall be increased to the extent Buyer will benefit financially due to Seller's payment prior to the Closing Date of the portion of any such item allocable to Buyer, and (except with respect to the items addressed in clause (a) below) shall be decreased to the extent Seller will benefit financially due to Buyer's payment on or after the Closing Date of the portion of any such item allocable to Seller. The items subject to proration include the following: (a) Subject to Section 6.10(b), personal property, real estate and occupancy Taxes, assessments and other charges, if any, on or with respect to the Business and operation of the Assets; (b) rent, Taxes (other than Income Taxes) and all other items (including prepaid services or goods not included in Inventories) payable by or to Seller under any of the Assigned Agreements to the extent not included in the account payables of the Business outstanding as of the day immediately preceding the Closing Date; (c) any permit, license, registration, compliance assurance fees or other fees with respect to any Transferable Permit or other Asset; (d) sewer rents and charges for water, telephone, electricity and other utilities with respect to the Assets; (e) rent and Taxes payable by or to Seller under the Real Property Leases assigned to Buyer to the extent not included in the account payables of the Business outstanding as of the day immediately preceding the Closing Date; (f) deposits made by Seller to the extent transferred to Buyer; (g) prepaid expenses paid by Seller to the extent transferred to Buyer; and (h) petty cash held locally for the benefit of the Business to the extent transferred to Buyer. 3.5 Deliveries by Seller. At the Closing, Seller will deliver, or cause to be delivered, the following to Buyer: 24 (a) The Bill of Sale, duly executed by Seller; (b) Copies of any and all consents, waivers or approvals obtained or required to be obtained by Seller from Government Authorities or non-governmental Persons with respect to the transfer of the Assets, or the consummation of the transactions contemplated by this Agreement; (c) One or more Special Warranty Deeds conveying title to the Real Property to Buyer, duly executed and acknowledged by Seller and in recordable form; (d) An opinion from Seller's general counsel, dated the Closing Date, substantially in the form of Exhibit D attached hereto, and opinions from Seller's Bond Counsel, dated the Closing Date, substantially in the form of Exhibit E attached hereto; (e) The Assignment and Assumption Agreement, duly executed by Seller; (f) A FIRPTA Affidavit, duly executed by Seller; (g) Copies, certified by the Secretary or Assistant Secretary of Seller, of corporate resolutions authorizing the execution and delivery of this Agreement and all of the agreements and instruments to be executed and delivered by Seller in connection herewith, and the consummation of the transactions contemplated hereby; (h) A certificate of the Secretary or Assistant Secretary of Seller identifying the name and title and bearing the signatures of the officers of Seller authorized to execute and deliver this Agreement and the other agreements and instruments contemplated hereby; (i) Certificate of Good Standing with respect to Seller, issued by the Secretary of State of the State of Delaware; (j) To the extent available, originals of all Assigned Agreements, Real Property Leases and Transferable Permits and, if not available, true and correct copies thereof (delivery of the foregoing documents will be deemed made in the case of any such documents then located at any of the offices included in the Assets, but only to the extent that Seller delivers to Buyer a schedule generally identifying each such office and the general categories of documents located in each such office); (k) All such other instruments of assignment, transfer or conveyance as shall, in the reasonable opinion of Buyer and its counsel, be necessary to transfer the Assets to Buyer, in accordance with this Agreement and where necessary or desirable in recordable form; (l) Such other agreements, documents, instruments and writings as are required to be delivered by Seller at or prior to the Closing Date pursuant to this Agreement or otherwise reasonably requested by Buyer in connection herewith; and (m) A certificate dated the Closing Date executed by Seller's President, Public Services Sector, to the effect that, to such officer's Knowledge, the conditions set forth in Sections 7.1(e) and (f) have been satisfied by Seller. 25 3.6 Deliveries by Buyer. At the Closing, Buyer will deliver, or cause to be delivered, the following: (a) The Purchase Price, as adjusted pursuant to Section 3.3, by wire transfer of immediately available funds denominated in U.S. dollars in accordance with Seller's instructions or by such other means as are agreed upon by Seller and Buyer; (b) The Assignment and Assumption Agreement, duly executed by Buyer; (c) All such other instruments of transfer or assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for the sale, conveyance, assignment and transfer of the Assets to, or the assumption of the Assumed Liabilities by, Buyer in accordance with this Agreement; (d) Copies, certified by the Secretary or Assistant Secretary of Buyer, of resolutions authorizing the execution and delivery of this Agreement and all of the agreements and instruments to be executed and delivered by the Buyer in connection herewith, and the consummation of the transactions contemplated hereby; (e) A certificate of the Secretary or Assistant Secretary of Buyer, identifying the name and title and bearing the signatures of the officers of Buyer authorized to execute and deliver this Agreement and the other agreements and instruments contemplated hereby; (f) An opinion from Buyer's general counsel, dated the Closing Date, substantially in the form of Exhibit F attached hereto; (g) Certified copies of any and all consents, waivers or approvals obtained or required to be obtained by Buyer from Government Authorities or non-governmental Persons with respect to the transfer of the Assets or the consummation of the transactions contemplated by this Agreement; (h) Such other agreements, documents, instruments and writings as are required to be delivered by Buyer at or prior to the Closing Date pursuant to this Agreement or otherwise reasonably requested by Seller in connection herewith; (i) Certificate of Good Standing with respect to Buyer, issued by the Secretary of State of Arizona; and (j) A certificate dated the Closing Date executed by Buyer's Chief Financial Officer to the effect that, to such officer's knowledge, the conditions set forth in Sections 7.2(e), (f) and (g) have been satisfied by Buyer. 3.7 Work in Progress. The Parties agree to work together before the Closing Date to effect on the Closing Date an orderly transition with respect to work in progress. 26 ARTICLE IV REPRESENTATIONS, WARRANTIES AND DISCLAIMERS OF SELLER Seller hereby represents and warrants to Buyer as follows: 4.1 Incorporation; Qualification. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease, and operate its material assets and properties and to carry on its business as is now being conducted. Seller is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which its business, as now being conducted, shall require it to be so qualified, except where the failure to be so qualified would not have a Seller Material Adverse Effect. 4.2 Authority. Seller has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which Seller is a signatory and to consummate the transactions contemplated hereby or thereby. The execution and delivery by Seller of this Agreement and each of the Ancillary Agreements to which Seller is a signatory and the consummation by Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Seller and this Agreement has been duly and validly executed and delivered by Seller. Each of this Agreement and the Ancillary Agreements to which Seller is a signatory constitutes the legal, valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 4.3 Consents and Approvals; No Violation. (a) Except as set forth in Schedule 4.3(a), neither the execution, delivery and performance of this Agreement nor the execution, delivery and performance of the Ancillary Agreements by Seller will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or Bylaws of Seller, (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Seller is a party or by which it, or any of the Assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or that would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect; or (iii) subject to obtaining the Seller Required Regulatory Approvals, constitute violations of any law, regulation, order, judgment or decree applicable to Seller, which violations, individually or in the aggregate, would result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. (b) Except as set forth in Schedule 4.3(b) (the filings and approvals referred to in Schedule 4.3(b) are collectively referred to as the "Seller Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for the execution and delivery of this Agreement and the Ancillary Agreements by Seller or the consummation by Seller of the transactions contemplated hereby and thereby, other than those the failure to obtain which would not result in a Seller Material Adverse Effect or an Asset Material Adverse Effect and would not otherwise result in a material violation of law by Buyer. 27 4.4 Insurance. Schedule 4.4 lists, as of the date of this Agreement, all material policies of fire, liability, workers' compensation and other forms of insurance (if any) owned or held by, or on behalf of, Seller with respect to the Assets and the Business. Except as set forth in such Schedule, all such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid (other than retroactive premiums which may be payable with respect to auto, general liability and workers' compensation insurance policies), and no notice of cancellation or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation. Except as described in Schedule 4.4, within the thirty-six (36) months preceding the date of this Agreement, Seller has not been refused any insurance with respect to the Assets or the Business nor has its coverage been limited by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the last twelve (12) months. 4.5 Real Property Leases. Schedule 4.5 lists, as of the date of this Agreement, all material real property leases under which Seller is a lessee or lessor and which relate to the Assets, including a separate listing of all leases of office space used by Seller in the conduct of the Business (the "Real Property Leases"). Seller will deliver to Buyer true, correct and complete copies of each of the Real Property Leases in accordance with Section 6.20. 4.6 Environmental Matters. Seller has heretofore delivered to Buyer all environmental reports and all environmental site assessments relating to the Assets that have been identified by Seller after diligent inquiry, which reports have been identified in schedules delivered to Buyer on or prior to the date hereof ("Environmental Reports"). Except as disclosed in Schedule 4.6 or in the Environmental Reports: (a) Seller holds, and is in substantial compliance with, all Environmental Permits that are required for Seller to conduct the Business and operate the Assets, and Seller is otherwise in compliance with applicable Environmental Laws with respect to the Business and operation of the Assets, except for such failures to hold or comply with required Environmental Permits, or such failures to be in compliance with applicable Environmental Laws, as would not, individually or in the aggregate, result in an Asset Material Adverse Effect; (b) Seller has not received (i) any written request for information, or been notified that it is a potentially responsible party, under CERCLA or any similar state law with respect to any of the Real Property, or (ii) any written notification from a Governmental Authority with respect to pending or ongoing investigations or enforcement actions related to alleged or potential violations of any applicable Environmental Law with respect to any of the Real Property; (c) Seller has not entered into or agreed to any consent decree or order relating to the Assets, and is not subject to any outstanding judgment, decree, or judicial order relating to compliance with any Environmental Law or to Remediation of Regulated Substances under any Environmental Law relating to the Assets; and 28 (d) To Seller's Knowledge, no Release of Regulated Substances has occurred at, from, in, on, or under the Real Property, and, except as legally permitted, no Regulated Substances are present in, on, about or migrating from the Real Property, in each case that would give rise to an Environmental Claim related to the Assets for which Remediation would reasonably be required, except in any such case to the extent that any such Release or Environmental Claim would not, individually or in the aggregate, result in an Environmental Claim in excess of $500,000. 4.7 Labor Matters. Schedule 4.7 sets forth the collective bargaining agreements, and amendments thereto, to which Seller is a party in connection with the Business. Seller has previously delivered to Buyer true and correct copies of all such collective bargaining agreements and amendments thereto. With respect to the Assets and the Business, except to the extent set forth in Schedule 4.7 and except for such matters as would not, individually or in the aggregate, result in an Asset Material Adverse Effect, (a) Seller is in compliance with all applicable laws respecting employment and employment practices, occupational safety and health, plant closing, mass layoffs, terms and conditions of employment and wages and hours; (b) Seller has not received any written notice of any unfair labor practice complaint against Seller pending before the National Labor Relations Board; (c) no arbitration proceeding arising out of or under any collective bargaining agreement is pending against Seller; and (d) Seller has not experienced any work stoppage within the three-year period prior to the date hereof and to Seller's Knowledge none is currently threatened. 4.8 Benefit Plans: ERISA. (a) Schedule 4.8 lists all material Benefit Plans. True and complete copies of all such Benefit Plans have been made available to the Buyer. (b) No liability under Title IV or Section 302 of ERISA has been incurred by Seller or any ERISA Affiliate of Seller that has not been satisfied in full, and no condition exists that presents a material risk to Seller or any ERISA Affiliate of Seller of incurring any such liability, other than liability for premiums due to the Pension Benefit Guaranty Corporation (which premiums have been paid when due). Insofar as the representation made in this Section 4.8 applies to Sections 4064, 4069 or 4204 of Title IV of ERISA, it is made with respect to any employee benefit plan, program, agreement or arrangement subject to Title IV of ERISA to which Seller or any ERISA Affiliate of Seller made, or was required to make, contributions during the five (5)-year period ending on the last day of the most recent plan year ended prior to the Closing Date. (c) Except as expressly provided in this Agreement, the consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event, (i) entitle any current or former employee or officer of Seller or any ERISA Affiliate of Seller to severance pay, unemployment compensation or any other payment, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or officer. 29 (d) There has been no material failure of any of the Benefit Plans that is a group health plan (as defined in Section 5000(b)(1) of the Code) to meet the requirements of Section 4980B(f) of the Code with respect to a qualified beneficiary (as defined in Section 4980B(g) of the Code). Neither the Seller nor any ERISA Affiliate of Seller has contributed to a nonconforming group health plan (as defined in Section 5000(c) of the Code) and no ERISA Affiliate of Seller has incurred a tax under Section 5000(e) of the Code that is or could become a liability of Buyer. (e) There are no pending, or to Seller's Knowledge, threatened claims by or on behalf of any Benefit Plans, by any employee or beneficiary covered under any such Benefit Plans, or otherwise involving any such Benefit Plans (other than routine claims for benefits). 4.9 Real Property. Schedule 4.9 contains a description of the Real Property included in the Assets. True and correct copies of any current surveys, abstracts, title commitments and title opinions identified by Seller after diligent inquiry to be in Seller's possession and all policies of title insurance currently in force and identified by Seller after diligent inquiry to be in the possession of Seller with respect to the Real Property have heretofore been made available to Buyer. 4.10 Condemnation. Except as set forth in Schedule 4.10, Seller has not received any written notices of and otherwise has no Knowledge of any pending or threatened proceedings or actions by any Governmental Authority to condemn or take by power of eminent domain all or any part of the Assets. 4.11 Assigned Agreements. (a) Schedule 4.11(a) lists each Assigned Agreement (other than Real Property Leases, line extension agreements and similar construction arrangements, railroad crossing agreements and similar arrangements, and Easements held by Seller) which is material to the Business, other than those (i) that are listed or described on another Schedule, (ii) that provide for annual payments by Seller after the date hereof of less than $100,000 or (iii) that, when aggregated with all other Assigned Agreements not listed on Schedule 4.5 or 4.11(a), provide for payments by Seller after the date hereof of less than $500,000 in the aggregate. Schedule 4.11(a) also lists each agreement that is material to the Assets or the Business that may expire or that Seller expects to terminate prior to the Closing Date other than any agreement that is an Excluded Asset. (b) Except as disclosed in Schedule 4.11(b), each Assigned Agreement listed on Schedule 4.5 or 4.11(a) constitutes a legal, valid and binding obligation of Seller and, to Seller's Knowledge, constitutes a valid and binding obligation of the other parties thereto, and may be transferred to the Buyer as contemplated by this Agreement without the consent of the other parties thereto and will continue in full force and effect thereafter, unless in such case the impact of such lack of legality, validity or binding nature, or inability to transfer, would not, individually or in the aggregate, result in an Asset Material Adverse Effect. (c) Except as set forth in Schedule 4.11(c), there is not, under the Assigned Agreements listed on Schedule 4.5 or 4.11(a), any default or event which, with notice or lapse of time or both, would constitute a default on the part of the Seller or to Seller's Knowledge, any of the other parties thereto, except such events of default and other events which would not, individually or in the aggregate, result in an Asset Material Adverse Effect. 30 4.12 Legal Proceedings. Except as set forth in Schedule 4.12, there is no action or proceeding pending or, to Seller's Knowledge, threatened against Seller before any court, arbitrator or Governmental Authority, which would, individually or in the aggregate, reasonably be expected to result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. Except as set forth in Schedule 4.12 Seller is not subject to any outstanding Order that would, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 4.13 Permits. Seller has all Permits (other than Environmental Permits, which are addressed in Section 4.6 hereof) necessary to own and operate the Assets except where the failure to have such Permits would not, individually or in the aggregate, create a Seller Material Adverse Effect or an Asset Material Adverse Effect. Except as disclosed on Schedule 4.13, Seller has not received any written notification that it is in violation of any such Permits, except notifications of violations which would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. Seller is in compliance with all Permits except where such non-compliance would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 4.14 Taxes. (a) Seller has filed or caused to be filed all Tax Returns that are required to be filed by it with respect to any Tax relating to the Assets, and has paid or caused to be paid all Taxes that have become due as indicated thereon, except where such Tax is being contested in good faith by appropriate proceedings, or where the failure to so file or pay would not result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. Seller has complied in all material respects with all applicable laws, rules and regulations relating to withholding Taxes relating to Transferred Employees. All Tax Returns relating to the Assets are true, correct and complete in all material respects. There are no liens for Taxes upon the Assets except for liens for Taxes not yet due and Permitted Encumbrances. (b) Except as set forth in Schedule 4.14, no notice of deficiency or assessment has been received from any taxing authority with respect to liabilities for Taxes of Seller in respect of the Assets, which have not been fully paid or finally settled, and any such deficiency shown in Schedule 4.14 is being contested in good faith through appropriate proceedings. (c) Except as set forth in Schedule 4.14, there are no outstanding agreements or waivers extending the applicable statutory periods of limitation for Taxes associated with the Assets that will be binding upon Buyer after the Closing. (d) Except as set forth on Schedule 4.14, none of the Assets is property that is required to be treated as being owned by any other person pursuant to the so-called safe harbor lease provisions of former Section 168(f) of the Code, and none of the Assets is "tax-exempt use" property within the meaning of Section 168(h) of the Code. 31 (e) Schedule 4.14 sets forth the taxing jurisdictions in which Seller owns assets or conducts business that require a notification to a taxing authority of the transactions contemplated by this Agreement, if the failure to make such notification, or obtain Tax clearance certificates in connection therewith, would either require Buyer to withhold any portion of the consideration or subject Buyer to any liability for any Taxes of Seller. 4.15 Intellectual Property. The Citizens Marks and the software licenses and related contracts described in Schedules 2.2 and 4.11(a) constitute all of the material Intellectual Property necessary for the operation and maintenance of the Assets or the conduct of the Business, each of which Seller either has all right, title and interest in or valid and binding rights under contract to use in connection with the operation of the Assets and the Business. Except as disclosed in Schedule 4.15, (a) Seller is not, nor has it received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default), under any contract to use such Intellectual Property, and (b) to Seller's Knowledge, such Intellectual Property is not being infringed by any other Person. Except as disclosed in Schedule 4.15, Seller has not received notice that it is infringing any Intellectual Property of any other Person in connection with the Assets or the Business, and Seller, to its Knowledge, is not infringing any Intellectual Property of any other Person which, individually or in the aggregate, would have an Asset Material Adverse Effect. 4.16 Capital Expenditures. Seller has heretofore delivered to Buyer a schedule of all Capital Expenditures that, as of the date of this Agreement, are planned by Seller from the date hereof through December 31, 2003 (the "Capital Expenditures Schedule"). 4.17 Compliance With Laws. Seller is in compliance with all applicable laws, rules and regulations with respect to its ownership of the Assets and operation of the Business except where the failure to be in compliance would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 4.18 Title. Seller has, and will have as of the Closing Date, good, valid and indefeasible title to the Real Property and the other Assets purported to be owned by Seller, free and clear of all Encumbrances except Permitted Encumbrances. 4.19 DISCLAIMERS. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE IV, THE ASSETS ARE TRANSFERRED "AS IS, WHERE IS", AND SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AS TO LIABILITIES, OPERATIONS OF THE ASSETS, CONDITION, VALUE OR QUALITY OF THE ASSETS OR THE PROSPECTS (FINANCIAL AND OTHERWISE), RISKS AND OTHER INCIDENTS OF THE ASSETS AND SELLER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE ASSETS, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS, OR THE APPLICABILITY OF ANY GOVERNMENTAL REQUIREMENTS, INCLUDING BUT NOT LIMITED TO ANY ENVIRONMENTAL LAWS, OR WHETHER SELLER POSSESSES SUFFICIENT REAL PROPERTY OR PERSONAL PROPERTY TO OPERATE THE ASSETS. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SELLER FURTHER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING THE ABSENCE OF HAZARDOUS SUBSTANCES OR LIABILITY OR POTENTIAL LIABILITY ARISING UNDER ENVIRONMENTAL LAWS WITH RESPECT TO THE ASSETS. 32 4.20 Financial Statements. Schedule 4.20 sets forth the unaudited balance sheet for the Business as of December 31, 2001 (the "Balance Sheet") and the unaudited statement of income of the Business for the twelve-month period ended December 31, 2001 (collectively, the "Financial Statements"). Except as set forth in Schedule 4.20, the Financial Statements have been prepared on a pre-tax basis in accordance, in all material respects, with GAAP applied on a basis consistent with prior periods except for the omission of full footnotes to such Financial Statements. Except as set forth in Schedule 4.20, the Balance Sheet presents fairly in all material respects the financial condition of the Business as of its date and the income statement included in the Financial Statements presents fairly in all material respects the results of operations of the Business for the periods covered thereby. The books and records of Seller from which the Financial Statements were derived were complete and accurate in all material respects at the time of such preparation. 4.21 SEC Filings; Financial Statements. (a) Seller has filed, or caused to be filed, all forms, reports and documents required to be filed by Seller with the SEC since January 1, 2001, and has heretofore delivered or made available to Buyer in the form filed with the SEC, together with any amendments thereto, its (i) Annual Reports on Form 10-K for the fiscal year ended December 31, 2000 and 2001, (ii) Quarterly Reports on Form 10-Q for the fiscal quarter ended March 31 and June 30, 2002, and (iii) all other reports or registration statements filed by Seller with the SEC since January 1, 2001 (collectively, the "Seller SEC Reports"). The Seller SEC Reports were prepared substantially in accordance with the requirements of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations promulgated under each of such respective acts, and did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The financial statements, including all related notes and schedules, contained in the Seller SEC Reports (or incorporated by reference therein) fairly present the consolidated financial position of Seller as at the respective dates thereof and the consolidated results of operations and cash flows of Seller for the periods indicated in accordance with GAAP applied on a consistent basis throughout the periods involved (except for changes in accounting principles disclosed in the notes thereto) and subject in the case of interim financial statements to normal year-end adjustments. 4.22 Sufficiency of Assets. The Assets and the Excluded Assets are the only assets owned, used, or held for use by Seller in, or in connection with, or otherwise necessary for, the conduct of the Business as presently conducted, except for such assets the failure to own, use, or hold for use, as would not have an Asset Material Adverse Effect or a Material Adverse Effect for Buyer. 33 ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 5.1 Organization. Buyer is an Arizona corporation, duly organized, validly existing and in good standing under the laws of the state of its organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as is now being conducted. 5.2 Authority. Buyer has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which Buyer is a signatory and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Buyer of this Agreement and the Ancillary Agreements to which Buyer is a signatory and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Buyer and this Agreement and the Ancillary Agreements have been duly and validly executed and delivered by Buyer. Each of this Agreement and the Ancillary Agreements to which Buyer is a signatory, constitute the legal, valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 5.3 Consents and Approvals; No Violation. (a) Except as set forth in Schedule 5.3(a), neither the execution, delivery and performance of this Agreement by Buyer nor the execution, delivery and performance of the Ancillary Agreements by Buyer or any of its Affiliates nor the consummation by Buyer of the transactions contemplated hereby and thereby will (i) conflict with or result in any breach of any provision of the Articles of Incorporation or Bylaws (or other similar governing documents) of Buyer, or any of its Affiliates, or (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Buyer or any of its Affiliates is a party or by which any of their respective assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, have a Buyer Material Adverse Effect or (iii) subject to obtaining the Buyer Required Regulatory Approvals, constitute violations of any law, regulation, order, judgment or decree applicable to Buyer, which violations, individually or in the aggregate, would result in a Buyer Material Adverse Effect. 34 (b) Except as set forth in Schedule 5.3(b) (the filings and approvals referred to in such Schedule are collectively referred to as the "Buyer Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for Buyer's execution and delivery of this Agreement and the Ancillary Agreements or the consummation by Buyer of the transactions contemplated hereby and thereby, other than such consents, approvals, filings or notices, which, if not obtained or made, will not (i) prevent Buyer from performing its obligations under this Agreement and the Ancillary Agreements or (ii) result in a Buyer Material Adverse Effect. 5.4 Availability of Funds. Buyer acknowledges and agrees that on the Closing Date, it will have sufficient funds to pay the Purchase Price under this Agreement and the Arizona Electric Purchase Agreement (including sufficient cash to fund the equity portions thereof) and to timely perform all of its obligations under this Agreement, the Ancillary Agreements, and Arizona Electric Purchase Agreement. Tucson Electric Power Company has the ability to contribute cash as equity to a wholly-owned subsidiary which constitutes a "Utility" or "Public Utility" subject to the receipt of required approvals under Title 14, Chapter 2, Article 8 (Public Utility Holding Companies and Affiliated Interests) of the Arizona Administrative Code. As of September 30, 2002, Tucson Electric Power Company held cash in the amount of approximately $65,000,000. 5.5 SEC Filings; Financial Statements. (a) UniSource has filed, or caused to be filed, all forms, reports and documents required to be filed by UniSource with the SEC since January 1, 2001, and has heretofore delivered or made available to Seller in the form filed with the SEC, together with any amendments thereto, its (i) Annual Reports on Form 10-K for the fiscal year ended December 31, 2000 and 2001, (ii) Quarterly Reports on Form 10-Q for the fiscal quarter ended March 31 and June 30, 2002, and (iii) all other reports or registration statements filed by UniSource with the SEC since January 1, 2001 (collectively, the "UniSource SEC Reports"). The UniSource SEC Reports were prepared substantially in accordance with the requirements of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations promulgated under each of such respective acts, and did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The financial statements, including all related notes and schedules, contained in the UniSource SEC Reports (or incorporated by reference therein) fairly present the consolidated financial position of UniSource as at the respective dates thereof and the consolidated results of operations and cash flows of UniSource for the periods indicated in accordance with GAAP applied on a consistent basis throughout the periods involved (except for changes in accounting principles disclosed in the notes thereto) and subject in the case of interim financial statements to normal year-end adjustments. 5.6 Legal Proceedings. Except as set forth in Schedule 5.6, (a) there are no actions or proceedings pending or, to Buyer's knowledge threatened against Buyer or any of its Affiliates before any court or arbitrator or Governmental Authority, which, individually or in the aggregate, would result in a Buyer Material Adverse Effect, and (b) neither Buyer nor any of its Affiliates is subject to any outstanding Orders, which would, individually or in the aggregate, result in a Buyer Material Adverse Effect. 35 5.7 No Knowledge of Seller's Breach. Buyer has no knowledge of any breach by Seller of any representation or warranty of Seller or of any other condition or circumstance that would excuse Buyer from its timely performance of its obligations hereunder. Buyer shall notify promptly Seller if any such information comes to Buyer's attention prior to the Closing. 5.8 Qualified Buyer. Buyer is qualified to obtain any Permits and Environmental Permits necessary for Buyer to own and operate the Assets as of the Closing. 5.9 Inspections. Buyer is knowledgeable about the Business as engaged in by Seller and of the usual and customary practices of companies engaged in businesses similar to the Business and has had access to the Assets, the officers and employees of Seller, and the books, records and files of Seller relating to the Business and the Assets. Buyer acknowledges and agrees that it has, prior to its execution of this Agreement, (i) reviewed the Environmental Reports and (ii) had an opportunity to conduct Inspections of the Assets, including the Real Property. Subject to Sections 6.2, 6.3 and 7.1(g), and without waiving Seller's representations and warranties in Section 4.6, Buyer acknowledges that it is satisfied with such review and Inspections to date and (ii) Buyer acknowledges and agrees that past, present, and future physical characteristics and Environmental Conditions may not have been revealed by its Inspections and the investigations of the Assets contained in the Environmental Reports. In making its decision to execute this Agreement, and to purchase the Assets, Buyer has relied on and will continue to rely upon the results of its Inspections, the Environmental Reports and Seller's representations and warranties in Section 4.6. Buyer acknowledges and agrees that the representations and warranties set forth in Article IV of this Agreement constitute the sole and exclusive representations and warranties of Seller to Buyer in connection with the transactions contemplated hereby and by the Ancillary Agreements, and there are no representations, warranties, covenants, understandings or agreements, oral or written, in relation thereto between the Parties other than those incorporated herein, including Section 6.3, and therein. Except for the representations and warranties expressly set forth in Article IV of this Agreement, Buyer disclaims reliance on any representations or warranties, either express or implied, by or on behalf of Seller or its Affiliates or Representatives. Without limiting the generality of the foregoing, Buyer acknowledges and agrees that, except as provided in Section 4.6, there are no representations or warranties of Seller with respect to the Environmental Condition of the Assets, compliance with Environmental Laws and Environmental Permits of the presence or Releases of hazardous material in the fixtures, soils, groundwater, surface water or air on, under or about or emanating from any of the Assets. 5.10 WARN Act. Buyer does not intend to engage in a "Plant Closing" or "Mass Layoff" as such terms are defined in the WARN Act within sixty days of the Closing Date. 36 ARTICLE VI COVENANTS OF THE PARTIES 6.1 Conduct of Business and Operation of Assets. (a) Except as described in Schedule 6.1(a), as required by an applicable law or by any Governmental Authority, as expressly contemplated by this Agreement or to the extent Buyer otherwise consents in writing (such consent not to be unreasonably withheld), during the period from the date of this Agreement to the Closing Date, Seller shall (i) operate the Assets in the ordinary course of business consistent with its past practices and Good Utility Practices, (ii) use all Commercially Reasonable Efforts to preserve intact the Assets in all material respects, and endeavor to preserve the goodwill and relationships with customers, suppliers and others having business dealings with it, (iii) maintain insurance described in Section 4.4 (or replacements thereto providing for substantially the same coverage), and (iv) comply with all applicable laws relating to the Assets, including without limitation, all Environmental Laws, except where the failure to so comply would not result in an Asset Material Adverse Effect. Seller agrees to incur Capital Expenditures in the ordinary course in respect of (A) growth of the customer base (see, e.g., items under the heading "Growth" in the Capital Expenditures Schedule) and (B) maintenance of the Assets and replacement activities (see, e.g., items under the heading "Replacement" in the Capital Expenditures Schedule). Buyer agrees that Seller's deferral of Capital Expenditures in respect of network growth (see, e.g., items under the heading "Infrastructure" in the Capital Expenditures Schedule) shall not be deemed to be inconsistent with or to violate Good Utility Practices. (b) Without limiting the generality of Section 6.1(a) and, except as contemplated in this Agreement or as described in Schedule 6.1(a), or as required under applicable law or by any Governmental Authority, prior to the Closing Date, without the prior written consent of Buyer (such consent not to be unreasonably withheld), Seller shall not: (i) Make any material change in the levels of Inventories customarily maintained by Seller with respect to the Business, other than changes which are consistent with Good Utility Practices; (ii) Sell, lease (as lessor), encumber, pledge, transfer or otherwise dispose of, any Asset (except for Inventories used, consumed or replaced in the ordinary course of business consistent with past practices of Seller or with Good Utility Practices) other than to encumber any such Asset with Permitted Encumbrances; (iii) Modify, amend or voluntarily terminate, prior to the respective expiration date of any of the Assigned Agreements or Real Property Leases or any of the Permits or Environmental Permits with respect to such Assets in any material respect, other than (A) in the ordinary course of business, to the extent consistent with the past practices of Seller or Good Utility Practices, (B) with cause, to the extent consistent with past practices of Seller or Good Utility Practices, or (C) as may be required in connection with transferring Seller's rights or obligations thereunder to Buyer pursuant to this Agreement; 37 (iv) Except as otherwise provided herein, enter into any commitment for the purchase, sale, or transportation of fuel for the Business having a term greater than six months and not terminable on or before the Closing Date either (A) automatically, or (B) by option of Seller (or, after the Closing, by Buyer) in its sole discretion, if the aggregate payment under such commitment for fuel and all other outstanding commitments for fuel for the Business not previously approved by Buyer would exceed $1,000,000; (v) Except as otherwise provided herein, enter into any contract, agreement, commitment or arrangement for the Business that individually exceeds $250,000 or in the aggregate exceeds $1,000,000 unless it is terminable by Seller (or, after the Closing Date, by Buyer) without penalty or premium upon no more than sixty (60) days notice; (vi) Except as otherwise required by the terms of the applicable IBEW CBA or as otherwise provided in Section 6.12, (A) hire, or transfer any employees of or for the Business prior to the Closing, other than to fill vacancies in existing positions in the reasonable discretion of Seller, (B) materially increase salaries or wages of employees employed in connection with such Asset prior to the Closing, (C) take any action prior to the Closing to affect a material change in the IBEW CBA or (D) take any action prior to the Closing to materially increase the aggregate benefits payable to the employees (considered as a group) employed in connection with the Business; and (vii) Except as otherwise provided herein, enter into any written or oral contract, agreement, commitment or arrangement with respect to any of the proscribed transactions set forth in the foregoing paragraphs (i) through (vi). 6.2 Access to Information. (a) Between the date of this Agreement and the Closing Date, Seller will, at reasonable times and upon reasonable notice, provide Buyer and its Representatives: (i) reasonable access to their respective managerial personnel, to all books, records, plans, equipment, offices and other facilities and properties constituting part of the Assets; (ii) such historical financial and operating data and other information with respect to the Assets as Buyer may from time to time reasonably request, to the extent reasonably available; (iii) upon request, a copy of each material report, schedule or other document, if any, filed by Seller with respect to the Assets with the SEC, FERC, ACC, ADEQ or any other Governmental Authority; (iv) access to all Assets for Inspection by Buyer and its Representatives at reasonable times during regular business hours scheduled for such Inspections, and shall provide qualified management, engineering, operations and maintenance and other personnel to make presentations as required, to escort such Persons and to assist in all aspects of conducting the Inspections, provided that each of Buyer and Seller shall bear their own costs of participating in the Inspections; and 38 (v) access to all such other information in the possession or control of Seller as shall be reasonably necessary to enable Buyer or its Representatives to verify the accuracy of the representations and warranties of Seller contained in this Agreement; provided, however, that any such Inspections shall be conducted in such a manner as not to interfere unreasonably with the operation of the Assets. In the event that Seller's provision of information under this Section 6.2 would (A) constitute a waiver of any legal privilege, including the attorney-client privilege or work product privilege, or (B) violate any legal or contractual obligation of Seller to a third party, then Seller shall first notify Buyer with respect to the existence and general nature of the restricted information. If the restricted information relates to the Assets, the Parties shall thereupon mutually agree upon a reasonable procedure in order to provide Buyer with access to the information while protecting the legitimate interests of Seller thereto. The mutually agreed procedure may include, without limitation, a limited waiver by Seller of the relevant privilege, Buyer's agreement to maintain the information in strict confidence, limited review or inspection of the information by specified individuals, or any combination of the foregoing. Notwithstanding anything in this Section 6.2(a) to the contrary, with respect to employee records Seller will only furnish or provide such access to Transferred Employee Records and will not furnish or provide access to other employee personnel records or medical information unless required by law or specifically authorized by the affected employee. (b) The Parties shall cooperate to schedule Buyer's Inspections of the Assets so that, to the extent reasonably feasible, any interference with the operation of the Business is minimized, and Buyer may complete its Inspections of the Assets within ninety (90) working days of commencement of Inspections and within six (6) months after the execution of this Agreement. (c) Until the conclusion of Buyer's next rate case for the Business (or such longer period as may be required by applicable law), each Party and its Representatives shall have reasonable access to all of the books and records relating to the Assets and the Business (for the Seller, only to the extent relating to periods prior to the Closing Date), including all Transferred Employee Records in the possession of Buyer or Seller to the extent that such access may reasonably be required in connection with the Assumed Liabilities or the Excluded Liabilities, or other matters relating to or affected by the operation of the Assets. Such access shall be afforded by the Party in possession of any such books and records upon receipt of reasonable advance notice and during normal business hours. The Party exercising this right of access shall be solely responsible for any costs or expenses incurred by it or the holder of the information with respect to such access pursuant to this Section 6.2(c). If the Party in possession of such books and records shall desire to dispose of any books and records upon or prior to the expiration of such above-stated period (or any such longer period), such Party shall, prior to such disposition, give the other Party a reasonable opportunity, at the latter's expense, to segregate and remove such books and records as it may select. 39 (d) Buyer agrees that, prior to the Closing Date, neither it nor its Representatives will contact any vendors, suppliers, employees, or other contracting parties of Seller or its Affiliates with respect to any aspect of the Assets or the transactions contemplated hereby, without the prior written consent of Seller, which consent shall not be unreasonably withheld. 6.3 Environmental Inspections and Information. (a) [Intentionally omitted.] (b) Buyer has conducted various environmental assessment activities with respect to the Assets, including reviewing existing environmental reports, correspondence, permits and related materials regarding the Assets and certain other "Phase I" and "Phase II" activities as set forth in the ASTM protocol regarding "Phase I" and "Phase II" environmental assessments. Seller acknowledges that, between the date of this Agreement and the Closing Date, Buyer will continue to conduct Inspections with respect to environmental matters, including "Phase I" and "Phase II" environmental assessments to the extent Buyer reasonably concludes that such assessments are warranted by the Environmental Reports or the findings of Buyer's assessments prior to the date of this Agreement. Any such Inspections shall be conducted as provided in Section 6.2. (c) If any environmental inspection conducted by Buyer or Seller before or after the date of this Agreement and before the Closing Date results in the discovery of one or more Environmental Conditions that are reasonably likely to give rise to one or more Environmental Claims related to the Assets, for which Remediation would reasonably be required (an "Adverse Environmental Condition"), and if the Adverse Environmental Condition, aggregated with all other Adverse Environmental Conditions identified by Buyer or Seller prior to the Closing Date, is reasonably likely to give rise to Remediation expenses of Buyer after Closing in excess of $1,500,000 in the aggregate (the "Environmental Threshold"), then either (i) the Base Purchase Price shall be reduced, to the extent such Adverse Environmental Condition is not Remediated prior to the Closing Date, by a mutually agreed amount, which amount shall be equal to the excess of (A) the estimated out-of-pocket costs and expenses which Buyer reasonably can be expected to incur to Remediate, in accordance with Good Utility Practices, such Adverse Environmental Condition after the Closing over (B) the Environmental Threshold (the "Environmental Price Adjustment") or (ii) if the Parties are not able to mutually agree on an Environmental Price Adjustment, Seller shall reimburse Buyer for all actual out-of-pocket costs and expenses that Buyer reasonably incurs after Closing to Remediate such Adverse Environmental Condition in excess of the Environmental Threshold. Any Adverse Environmental Condition which has or is reasonably expected to have an aggregate economic impact on Buyer, taking into consideration all relevant circumstances, in excess of $25,000,000, shall be conclusively deemed to be an Asset Material Asset Effect. Notwithstanding the foregoing, any single Adverse Environmental Condition which is reasonably expected to give rise to Remediation expenses of less than $25,000 shall not be counted toward the Environmental Threshold and shall not result in an Environmental Price Adjustment. (d) Buyer either has provided or shall provide to Seller, promptly following Buyer's receipt thereof, copies of all audits, reports, studies, assessments and other information composed or compiled, or to be composed or compiled, by Buyer or Buyer's Representatives in connection with environmental assessment activities. Buyer shall treat all such information delivered to, or composed or compiled by, Buyer or Buyer's Representative as Environmental Data in accordance with the procedures of Section 6.3(e). 40 (e) All audits, reports, studies and assessments delivered to or prepared by Buyer and all other information collected and generated as a result of Buyer's environmental due diligence ("Environmental Data") will be subject to the terms and conditions of the Confidentiality Agreement, dated June 3, 2002, between Seller and Buyer, except as otherwise expressly provided in this Section 6.3(e). Neither Buyer nor its Representatives shall disclose or release any Environmental Data without the prior written consent of Seller and all such information shall be kept strictly confidential. To the extent reasonably practicable, the Environmental Data shall be prepared at the request of counsel to Buyer and, to the fullest extent permitted by law, shall be the work product of such counsel and constitute confidential attorney/client communications. The Environmental Data shall be transferred among Buyer and its Representatives in a manner that will preserve, to the extent reasonably practicable, such privileges. Buyer expressly agrees that until the Closing, it will not distribute the Environmental Data to any third party without Seller's prior written consent (such consent not to be unreasonably withheld). After the Closing, Buyer agrees that it will not distribute the Environmental Data to any third party without Seller's prior written consent, except as required by law or by express provisions of Buyer's corporate compliance program if Seller is provided written notice at least ten (10) days prior to such distribution; provided, however, that Buyer may distribute the Environmental Data to any potential purchaser of any of the Assets or an ownership interest therein (either directly or through the purchase of an ownership interest in an entity holding any of the Assets) only after first notifying the Seller. 6.4 Confidentiality. (a) Each Party shall, and shall use its reasonable best efforts to cause its Representatives to, (i) keep all Proprietary Information of any other Party confidential and not to disclose or reveal any such Proprietary Information to any person other than such Party's Representatives and (ii) not use such Proprietary Information other than in connection with the consummation of the transactions contemplated hereby. After the Closing Date and except as provided in Section 6.3(e), any Proprietary Information, to the extent related to the Assets acquired by Buyer, shall no longer be subject to the restrictions set forth herein. The obligations of the Parties under this Section 6.4(a) shall be in full force and effect for three (3) years from the date hereof and will survive the termination of this Agreement, the discharge of all other obligations owed by the Parties to each other and the Closing Date. (b) Notwithstanding the terms of Section 6.4(a) above, the Parties agree that prior to the Closing, Buyer may reveal or disclose Proprietary Information to any other Persons in connection with (i) the financing of Buyer's purchase of the Assets or any equity participation in Buyer's purchase of the Assets and (ii) obtaining insurance for the Assets; provided that such Persons agree in writing to maintain the confidentiality of the Proprietary Information in accordance with this Agreement. 41 (c) Upon the other Party's prior written approval (which shall not be unreasonably withheld), any of the Parties may provide Proprietary Information of the other Parties to the SEC, FERC, ACC, ADEQ or any other Governmental Authority with jurisdiction or any securities exchange, as may be necessary to obtain Required Regulatory Approvals or to comply generally with any relevant law or regulation. The disclosing Party will seek confidential treatment for the Proprietary Information provided to any Governmental Authority and the disclosing Party will notify the other Party as far in advance as is practicable of its intention to release to any Governmental Authority any Proprietary Information. 6.5 Public Statements. Subject to the requirements imposed by law, any Governmental Authority or securities exchange, prior to the Closing Date, no press release or other public announcement or public statement or comment in response to any inquiry relating to the transactions contemplated by this Agreement shall be issued or made by any Party without the prior approval of the other Party (which approval shall not be unreasonably withheld). The Parties agree to cooperate in preparing any such announcements. 6.6 Expenses. Except to the extent specifically provided herein, whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Party incurring such costs and expenses. Notwithstanding anything to the contrary herein, Buyer will be responsible for all filing fees under the HSR Act relating to the Assets it would acquire hereunder. 6.7 Further Assurances. (a) Subject to the terms and conditions of this Agreement, each Party shall use its Commercially Reasonable Efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the purchase, sale, transfer and delivery of the Assets and the assumption of the Assumed Liabilities pursuant to this Agreement. Such actions shall include, without limitation, each Party using its Commercially Reasonable Efforts to ensure satisfaction of the conditions precedent to its obligations hereunder, including obtaining all necessary consents, approvals, and authorizations of third parties and Governmental Authorities required to be obtained in order to consummate the transactions hereunder, and to effectuate a transfer of the Transferable Permits to Buyer. Seller shall cooperate with Buyer in its efforts to obtain all other Permits and Environmental Permits necessary for Buyer to operate the Assets. None of the Parties hereto shall, without prior written consent of the other Party, take or fail to take any action, which might reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement. (b) In the event that any Asset shall not have been assigned, conveyed, transferred and delivered hereunder to Buyer at the Closing, Seller shall, subject to Section 6.7(c), use Commercially Reasonable Efforts to assign, convey, transfer and deliver such Assets to Buyer as promptly as is practicable after the Closing. (c) (i) To the extent that Seller's rights under any Assigned Agreement or Real Property Lease may not be assigned without the consent of another Person which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same, if an attempted assignment would constitute a breach thereof or be unlawful. 42 (ii) Seller agrees that if any consent to an assignment of any Assigned Agreement or Real Property Lease shall not be obtained or if any attempted assignment would be ineffective or would impair the Buyer's rights and obligations under the Assigned Agreement or Real Property Lease in question, so that Buyer would not in effect acquire the benefit of all such rights and obligations, Seller, at the Buyer's option and to the maximum extent permitted by law and such Assigned Agreement or Real Property Lease, shall, after the Closing Date, appoint Buyer to be Seller's agent with respect to such Assigned Agreement or Real Property Lease, or, to the maximum extent permitted by law and such Assigned Agreement or Real Property Lease, enter into such reasonable arrangements with Buyer or take such other actions as are necessary to provide Buyer with the same or substantially similar rights and obligations of such Assigned Agreement or Real Property Lease as Buyer may reasonably request. Seller shall cooperate and shall use Commercially Reasonable Efforts prior to and after the Closing Date to obtain an assignment to Buyer of each Assigned Agreement or Real Property Lease. (iii) To the extent that any fuel supply contract or power purchase agreement is not assignable or the contracting party withholds consent to assignment, then Seller agrees to continue to purchase fuel and/or power pursuant to such contract(s) and to resell it to Buyer at the purchase price for the remainder of the term of such contract(s), provided that the term of such contract(s) shall not be extended. Buyer shall make payment to Seller in this circumstance on an as-incurred basis. (d) To the extent that Seller's rights under any warranty or guaranty described in Section 2.1(h) may not be assigned without the consent of another Person, which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same, if an attempted assignment would constitute a breach thereof, or be unlawful. Seller agrees that if any consent to an assignment of any such warranty or guaranty shall not be obtained, or if any attempted assignment would be ineffective or would impair Buyer's rights and obligations under the warranty or guaranty in question, so that Buyer would not in effect acquire the benefit of all such rights and obligations, Seller, at Buyer's option and expense, shall use Commercially Reasonable Efforts, to the extent permitted by law and by such warranty or guaranty, to enforce such warranty or guaranty for the benefit of Buyer so as to provide Buyer to the maximum extent possible with the benefits and obligations of such warranty or guaranty. 6.8 Consents and Approvals. (a) As promptly as advisable after the execution of this Agreement, Buyer and Seller shall each file or cause to be filed with the Federal Trade Commission and the United States Department of Justice any notifications required to be filed under the HSR Act and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby. Each Party shall file any HSR Act notifications with respect to this Agreement and with respect to the Arizona Electric Purchase Agreement simultaneously and in the same filing. Buyer and Seller shall use their respective reasonable best efforts to respond promptly to any requests for additional information made by either of such agencies, and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date after the date of filing of such notification. Buyer will pay all filing fees under the HSR Act relating to the Assets, but each of Seller and Buyer will bear its own costs of the preparation of any such filing. 43 (b) The Parties shall cooperate and use all Commercially Reasonable Efforts to promptly prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, approvals and authorizations of all Governmental Authorities necessary or advisable to consummate the transactions contemplated by this Agreement, including, without limitation, the Required Regulatory Approvals. Buyer shall have the right to review and approve in advance all the information relating to Buyer, on the one hand, and Seller shall have the right to review and approve in advance all the information relating to Seller, on the other hand, in either case, which appear in any filing made in connection with the transactions contemplated by this Agreement. Buyer and Seller agree that they will consult and cooperate with each other with respect to the obtaining of all such necessary permits, consents, approvals and authorizations of Governmental Authorities. (c) In connection with applications and other filings for the Required Regulatory Approvals, and the prosecution of any pending regulatory proceedings material to the Business Buyer and Seller shall jointly, and on an equal basis, coordinate the overall development of the positions to be taken and the regulatory actions to be requested in such applications and filings for approval of the sale by the Seller and the purchase by the Buyer of the Assets and the Business, of all other matters contemplated by this Agreement which require regulatory approval and of all other regulatory matters incidental thereto which are to be addressed in such applications and filings. Efforts to obtain any necessary approvals (including from the ACC and the FERC) shall be prosecuted by counsel mutually agreed upon by the Parties, and acting as joint counsel to the Parties, it being understood, however, that (i) all positions taken in the filings with such Governmental Authorities shall be consistent with the mutual understandings of the Parties and (ii) any SEC approvals required by Buyer shall be prosecuted by Buyer's counsel. (d) Seller and Buyer shall cooperate with each other and promptly prepare and file notifications with, and request Tax clearances from, state and local taxing authorities in any jurisdictions in which a portion of the Purchase Price may be required to be withheld or in which Buyer would otherwise be liable for any Tax liabilities of Seller pursuant to such state and local Tax law. (e) Seller shall have primary responsibility for securing the transfer of the Transferable Permits, effective as of the Closing Date. Buyer shall have the primary responsibility for securing the transfer, reissuance or procurement of the Permits and Environmental Permits (other than Transferable Permits) effective as of the Closing Date. Seller shall cooperate with Buyer's efforts in this regard and assist in any transfer or reissuance of a Permit or Environmental Permit held by Seller, or the procurement of any other Permit or Environmental Permit when so requested by Buyer. 6.9 Fees and Commissions. Each of Seller and Buyer represent and warrant to the other that, except for Morgan Stanley & Co. Incorporated, which is acting for and at the expense of Seller, and Credit Suisse First Boston Corporation, which is acting for and at the expense of Buyer, no broker, finder or other Person is entitled to any brokerage fees, commissions or finder's fees in connection with the transactions contemplated hereby by reason of any action taken by the Party making such representation. Each of Seller and Buyer will pay to the others or otherwise discharge, and will indemnify and hold the others harmless from and against, any and all claims or liabilities for all brokerage fees, commissions and finder's fees (other than the fees, commissions and finder's fees payable to the party listed above) incurred by reason of any action taken by the indemnifying party. Buyer has a preexisting business relationship with New Harbor, Incorporated and agrees to be responsible for any brokerage fees, commissions or finder's fees of New Harbor, Incorporated, if any, arising from the transactions contemplated by this Agreement. 44 6.10 Tax Matters. (a) All Transfer Taxes incurred in connection with this Agreement and the transactions contemplated hereby, including, without limitation, (A) Arizona sales tax; (B) the Arizona transfer tax, conveyance fees or conveyances of interests in real and/or personal property; and (C) Arizona sales tax and transfer tax on deeds shall be borne as follows: fifty percent (50%) by the Buyer and fifty percent (50%) by the Seller. Seller shall file, to the extent required by, or permissible under, applicable law, all necessary Tax Returns and other documentation with respect to all such Transfer Taxes, and, if required by applicable law, Buyer shall join in the execution of any such Tax Returns and other documentation. Prior to the Closing Date, to the extent applicable, Buyer shall provide to Seller appropriate certificates of Tax exemption from each applicable taxing authority. (b) With respect to Taxes to be prorated in accordance with Section 3.4 of this Agreement, Buyer shall prepare and timely file all Tax Returns required to be filed after the Closing Date with respect to the Assets, if any, and shall duly and timely pay all such Taxes shown to be due on such Tax Returns. Buyer's preparation of any such Tax Returns shall be subject to Seller's approval, which approval shall not be unreasonably withheld. Buyer shall make such Tax Returns available for Seller's review and approval no later than fifteen (15) Business Days prior to the due date for filing each such Tax Return. Upon receipt by Buyer of the tax bill, invoice or other statement regarding such real and personal property Taxes, Buyer shall calculate the pro rata share of such tax bill, invoice or other statement attributable to Buyer and Seller. Buyer shall then forward, as soon as possible, to Seller a copy of such tax bill, invoice or statement along with the supporting documentation relating to the calculation of the pro rata share to Seller and Seller will promptly pay to Buyer Seller's pro rata share of such tax bill, invoice or statement. In the event Seller first receives a tax bill, invoice or statement relating to the Assets from a taxing authority, Seller shall promptly forward such tax bill, invoice or statement to Buyer. (c) Buyer and Seller shall provide the other with such assistance as may reasonably be requested by the other Party in connection with the preparation of any Tax Return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to liability for Taxes, and each shall retain and provide the requesting Party with any records or information which may be relevant to such return, audit, examination or proceedings. Any information obtained pursuant to this Section 6.10(c) or pursuant to any other Section hereof providing for the sharing of information or review of any Tax Return or other instrument relating to Taxes shall be kept confidential by the Parties hereto. 45 (d) In the event that a dispute arises between Buyer and Seller, with respect to Taxes in Sections 6.10(a) and 6.10(b), or concerning any amount due under this Section 6.10, the Parties shall attempt in good faith to resolve such dispute and any agreed upon amount shall be paid to the appropriate Party. If such dispute is not resolved within thirty (30) days, the Parties to such dispute shall submit the dispute to the Independent Accounting Firm for resolution, which resolution shall be final, conclusive and binding on such Parties. Notwithstanding anything in this Agreement to the contrary, the fees and expenses of such Independent Accounting Firm shall be allocated between the Parties so that the non-disputing Party's share of such fees and expenses shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by the disputing Party to such auditor that is successfully disputed by the disputing Party (as finally determined by such auditor) bears to the total amount of such remaining disputed amount so submitted by the disputing Party to such auditor. Any payment required to be made as a result of the resolution of the dispute by the Independent Accounting Firm shall be made within ten days after such resolution, together with any interest determined by the Independent Accounting Firm to be appropriate. (e) Buyer agrees that Seller may, at Seller's election prior to the Closing Date, direct that all or a portion of the Purchase Price be delivered to a "qualified intermediary" (as defined in Treasury Regulation Section 1.1031(k) - (g)(4)) as to enable Seller's relinquishment of the Assets to qualify as part of a like-kind exchange of property covered by Section 1031 of the Code. If Seller so elects, Buyer shall cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the Code (including any actions required to facilitate the use of a "qualified intermediary"), and Buyer agrees that Seller may assign all or part of its rights and delegate all or part of its obligations under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of like-kind exchange of property covered by Section 1031 of the Code. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts are not required to include an unreasonable delay in the consummation of the transactions contemplated by this Agreement. (f) Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Base Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Code. If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the Parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any Proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all Tax Returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of such Party's good faith Allocations, unless otherwise required because of a change in any applicable law. 46 6.11 Advice of Changes. Prior to the Closing, each Party will timely advise the other in writing with respect to any matter arising after execution of this Agreement which becomes known to that Party and which, if existing or occurring at the date of this Agreement, would have been required to be set forth in this Agreement, including any of the Schedules or Exhibits hereto. Any such written notice will not be deemed to have amended this Agreement, including the appropriate Schedule or Exhibit, or to have qualified any representation or warranty contained in this Agreement, or to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the development. 6.12 Seller Employees. (a) Buyer shall give Qualifying Offers of employment to all employees of Seller who are covered by the IBEW Local Union No. 387 collective bargaining agreement with Seller (the "IBEW CBA") and are employed in positions relating to the Business (collectively, "Union Employees"). Each such person who becomes employed by Buyer pursuant to this section shall be referred to herein as a "Transferred Union Employee". (b) Buyer shall give Qualifying Offers of employment to substantially all of the salaried employees of Seller who are employed in positions relating to the Business (collectively, "Non-Union Employees"). Each such person who becomes employed by Buyer pursuant to this section shall be referred to herein as a "Transferred Non-Union Employee." Buyer shall reimburse Seller for 50 percent of the aggregate Severance Cost (as defined below) relating to those Non-Union Employees whose employment is terminated by Seller prior to or as of the Closing Date. "Severance Cost" means the sum of the following costs incurred by Seller resulting from a Non-Union Employee's termination of employment with Seller: (i) all cash severance benefits payable pursuant to Seller's severance policy, (ii) the cost of outplacement services provided pursuant to Seller's severance policy, (iii) Seller's subsidized portion of COBRA Continuation Coverage provided by Seller's health plan in accordance with Seller's severance policy, (iv) the additional severance benefits payable pursuant to arrangements with the specific individuals identified in a schedule delivered to Buyer prior to the date hereof; and (v) any retention bonuses paid by Seller to Non-Union Employees who do not receive Qualifying Offers of employment and who are deemed in Seller's discretion to be critical to the ongoing operation of the Business. With respect to the Severance Cost components described in clauses (i), (ii), (iv) and (v) of the preceding sentence, Buyer shall pay such reimbursement to Seller at the later of Closing or five days after receipt of a list of such terminated Non-Union Employees and the amount of such Severance Cost components with respect to such employees. With respect to the Severance Cost component described in clause (iii), Seller shall provide Buyer during the COBRA Continuation Coverage period with a monthly schedule setting forth the cumulative amount of such cost component for the preceding month, and Buyer shall pay such reimbursement to Seller within five days after receipt of each such schedule. 47 (c) All offers of employment made by Buyer pursuant to Sections 6.12(a) and (b) shall be made in accordance with all applicable laws and regulations, and for Union Employees, in accordance with the IBEW CBA and shall remain open for a period of ten (10) working days. Any such offer which is accepted within such ten (10) working day period shall thereafter be irrevocable, except for good cause, until the earlier of the Closing Date or the termination of this Agreement pursuant to its terms. Additionally, such offers shall be contingent upon the Non-Union Employee's or Union Employee's successful completion of drug testing pursuant to Buyer's policies and in compliance with the IBEW CBA. Following acceptance of such offers, Buyer shall provide written notice thereof to Seller and Seller shall provide Buyer with access to the files and records of employees accepting such offers, to the extent permitted by contract, the IBEW CBA and/or applicable law. (d) The following shall be applicable with respect to Transferred Employees: (i) From and after the Closing Date, Transferred Employees shall accrue no additional benefits under any employee benefit plan, policy, program or arrangement of Seller or its Affiliates. (ii) For such Transferred Union Employees, Buyer shall recognize the IBEW as the exclusive collective bargaining representative and shall assume the terms and conditions of the IBEW CBA, to the extent applicable to such Transferred Union Employees, until the expiration of said agreement, and will further comply with all applicable legal obligations with respect to collective bargaining under federal labor law thereafter. (iii) As of the Closing Date, Buyer shall cause Transferred Non-Union Employees to be covered by the Buyer benefit plans listed on Schedule 6.12(d)(iii), and shall cause Transferred Union Employees to be provided with benefits that are consistent with the terms of the IBEW CBA or are otherwise acceptable to the applicable union. The commitments under this paragraph shall require the following: (A) With respect to health care plans, Buyer agrees to waive or to cause the waiver of all limitations as to pre-existing conditions and actively-at-work exclusions and waiting periods for such employees, except that Buyer may require the employee or his/her dependents who, on the Closing Date, is then in the process of satisfying any similar exclusion or waiting period under the Seller health care plans to satisfy fully the balance of the applicable time period for such exclusion or waiting period under the applicable Buyer plan. With respect to the calendar year in which the Closing Date occurs, all health care expenses incurred by any such employees and/or any eligible dependent thereof, including without limitation any alternate recipient pursuant to qualified medical child support orders, in the portion of the calendar year preceding the Closing Date that were qualified to be taken into account for purposes of satisfying any deductible or out-of-pocket limit under any Seller health care plans shall be taken into account for purposes of satisfying any deductible or out-of-pocket limit under the health care plan of Buyer for such calendar year. 48 (B) With respect to service and seniority, Buyer shall recognize each such employee's service and seniority with Seller and any affiliate of Seller for all non-pension purposes, including the determination of eligibility and extent of service or seniority-related welfare benefits such as vacation and sick pay benefits. Seller agrees to pay each such employee for all vacation benefits banked, accrued, and unused, as of the Closing Date, or otherwise according to Seller's policies and applicable law. For purposes of this Section 6.12(d)(iii)(B), Transferred Employees who have prior service with Southern Union Company, and who are identified on a schedule delivered to Buyer prior to the date hereof, shall be treated as service with Seller. (C) The Citizens Pension Plan ("Seller's Pension Plan") shall retain all liabilities and assets for pension benefits accrued by Transferred Employees through the day immediately preceding the Closing Date, and Seller shall cause all such accrued benefits to become fully vested as of the Closing Date. Seller shall, within 90 days following the Closing Date, notify Transferred Employees who are entitled to deferred vested benefits under Seller's Pension Plan of the amount of such benefits. Buyer shall take all actions necessary to cause the Buyer's qualified pension plan listed on Schedule 6.12(d)(iii) in which Transferred Employees are eligible to participate pursuant to Section 6.12(d)(iii) to provide benefits no less valuable than those provided in Seller's Pension Plan and to recognize the service that the Transferred Employees had under Seller's Pension Plan for purposes of such Transferred Employees' eligibility to participate, vesting, attainment of retirement dates, subsidized benefits, entitlement to optional forms of payment, and benefit accrual; provided, however that a Transferred Employee's benefit under Buyer's Pension Plan shall be offset by his or her accrued benefit under Seller's Pension Plan. The offset referred to in the preceding sentence shall be based on the benefit that would have been available with respect to such Transferred Employee under the terms of Seller's Pension Plan had such Seller's Pension Plan benefit commenced on the Transferred Employee's annuity starting date under Buyer's Pension Plan and been paid in the same form as the benefit paid under Buyer's Pension Plan. Notwithstanding the preceding sentence, in the event that a Transferred Employee is ineligible to commence receipt of his or her accrued benefit under Seller's Pension Plan on his or her annuity starting date under Buyer's Pension Plan or in the form elected under the Buyer's Pension Plan, the offset shall be based on the hypothetical benefit that is the actuarial equivalent (as determined using the then current actuarial assumptions of Seller's Pension Plan) of the Transferred Employee's accrued benefit under Seller's Pension Plan, such hypothetical benefit being assumed to be payable in the same form and with the same annuity starting date as the Transferred Employee's benefit under Buyer's Pension Plan. At Buyer's request, Seller shall provide Buyer with the benefit calculations applicable to a Transferred Employee under Seller's Pension Plan. 49 (D) Buyer shall assume all liabilities, obligations and responsibilities with respect to providing post-retirement health and life insurance benefits ("Post-Retirement Welfare Benefits") to (i) retirees of the Business as of the Closing Date (the "Current Retirees") and (ii) Transferred Employees who have satisfied the age and service eligibility requirements for Post-Retirement Welfare Benefits under the applicable Seller plans (the "Grandfathered Active Employees" and, together with the Current Retirees, the "Grandfathered Individuals"). The Grandfathered Individuals are listed in Schedule 6.12(d)(iii)(D). Buyer shall continue to provide to the Current Retirees Post-Retirement Welfare Benefits that are comparable to those Post-Retirement Welfare Benefits provided to such Current Retirees immediately prior to the Closing Date, under cost-sharing structures that are at least as favorable as the cost-sharing structures in effect for and available to the Current Retirees immediately prior to the Closing Date. Buyer shall provide to the Grandfathered Active Employees Post-Retirement Welfare Benefits that are comparable to those Post-Retirement Welfare Benefits provided to such Grandfathered Active Employees immediately prior to the Closing Date, commencing at the time such Grandfathered Active Employees retire. The Base Purchase Price shall be decreased by the amount by which the APBO (as hereinafter defined) exceeds two million dollars ($2,000,000). The "APBO" means the accumulated post-retirement benefit obligation (within the meaning of the Statement on Financial Accounting Standards No. 106) of the Grandfathered Individuals receiving or eligible for the Post-Retirement Welfare Benefits to the extent Buyer has committed to provide such Post-Retirement Welfare Benefits pursuant to this Section 6.12(d)(iii)(D), determined using a discount rate of 6.75% and the remaining assumptions disclosed in the January 1, 2001 Actuarial Valuation Report dated September 17, 2002, as set forth on Schedule 6.12(d)(iii)(D). (E) With respect to the Seller's 401(k) Savings Plan (the "Savings Plan"), Seller shall vest Transferred Employees in their Savings Plan account balances as of the Closing Date. Seller hereby represents to Buyer that the Savings Plan is intended to be qualified within the meaning of Section 401 of the Code. Buyer shall take all actions necessary to cause the Buyer's qualified 401(k) plan listed on Schedule 6.12(d)(iii) in which Transferred Employees are eligible to participate pursuant to Section 6.12(d)(iii) (x) to recognize the service that the Transferred Employees had in the Savings Plan for purposes of determining such Transferred Employees' eligibility to participate, vesting, attainment of retirement dates, contribution levels, and, if applicable, eligibility for optional forms of benefit payments, and (y) to accept direct-rollover transfers of Transferred Employees' account balances in the Savings Plan, including transfers of loan balances and related promissory notes, provided that such loans would not be treated as taxable distributions at any time prior to such transfer. (F) Within sixty (60) days after the Closing Date, Seller shall transfer to Buyer's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the day immediately preceding the Closing Date. As soon as practicable after the Closing Date, Seller shall provide to Buyer a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such account, and balances standing to their credit as of the day immediately preceding the Closing Date. 50 (e) With respect to severance benefits, Buyer shall provide to any Transferred Non-Union Employee who is terminated by Buyer (other than for cause) prior to the date which is one year following the Closing Date, severance benefits at the level set forth in a schedule provided to Seller prior to the date hereof. Any employee provided severance benefits under this section may be required to execute a release of claims against Seller and Buyer, in such form as Buyer shall prescribe, as a condition for the receipt of such benefits. (f) Each Transferred Non-Union Employee who is initially assigned, or assigned within twelve (12) months of the Closing Date, by Buyer to a principal place of work that requires such employee to relocate his residence will be reimbursed by Buyer for all relocation expenses in accordance with the relocation benefits plans set forth in a schedule provided to Seller prior to the date hereof. For purposes of the foregoing a required relocation of residence shall include a change in the principal place of work that is more than 30 miles farther from such employee's principal place of work immediately prior to the Closing Date and requires an average commute from his current residence of at least one hour in each direction. (g) Seller shall be responsible, with respect to the Business, for performing and discharging all requirements under the WARN Act and under applicable state and local laws and regulations for the notification of its employees of any "employment loss" within the meaning of the WARN Act which occurs on or prior to the Closing Date. (h) Buyer shall not be responsible for, but Seller shall be responsible for, extending COBRA Continuation Coverage to any employees and former employees of Seller, or to any qualified beneficiaries of such employees and former employees, who become or became entitled to COBRA Continuation Coverage on or before the Closing Date, including those for whom the Closing Date occurs during their COBRA election period. (i) Seller or its Affiliates shall pay or cause to be paid to all Transferred Employees, all compensation (including vacation pay), workers' compensation or other employment benefits to which they are entitled under the terms of the applicable compensation or Seller benefit plans or programs as of the Closing Date. Buyer shall pay to each Transferred Employee all unpaid salary or other compensation or employment benefits which have accrued to such employees following the Closing Date, at such times as provided under the terms of the applicable compensation or benefit programs. Notwithstanding the foregoing, if the Closing Date is on or after July 1 of any calendar year, Seller and Buyer shall pro-rate the obligation to pay any bonuses declared by Seller on or after the Closing Date (but prior to March 1 of the calendar year following the year in which the Closing Date occurs) that would have been payable to the Transferred Employees had the Transferred Employees remained employed by Seller or its Affiliates throughout the calendar year in which the Closing Date occurs, in accordance with the provisions of any policy, plan, practice or arrangement of Seller under which such bonus would have been paid. Buyer shall be obligated to pay that portion of each such bonus determined by multiplying the amount of such bonus by a fraction, the numerator of which is the number of days from and after the Closing Date through the end of the calendar year in which the Closing Date occurs, and the denominator of which is 365. 51 (j) Seller shall be responsible for maintaining workers' compensation coverage for all Union Employees and Non-Union Employees for claims relating to occurrences prior to the Closing Date. (k) Individuals who are otherwise Union Employees or Non-Union Employees but who on any date are not actively at work due to a leave of absence covered by the Family and Medical Leave Act (FMLA), or due to any other authorized leave of absence, including, without limitation, short-term disability, or who are on long-term disability, shall nevertheless be treated as "Union Employees" or as "Non-Union Employees", as the case may be, on such date if they are able (i) to return to work within the protected period under the FMLA or such other leave (which in any event shall not extend more than twelve (12) weeks after the Closing Date), whichever is applicable, and (ii) to perform the essential functions of their job, with or without a reasonable accommodation. (l) Buyer shall be responsible, with respect to the Business, for performing and discharging all requirements under the WARN Act and under applicable state and local laws and regulations for the notification of its employees of any "employment loss" within the meaning of the WARN Act which occurs following the Closing Date. (m) Buyer is responsible for extending and continuing to extend COBRA Continuation Coverage to all Transferred Employees, and qualified beneficiaries of such employees who become entitled to such COBRA Continuation Coverage following the Closing Date. (n) The provisions of this Section 6.12 shall not be construed as being for the benefit for any person other than the Parties hereto, and shall not be enforceable by persons other than such Parties (including, without limitations, the Transferred Employees). 6.13 Risk of Loss. (a) From the date hereof through the Closing Date, all risk of loss or damage to the assets included in the Assets shall be borne by Seller, other than loss or damage caused by the acts or negligence of Buyer or any Buyer Representative, which loss or damage shall be the responsibility of Buyer. (b) If, before the Closing Date, all or any portion of the Assets are taken by eminent domain, municipalization or condemnation or are the subject of a pending taking which has not been consummated, (such event being called, in either case, a "Taking"), then Seller shall notify Buyer promptly in writing of such Taking. (i) If such Taking relates to Assets of Seller having an aggregate net book value in excess of $50,000,000, then such Taking shall be a "Material Taking." Upon a Material Taking, Seller and Buyer shall negotiate to settle the loss, if any, resulting from such Material Taking (and such negotiation shall include, without limitation, the negotiation of a fair and equitable reduction in the Base Purchase Price to offset such loss, if any, based on consideration of all relevant circumstances). If Seller and Buyer shall fail to agree to settle the loss, if any, resulting from said Material Taking, said Material Taking shall be conclusively deemed to be an Asset Material Adverse Effect. Any Taking relating to any Assets of Seller's Santa Cruz division shall not be deemed to be a Material Taking. 52 (ii) If such Taking is not a Material Taking, then (A) Buyer may elect to, in the name of Seller, negotiate for, claim, contest and receive the portion of the award properly allocable to those Assets that are the subject of the Taking, (B) to the extent the Taking shall have been consummated prior to the Closing, Seller shall be relieved of its obligation to convey to Buyer those Assets that were the subject of the Taking, (C) at the Closing, Seller will assign to Buyer all of its rights to damages payable as a result of the Taking, and will pay to Buyer all damages previously paid to it in connection with the Taking, in each case to the extent properly allocable to those Assets that are the subject of the Taking, and (D) following the Closing, Seller will give to Buyer any further assurances of such rights and assignment with respect to the Taking as Buyer reasonably may request from time to time. (c) (i) If any casualty loss or damage to the Assets shall occur before the Closing Date, then the Base Purchase Price shall be reduced, to the extent such loss or damage is not remedied prior to the Closing Date, by an amount mutually acceptable to the Parties, which amount shall be equal to the estimated out-of-pocket costs and expenses which Buyer reasonably can be expected to incur to repair or replace, in accordance with Good Utility Practices, such lost or damaged Assets after Closing. If the actual out-of-pocket costs and expenses which Buyer reasonably incurred to repair or replace, in accordance with Good Utility Practices, such lost or damaged Assets exceeds such estimated amount, Seller shall reimburse Buyer for such excess costs. If the Parties do not agree to an adjustment to the Base Purchase Price in respect of the casualty loss, then the Closing shall be postponed for such period of time (not to exceed six (6) months), and Seller shall repair or replace the lost or damaged Assets in accordance with Good Utility Practices and Buyer or its Representatives will have the right to inspect and observe and approve, all repairs or replacements made by Seller to remedy such casualty loss. (ii) Notwithstanding anything to the contrary in Section 6.13(c)(i) above, if Seller shall have failed to remedy, cure or otherwise reverse by the Closing Date any casualty loss or damage to the Assets such that the estimated out-of-pocket costs and expenses that Buyer reasonably can be expected to incur to repair or replace such lost or damaged Assets exceeds $25,000,000, such loss or damage shall be conclusively deemed to be an Asset Material Adverse Effect. 6.14 Tax Exempt Financing (a) Seller represents that: (i) The Exempt Facilities have been financed, and refinanced, in whole or in part, with the proceeds of the issuance and sale by various governmental authorities of industrial development revenue bonds or private activity bonds the interest on which, with certain exceptions, is excluded from gross income for purposes of Federal income taxation (such bonds, as currently outstanding, the "Revenue Bonds"); and Seller is the economic obligor in respect of such Revenue Bonds; 53 (ii) The Revenue Bonds are described in Schedule 6.14(a); (iii) The basis for the exclusion of interest on the Revenue Bonds from gross income for Federal income tax purposes is the use of the Exempt Facilities for "the local furnishing of electric energy or gas" under Sections 142(a)(8) and 142(f) of the Code or, if applicable, Section 103(b)(4)(E) of the Internal Revenue Code of 1954, as amended (the "1954 Code"), and in either case the applicable Treasury Regulations (the "Regulations") thereunder; (iv) The use of the Exempt Facilities for a purpose other than a qualifying purpose indicated in subsection (iii) above could impair (A) such exclusion from gross income of the interest on the Revenue Bonds, possibly with retroactive effect, unless appropriate remedial action were taken (which could include prompt defeasance or redemption of the Revenue Bonds) and/or (B) the deductibility of payments by Seller or Buyer of interest based on the restrictions in Section 150(b) of the Code; (v) After August 20, 1996, at least the following bonds exempt from tax under Section 103 of the Code and in whole or in part described in Section 142(a)(8) of the Code have been issued with respect to facilities of Seller for the "local furnishing of electric energy or gas": The Industrial Development Authority of the County of Navajo, Industrial Development Revenue Bonds (Citizens Utilities Company Project) 1997 Series B ($12,380,000), and The Industrial Development Authority of the County of Yavapai, Industrial Development Revenue Bonds (Citizens Utilities Company Project) 1998 Series ($20,000,000); and (vi) Any breach by Buyer of its obligations under this Section 6.14 could result in the incurrence by Seller of additional costs and expenses with respect to the Revenue Bonds, including, without limitation, increased interest costs, loss of the interest deduction for tax purposes and transaction costs relating to any refinancing, redemption and/or defeasance of all or part of the Revenue Bonds (cumulatively, the "Tax Impact"). (b) Buyer agrees that Buyer will indemnify Seller for costs incurred by Seller in respect of any Tax Impact that would not have arisen but for Buyer's breach of its obligations under Section 6.14(c) (except as excused elsewhere in this Section 6.14). (c) After August 20, 1996, at least the following bonds exempt from tax under Section 103 of the Code and described in whole or in part in Section 142(a)(8) of the Code have been issued with respect to facilities of Buyer for the "local furnishing of electric energy": The Industrial Development Authority of the County of Pima, Industrial Development Revenue Bonds (Tucson Electric Power Company Project) 1997 Series A, B and C ($247,460,000), and The Industrial Development Authority of the County of Apache, Pollution Control Revenue Bonds (Tucson Electric Power Company Project) 1998 Series A, B and C ($200,000,000). So long as any Revenue Bonds remain outstanding with respect to gas Exempt Facilities in any county, Buyer agrees that it shall not use, or take any deliberate act to permit the use of, or fail to take any act within its control that would prevent the use of, the gas Exempt Facilities within that county for any purpose or in any manner other than as shall be consistent with the Exempt Facility Operating Protocols (as such Exempt Facility Operating Protocols may have been updated, amended or corrected by Seller for the purpose of their accuracy on or before the Closing Date; provided that such changes do not materially impact Buyer's operation of the Assets) delivered by Seller to Buyer on or before the date of this Agreement, unless Buyer: 54 (i) has obtained at its own expense an opinion addressed to Seller of nationally recognized bond counsel reasonably acceptable to Seller ("Bond Counsel") that such use will not impair (x) the exclusion from gross income of the interest on any issue of Revenue Bonds for Federal income tax purposes and (y) the deductibility of Seller's payments of interest based on the restrictions in Section 150(b) of the Code; or (ii) has provided written notice to Seller of any act or failure to act either (x) not later than 45 days after the effective date of such action, or (y) if any of such affected Revenue Bonds are not then eligible for optional or mandatory redemption by the terms thereof, sufficiently in advance of such act or failure to act to permit Seller to request from the IRS a private letter ruling to the effect that such action does not constitute an event that would adversely affect the exclusion of the interest on such Revenue Bonds from gross income for Federal income tax purposes, to receive a final ruling to such effect from the IRS, and to dispose of the Revenue Bonds in a manner not inconsistent with such ruling ("Sufficient Notice"). (Reference is made to Schedule 6.14(a) for a listing of the respective optional redemption dates of the Revenue Bonds.) (d) Notwithstanding any other provision of this Agreement, it is expressly understood and agreed that the provisions of Section 6.14(c) shall not prohibit Buyer from (and Buyer shall incur no liability to Seller for or in connection with Buyer) suspending the operation of the Exempt Facilities (in whole or in part) on a temporary basis, or from terminating the operation of the Exempt Facilities (in whole or in part) on a permanent basis and shutting down, retiring, abandoning and/or decommissioning the Exempt Facilities (in whole or in part); provided, however, that if the Exempt Facilities, in whole or in part, are dismantled and sold, including any sale for scrap, at any time when any Revenue Bonds remain outstanding, then the proceeds of such sale of Exempt Facilities shall within six months from the date of sale be expended to acquire replacement property to be used as described in the related Exempt Facility Operating Protocol, unless (I) Buyer has obtained at its own expense an opinion addressed to Seller of Bond Counsel that the failure to take this action will not impair (x) the exclusion from gross income of the interest on any issue of Revenue Bonds for Federal income tax purposes and (y) the deductibility of Seller's payments of interest based on the restrictions in Section 150(b) of the Code; (II) the proceeds of such sales are less than $50,000 in a calendar year; or (III) Buyer has provided Sufficient Notice of such action to Seller. (e) Buyer agrees that it shall not issue, or have issued on its behalf, any tax-exempt bonds to finance or refinance its acquisition of the Exempt Facilities, provided that it is expressly understood and agreed that this clause (e) shall not prohibit Buyer's use of tax-exempt bonds to finance or refinance any improvement to the Exempt Facilities made after the date of acquisition or to any assets other than the Exempt Facilities. 55 (f) Buyer agrees to provide prompt written notice to Seller of any condemnation of, or casualty loss with respect to, the Exempt Facilities, in whole or in substantial part, to cooperate in good faith with Seller in Seller's efforts to ascertain the consequences of any such eminent domain proceeding or casualty loss for the (A) exclusion of interest on the Revenue Bonds from gross income for Federal income tax purposes and (B) the deductibility of Seller's payments of interest based on the restrictions in Section 150(b) of the Code. (g) Seller agrees that the Revenue Bonds shall be redeemed no later than the earlier of (I) their respective stated maturity dates, and (II) their respective first optional redemption dates on or after the Closing Date. Seller also agrees that none of the Revenue Bonds shall be refunded. (h) Seller hereby represents that it has performed all duties and obligations of "Company" under the documents relating to the Revenue Bonds, that the representations and warranties under the documents relating to the Revenue Bonds remain true and correct, and that there has been no breach of any covenant or agreement by Seller under the documents relating to the Revenue Bonds. Seller hereby covenants that, until all of the Revenue Bonds have been redeemed, Seller will perform all duties and obligations of "Company" under the documents relating to the Revenue Bonds, that Seller's representations and warranties under such documents will remain true and correct and that Seller will not breach any covenant or agreement of Seller under such documents; provided that Seller's covenant in this sentence shall not extend to any such duties, obligations, representations, warrantees, covenants or agreements the necessary predicate for which is Seller's actual ownership, possession or control of the Exempt Facilities from and after the Closing Date. Seller acknowledges and agrees that although Seller from and after the Closing Date will not own, possess or control the Exempt Facilities, Seller shall remain primarily obligated under the documents relating to the Revenue Bonds and, as between itself and each issuer of the Revenue Bonds, shall remain subject to each of Seller's representations, warranties, covenants and agreements thereunder. Buyer shall have no liability under this Section 6.14 unless interest on the Revenue Bonds would be excluded from gross income for Federal income tax purposes absent an act or failure to act by Buyer in contravention of the terms of Section 6.14(c). (i) In any case where Buyer has provided notice to Seller under this Section 6.14, Buyer agrees that it will join and cooperate with Seller with respect to any request by Seller to the Internal Revenue Service to obtain a private letter ruling regarding any Tax Impacts of the act or failure to act by Buyer that prompted such notice. Seller will join and cooperate with Buyer with respect to any request by Buyer to the Internal Revenue Service to obtain a private letter ruling regarding any Tax Impacts. The Party seeking the private letter ruling shall bear all costs of the filing, legal and related out-of-pocket expenses incurred in the course of such request. (j) Seller agrees that it has sole responsibility to make any required payments of principal and interest on the Revenue Bonds and that Buyer has no responsibility to make such payments. Seller agrees that it will indemnify, protect, defend and hold harmless Buyer from and against any claim that Buyer owes any payment of principal or interest on the Revenue Bonds. Seller agrees that Buyer shall retain any payments with respect to any casualty event or any condemnation of the Exempt Facilities and that, except as Buyer has otherwise agreed under Section 6.14(c), Buyer shall not be restricted in its use of any such proceeds. 56 (k) If Buyer shall sell, exchange, transfer or otherwise dispose of the Exempt Facilities in whole or substantial part (aggregate price of $500,000 or more in a calendar year) to one or more third parties, Buyer shall cause to be included in the documentation relating to such transaction covenants and agreements on the part of such third party substantially identical to those on the part of Buyer contained in this Section 6.14. (l) The covenants and agreements on the part of Buyer and Seller contained in this Section 6.14 shall continue in effect so long as any of the Revenue Bonds shall remain outstanding. Seller shall notify Buyer promptly when there shall be no Revenue Bonds outstanding. (m) Buyer acknowledges and agrees that Seller's bond counsel may rely on Buyer's representations, warranties and covenants as hereinabove provided for the purpose of rendering legal opinions, as required by the Indentures of Trust, the Loan Agreements and the Tax Regulatory Agreements relating to the Revenue Bonds ("IDRB Documents") as a precondition to the sale by Seller of such Exempt Facilities, to the effect that the sale of such Exempt Facilities will not result in (I) the inclusion of the interest on the Revenue Bonds in the gross income of the recipient for purposes of Federal income taxation, and (II) disallowance of interest expense to Seller under Section 150(b) of the Code. Seller acknowledges and agrees that Buyer shall be an addressee of the above-described opinion letters of Seller's bond counsel or shall receive a reliance letter from Seller's bond counsel authorizing Buyer to rely on such opinion letters. (n) Nothing in this Agreement is intended to nor shall it be interpreted as (i) an assignment to, and assumption by, Buyer of any of the IDRB Documents, or (ii) as an undertaking or agreement by Buyer to assume, guarantee or pay any of Seller's loan or other payment obligations pursuant to the IDRB Documents. Other than as stated in this Section 6.14, Buyer shall have no liability in respect of the Revenue Bonds. (o) Each of Buyer and Seller shall use its Commercially Reasonable Efforts, and shall cooperate with the other Party in the other Party's efforts, to obtain all Consents, bond counsel opinions and IRS rulings as may be required under the IDRB Documents and the Code to enable Seller to defease, prepay, redeem or retain until the first possible redemption date the IDRB Indebtedness and to sell the Assets to Buyer without the result that the interest on the Revenue Bonds will be included in the gross income of the recipient for purposes of Federal income taxation; provided, however, that Buyer shall have no obligation in respect of its ownership or operation of the Exempt Facilities (including but not limited to rates imposed by Buyer in respect of utility service provided by the Exempt Facilities or by any other facilities of Buyer or affiliates of Buyer) other than to comply with the Exempt Facility Operating Protocols. 57 6.15 Seller Guarantees and Surety Instruments. Buyer shall use Commercially Reasonable Efforts to assist Seller in obtaining full and complete releases of the guarantees, letters of credit, bonds and other surety instruments listed in Schedule 6.15. In this connection, Buyer agrees to provide a guaranty, letter of credit, bond or other surety instrument at Closing to replace those listed in Schedule 6.15. 6.16 Citizens Marks. Buyer acknowledges and agrees with Seller that Seller has the absolute and exclusive proprietary right to the Citizens Marks, all rights to which and the goodwill represented thereby and pertaining thereto are being retained by Seller. Within ninety (90) days after the Closing Date, Buyer shall cease using any Citizens Mark and shall remove from the Assets any and all Citizens Marks. Thereafter, Buyer shall not use any Citizens Mark in connection with the sale of any products or services or otherwise in the conduct of the businesses. In the event that Buyer breaches this Section 6.16, Seller shall be entitled to specific performance and to injunctive relief against further violations, as well as any other remedies at law or in equity available to Seller. 6.17 Title Commitments. Prior to Closing, Seller shall cooperate with Buyer and use Commercially Reasonable Efforts to assist Buyer if Buyer desires to obtain American Land Title Association ("ALTA") title insurance commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final form, from one or more title insurance companies (collectively, the "Title Company"), committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment) to issue ALTA (or its local equivalent) form of title insurance policies in an amount acceptable to the Buyer and the Title Company insuring good, valid, indefeasible fee simple title to the Real Property in Buyer, in all cases, at Buyer's sole expense and in the respective amounts that Buyer requests prior to Closing, subject to no Encumbrances or other exceptions to title other than Permitted Encumbrances (collectively the "Title Policies"). On or prior to the Closing Date, Seller shall execute and deliver, or cause to be executed and delivered, to the Title Company, at no cost to Seller, any customary affidavits, standard gap indemnities, evidence of corporate existence and authority, and similar documents reasonably requested by the Title Company in connection with the issuance of the Title Commitments or the Title Policies; provided that such efforts and Buyer's request for Title Policies or Title Commitments shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement, except to the extent caused by or resulting from Seller's breach of this Agreement; and provided further, that nothing in this Section 6.17 shall obligate Seller to execute or deliver any document that affects, in a manner adverse to Seller, Seller's liability to Buyer as expressed herein and in the Special Warranty Deed. 6.18 Joint Use Agreement re: Easements. To the extent reasonably requested by either Party, at least sixty (60) days before Closing, Buyer and Seller (or its appropriate Affiliate) will commence good faith negotiations of a joint use agreement, to be fully executed and delivered by the Parties at Closing, regarding the shared Easements to be partially assigned to Buyer at Closing as contemplated in Schedule 2.2. Such joint use agreement will be partially assignable by Seller to any purchaser of Seller's or its Affiliate's other utility plant permitted to be located on the real property that is the subject of any such shared Easements. 6.19 [Intentionally Omitted] 58 6.20 Post-Execution Delivery of Schedules. Within one hundred eighty days (180) following the date of execution of this Agreement, Seller shall deliver to Buyer a schedule, to be identified as Schedule 6.20, which sets forth all of the following identified by Seller after reasonable investigation (i) all Permits, (ii) all material items of Tangible Personal Property (other than Inventories), (iii) quantities of Inventories recorded in Seller's books and records for the Business as of the last day of the month preceding the date of this Agreement, together with the net book values of such Inventories as of such date, (iv) all Easements held by Seller in connection with the Business, (v) all line extension agreements and similar construction arrangements, railroad crossing agreements and similar arrangements, and (vi) all Real Property Leases. Schedule 6.20 will also designate those Permits that require the consent of the respective Governmental Authority to transfer and those that purport to be non-transferable. ARTICLE VII CONDITIONS 7.1 Conditions to Obligations of Buyer. The obligation of Buyer to effect purchase of the Assets and the other transactions contemplated by this Agreement shall be subject to the fulfillment of the following conditions, or waiver thereof, by Buyer at or prior to the Closing Date: (a) The waiting period under the HSR Act applicable to the consummation of the sale of the Assets contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any Governmental Authority which prevents the consummation of the sale of the Assets contemplated herein shall have been issued and remain in effect (each Party agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted) and no statute, rule or regulation shall have been enacted by any state or federal government or Governmental Authority prohibiting the consummation of the sale of the Assets; (c) Buyer shall have received all of Buyer's Required Regulatory Approvals by Final Order, and such Required Regulatory Approvals shall not contain terms and conditions that would result in a Regulatory Material Adverse Effect for Buyer or an Asset Material Adverse Effect; (d) Seller shall have received all of Seller's Required Regulatory Approvals by Final Order, and such Required Regulatory Approvals shall not contain terms and conditions that would result in a Regulatory Material Adverse Effect for Buyer or an Asset Material Adverse Effect; (e) Seller shall have performed and complied with each of its covenants and agreements contained in this Agreement which are required to be performed and complied with by Seller on or prior to the Closing Date except where the failure to so perform or comply, when taken in the aggregate, would not have a Buyer Material Adverse Effect or an Asset Material Adverse Effect; 59 (f) The representations and warranties of Seller set forth in this Agreement shall be true and correct as of the Closing Date as though made at and as of the Closing Date, except (i) subject to Section 6.11, to the extent due to changes expressly permitted by this Agreement or otherwise in writing by Buyer, (ii) that representations and warranties made as of, or in respect of, only a specified date or period shall be true and correct as of, or in respect of, such date or period and (iii) to the extent that any failure of such representations and warranties to be true and correct as aforesaid when taken in the aggregate would not have a Buyer Material Adverse Effect or an Asset Material Adverse Effect (it being understood and agreed that the economic impact of any Adverse Environmental Condition shall not be considered in the determination of an Asset Material Adverse Effect except as otherwise provided in Section 6.3); (g) No Asset Material Adverse Effect shall have occurred and be continuing; (h) Seller shall have delivered, caused to be delivered, or be standing ready to deliver, to Buyer at the Closing, Seller's closing deliveries described in Section 3.5; (i) Buyer shall have received any consents of third parties required for the assignment to Buyer of any of the Assigned Agreements other than consents that, if not obtained, would not have an Asset Material Adverse Effect or a Buyer Material Adverse Effect, in form and substance reasonably acceptable to Buyer; and (j) Buyer shall be reasonably satisfied that the consummation of the asset purchase and sale transaction contemplated by the Asset Purchase Agreement, dated as of the date hereof, between Seller and Buyer relating to purchase by Buyer of Seller's electric utility business in the State of Arizona (the "Arizona Electric Purchase Agreement"), will occur concurrently with the Closing. 7.2 Conditions to Obligations of Seller. The obligations of Seller to effect the sale of the Assets and the other transactions contemplated by this Agreement shall be subject to the fulfillment of the following conditions, or the waiver thereof, by Seller at or prior to the Closing Date: (a) The waiting period under the HSR Act applicable to the consummation of the sale of the Assets contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any Governmental Authority which prevents the consummation of the sale of the Assets contemplated herein shall have been issued and remain in effect (each of Seller and Buyer agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted) and no statute, rule or regulation shall have been enacted by any state or federal government or Governmental Authority in the United States prohibiting the consummation of the sale of the Assets; (c) Seller shall have received all of Seller's Required Regulatory Approvals by Final Order, and such Required Regulatory Approvals shall not contain terms and conditions that would have an Asset Material Adverse Effect or a Seller Material Adverse Effect; 60 (d) Seller shall have received any consents of third parties required for the assignment to Buyer of any of the Assigned Agreements other than consents that, if not obtained, would not have a Seller Material Adverse Effect; (e) Buyer shall have performed and complied with each of its covenants and agreements contained in this Agreement which are required to be performed and complied with by Buyer on or prior to the Closing Date except where the failure to so perform or comply, when taken in the aggregate, would not have a Seller Material Adverse Effect; (f) The representations and warranties of Buyer set forth in this Agreement shall be true and correct as of the Closing Date as though made at and as of the Closing Date, except (i) subject to Section 6.11, to the extent due to changes expressly permitted by this Agreement or otherwise in writing by Seller, (ii) that representations and warranties made as of, or in respect of, only a specified date or period shall be true and correct as of, or in respect of, such date or period and (iii) to the extent that any failure of such representations and warranties to be true and correct as aforesaid when taken in the aggregate would not have a Seller Material Adverse Effect; (g) Buyer shall have assumed, as set forth in and subject to Section 6.12, all of the applicable obligations under the IBEW CBA; (h) Buyer shall have delivered, caused to be delivered or standing ready to deliver, to Seller at the Closing, Buyer's closing deliveries described in Section 3.6; (i) Seller shall be reasonably satisfied that the consummation of the Arizona Electric Purchase Agreement will occur concurrently with the Closing; and (j) Seller shall have received opinions from Seller's Bond Counsel, dated the Closing Date, substantially in the form attached hereto as Exhibit E. ARTICLE VIII INDEMNIFICATION 8.1 Indemnification of Seller by Buyer. Subject to Section 8.3, Buyer shall indemnify, defend and hold harmless Seller, its officers, directors, employees, shareholders, Affiliates and agents (each, a "Seller Indemnitee") from and against any and all Indemnifiable Losses asserted against or suffered by any Seller Indemnitee (each, a "Seller Indemnifiable Loss") in any way relating to, resulting from or arising out of or in connection with (i) any breach by Buyer of any covenant or agreement of Buyer contained in this Agreement or any failure or inaccuracy of any representation or warranty of Buyer contained in this Agreement, (ii) the Assumed Liabilities, (iii) any loss or damages resulting from or arising solely out of any Inspection of the Assets, and (iv) any Third Party Claims against a Seller Indemnitee to the extent arising out of or in connection with Buyer's ownership or operation of the Assets on or after the Closing Date. 8.2 Indemnification of Buyer by Seller. 61 (a) Subject to Section 8.3, Seller shall indemnify, defend and hold harmless Buyer, its officers, directors, employees, shareholders, Affiliates and agents (each, a "Buyer Indemnitee") from and against any and all Indemnifiable Losses asserted against or suffered by any Buyer Indemnitee (each, a "Buyer Indemnifiable Loss") in any way relating to, resulting from or arising out of or in connection with (i) any breach by Seller of any covenant or agreement of Seller contained in this Agreement or failure or inaccuracy of any representation or warranty of Seller contained in this Agreement, (ii) the Excluded Liabilities, (iii) noncompliance by Seller with any bulk sales or transfer laws as provided in Section 10.12, and (iv) any Third Party Claims against a Buyer Indemnitee arising out of or in connection with Seller's ownership or operation of the Excluded Assets on or after the Closing Date. (b) Subject to Sections 8.3(a), (e), (f) and (g) and the other provisions of this Section 8.2(b) and so long as Buyer complies with the Exempt Facilities Operating Protocols relating to an issue of outstanding Revenue Bonds, Seller agrees to indemnify, defend and hold harmless the Buyer Indemnitees from and against Buyer's Tax Losses (as defined below) upon a final decree or judgment of any federal court or a final action by the IRS (a "Final Determination") that the related Exempt Facilities are "tax-exempt bond financed property" under Section 168(g)(5) of the Code by reason of such issue of Revenue Bonds remaining outstanding from and after the Closing Date. No such decree or action shall be considered to be a Final Determination unless Seller has been given written notice and, if it is so desired and is legally allowed, has been afforded the opportunity to contest the same either directly or in the name of Buyer, and until conclusion of any appellate review, if sought. The maximum aggregate amount of Buyer's Tax Losses for which Seller shall be obligated to indemnify the Buyer Indemnitees both (i) under this Section 8.2(b) and (ii) under the corresponding Section 8.2(b) of the Arizona Electric Purchase Agreement shall be $1,500,000. "Buyer's Tax Losses" shall mean the amount equal to the present value (calculated using a discount rate of 10 percent per annum) of the difference (multiplied by the applicable combined federal and State of Arizona corporate tax rate of Buyer Indemnitee) for each affected tax year between the respective dollar amounts of (x) depreciation of the related Exempt Facilities allowed under Section 168(g) of the Code, and (y) the depreciation of such Exempt Facilities that would be allowable under Section 168 of the Code if the Exempt Facilities were not "tax-exempt bond financed property." The indemnity granted by Seller in this Section 8.2(b) shall terminate at 5:00 p.m., local time in New York, New York, on the seventh anniversary of the Closing Date, provided that such termination shall not affect Seller's obligations under this Section 8.2(b) if Buyer provided Seller with proper notice of the claim or event for which indemnification is sought prior to such termination. 8.3 Certain Limitations on Indemnification. (a) Notwithstanding anything to the contrary contained herein: (i) any Indemnitee shall use Commercially Reasonable Efforts to mitigate all losses, damages and the like relating to a claim under these indemnification provisions, including availing itself of any defenses, limitations, rights of contribution, claims against third persons and other rights at law or equity. The Indemnitee's Commercially Reasonable Efforts shall include the reasonable expenditure of money to mitigate or otherwise reduce or eliminate any loss or expenses for which indemnification would otherwise be due, and the Indemnifying Party shall reimburse the Indemnitee for the Indemnitee's reasonable expenditures in undertaking the mitigation; and 62 (ii) any Indemnifiable Loss shall be net of the dollar amount of any insurance or other proceeds actually received by the Indemnitee or any of its Affiliates with respect to the Indemnifiable Loss. Any Party seeking indemnity hereunder shall use Commercially Reasonable Efforts to seek coverage (including both costs of defense and indemnity) under applicable insurance policies with respect to any such Indemnifiable Loss. (b) Except as otherwise provided in this Section 8.3(b), the representations, warranties, covenants and agreements of the Parties set forth in this Agreement shall survive the Closing Date for a period of eighteen (18) months, and all representations, warranties, covenants and agreements of the Parties under this Agreement and the related indemnities granted in this Article VIII shall terminate at 5:00 p.m., local time in New York City, New York, on the day that is eighteen (18) months after the Closing Date. The expiration, termination or extinguishment of any covenant or agreement shall not affect the Parties' obligations under Section 8.1 or 8.2 hereof if the Indemnitee provided the Indemnifying Party with proper notice of the claim or event for which indemnification is sought prior to such expiration, termination or extinguishment. Notwithstanding the foregoing provisions of this Section 8.3(b), the representations, warranties, covenants and agreements contained in Sections 3.3(e), 6.2(c), 6.3(c), 6.3(e), 6.4(a), 6.10, 6.12, 6.14, 6.16, and in Articles VIII and X, will survive the Closing in accordance with their terms. (c) Notwithstanding anything to contrary in this Agreement, in no event shall Buyer indemnify Seller Indemnitees or Seller indemnify Buyer Indemnitees, or otherwise be liable in any way whatsoever to said Indemnitees, for any Losses otherwise subject to indemnification by the Indemnifying Party (determined after giving effect to the other provisions of this Section 8.3) until the Buyer Indemnitees or the Seller Indemnitees, as the case may be, have incurred otherwise indemnifiable Losses that in the aggregate exceed a threshold amount equal to one percent (1%) of the Purchase Price, after which Buyer or Seller, as the case may be, shall then be liable for all Losses incurred by the Seller Indemnitees or the Buyer Indemnitees, as applicable. The limitations on indemnification set forth in this Section 8.3(c) shall not apply to any losses asserted against or suffered by an Indemnitee in any way relating to, resulting from or arising out of or in connection with the failure of (i) the appropriate Party to make the payment required to be made by it in accordance with Section 3.3(d), (ii) Buyer to discharge Assumed Liabilities other than those specified in Sections 2.3(e) and 2.3(i), (iii) Seller to discharge Excluded Liabilities other than those specified in Sections 2.4(d), 2.4(g), 2.4(h), 2.4(j) and 2.4(n), (iv) Seller to make any payment to Buyer if and to the extent required by Section 3.3(e), 6.3(c), 6.10(b), 6.13(c) or 8.2(b), and (v) Buyer to make any payment to Seller if and to the extent required by Section 6.12(b). Any such losses also shall be disregarded when determining whether the threshold set forth in this Section 8.3(c) has been exceeded. (d) Notwithstanding anything to the contrary in this Agreement, in no event shall Seller indemnify the Buyer Indemnitees or Buyer indemnify Seller Indemnitees, or be otherwise liable in any way whatsoever to said Indemnitees, for any Losses otherwise subject to indemnification by the Indemnifying Party (determined after giving effect to the other provisions of this Section 8.3) that in the aggregate exceed an amount equal to fifty percent (50%) of the Purchase Price. 63 (e) Except to the extent otherwise provided in Section 3.3 (relating to adjustments to the Base Purchase Price), Section 6.3(c) (relating to post-Closing reimbursement of excess environmental Remediation costs), Section 6.10(b) (relating to post-Closing reimbursements for Taxes), Section 6.12(b) (relating to post-Closing reimbursements for Severance Costs), Section 6.13(c) (relating to post-Closing reimbursement of excess costs and expenses of repairing lost or damaged Assets), and Section 6.16 (relating to specific performance and injunctive relief with respect to Citizens Marks), the rights and remedies of Seller and Buyer under this Article VIII are exclusive and in lieu of any and all other rights and remedies which each of Seller and Buyer may have under this Agreement or otherwise for monetary relief, with respect to (i) all post-Closing claims relating to this Agreement, the events giving rise to this Agreement and the transactions provided for herein or contemplated hereby or thereby, or (ii) the Assumed Liabilities or the Excluded Liabilities, as the case may be. Notwithstanding any language contained in any Ancillary Agreement (including the Special Warranty Deed), the representations and warranties of Seller set forth in this Agreement will not be merged into any such Ancillary Agreement and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement shall control. No provision set forth in any such Ancillary Agreement shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. (f) Notwithstanding anything to the contrary contained herein, no Party (including an Indemnitee) shall be entitled to recover from any other Party (including an Indemnifying Party) for any liabilities, damages, obligations, payments, losses, costs, or expenses under this Agreement any amount in excess of the actual compensatory damages, court costs and reasonable attorney's and other advisor fees suffered by such Party. Each of Buyer and Seller waive any right to recover punitive, incidental, special, exemplary and consequential damages arising in connection with or with respect to this Agreement. The provisions of this Section 8.3(d) shall not apply to indemnification for a Third Party Claim. (g) The limitations set forth in this Section 8.3 do not apply to fraud or willful misconduct of a Party. (h) No amount shall be recovered from a Party for the breach or untruth of any of such Party's representations, warranties, covenants or agreements, or for any other matter, to the extent that the other such Party had knowledge of such breach, untruth or other matter at or prior to the Closing, nor shall the other Party be entitled to rescission with respect to any such matter. 8.4 Defense of Claims. (a) If any Indemnitee receives notice of the assertion or commencement of any Third Party Claim made or brought by any Person who is not a Party to this Agreement or any Affiliate of a Party to this Agreement with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee shall give such Indemnifying Party reasonably prompt written notice thereof, but in any event such notice shall not be given later than ten (10) calendar days after the Indemnitee's receipt of notice of such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third Party Claim at such Indemnifying Party's expense and by such Indemnifying Party's own counsel, provided that the counsel for the Indemnifying Party who shall conduct the defense of such Third Party Claim shall be reasonably satisfactory to the Indemnitee. The Indemnitee shall cooperate in good faith in such defense at such Indemnitee's own expense. If an Indemnifying Party elects not to assume or to participate in the defense of any Third Party Claim, the Indemnitee may compromise or settle such Third Party Claim over the objection of the Indemnifying Party, which settlement or compromise shall conclusively establish the loss for which the Indemnified Party may seek indemnification from the Indemnifying Party pursuant to this Agreement. 64 (b) (i) If, within ten (10) calendar days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claims, the Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in Section 8.4(a), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if the Indemnifying Party shall fail to take reasonable steps necessary to defend diligently such Third Party Claim within twenty (20) calendar days after receiving notice from the Indemnitee that the Indemnitee believes the Indemnifying Party has failed to take such steps, the Indemnitee may assume its own defense and the Indemnifying Party shall be liable for all reasonable expenses thereof. (ii) Without the prior written consent of the Indemnitee, the Indemnifying Party shall not enter into any settlement of any Third Party Claim which would lead to liability or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to the Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer within ten (10) calendar days after its receipt of such notice, the Indemnifying Party shall be relieved of its obligations to defend such Third Party Claim and the Indemnitee may contest or defend such Third Party Claim at its own expense. In such event, the maximum liability of the Indemnifying Party as to such Third Party Claim will be the amount of such settlement offer plus reasonable costs and expenses paid or incurred by Indemnitee up to the date of said notice. (c) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct Claim") shall be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event such notice shall not be given later than ten (10) calendar days after the Indemnitee becomes aware of such Direct Claim, and the Indemnifying Party shall have a period of thirty (30) calendar days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such thirty (30) calendar day period, the Indemnifying Party shall be deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its right to indemnification under this Agreement. 65 (d) If the amount of any Indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage or pursuant to any claim, recovery, settlement or payment by, from or against any other entity, the amount of such reduction (less any out-of-pocket costs incurred in connection therewith and the cost of any adjusted premium charges to the extent directly relating to the claim for such Indemnifiable Loss ("Recovery Costs"), together with interest thereon from the date of payment thereof at the publicly announced prime rate then in effect of Citibank, shall promptly be repaid by the Indemnitee to the Indemnifying Party. (e) A failure to give timely notice as provided in this Section 8.4 shall not affect the rights or obligations of any Party hereunder except if, and only to the extent that, as a result of such failure, the Party which was entitled to receive such notice was actually prejudiced as a result of such failure. ARTICLE IX TERMINATION 9.1 Termination. (a) This Agreement may be terminated at any time prior to the Closing Date by mutual written consent of Seller and Buyer. (b) This Agreement may be terminated by Seller or Buyer if (i) any federal or state court of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappeallable; (ii) any statute, rule, nonappeallable order or regulation shall have been enacted or issued by any Governmental Authority which prohibits the consummation of the Closing; or (iii) the Closing shall have not occurred on or before the day which is fifteen (15) months from the date of this Agreement, subject to such extensions (not to exceed six months) as may be required by Seller to repair or replace lost or damaged Assets in accordance with Section 6.13(c) (the "Termination Date"); provided that the right to terminate this Agreement under this Section 9.1(b)(iii), and any other Section, shall not be available to any Party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in the event giving rise to the applicable termination right. (c) Except as otherwise provided in this Agreement, this Agreement may be terminated by Buyer if any of the Buyer Required Regulatory Approvals, the receipt of which is a condition to the obligation of Buyer to consummate the Closing as set forth in Section 7.1(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied) or, if such Required Regulatory Approval is obtained, contains terms or conditions that would have a Regulatory Material Adverse Effect for Buyer (after Buyer's petition for rehearing objecting to such terms and conditions has been denied) or an Asset Material Adverse Effect, in either case that is not cured or otherwise addressed in a manner reasonably acceptable to Buyer by the Closing Date. 66 (d) Except as otherwise provided in this Agreement, this Agreement may be terminated by Seller if any of the Seller Required Regulatory Approvals, the receipt of which is a condition to the obligation of Seller to consummate the Closing as set forth in Section 7.2(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied) or, if such Required Regulatory Approval is obtained, contains terms or conditions that would have a Regulatory Material Adverse Effect for Seller (after Seller's petition for rehearing objecting to such terms and conditions has been denied), in either case that is not cured or otherwise addressed in a manner reasonably acceptable to Seller by the Closing Date. (e) This Agreement may be terminated by Buyer if there has been a violation or breach by Seller of any covenant, representation or warranty contained in this Agreement provided that such violation or breach would have an Asset Material Adverse Effect or a Buyer Material Adverse Effect that is not cured or otherwise addressed by Seller in a manner reasonably acceptable to Buyer by the Closing Date and such violation or breach has not been waived by Buyer. (f) This Agreement may be terminated by Seller, if there has been a violation or breach by Buyer of any covenant, representation or warranty contained in this Agreement provided that such violation or breach would have a Seller Material Adverse Effect, (including, without limitation, Buyer's failure to pay the Purchase Price on the Closing Date) and such violation or breach is not cured or otherwise addressed by Buyer in a manner reasonably acceptable to Seller by the Closing Date, and such violation or breach has not been waived by Seller. 9.2 Procedure and Effect of Termination. In the event of termination of this Agreement by either or both Seller and Buyer pursuant to this Article IX, written notice thereof shall forthwith be given by the terminating Party to the other Party, whereupon the liabilities of the Parties hereunder will terminate, except as otherwise expressly provided in this Agreement (including Section 9.3), and thereafter none of the Parties shall have any recourse against any other Party by reason of this Agreement. If prior to Closing either Party resorts to legal proceedings to enforce this Agreement, the prevailing Party in such proceedings shall be entitled to recover all costs incurred by such Party, including reasonable attorney's fees, in addition to any other relief to which such Party may be entitled; provided, however, and notwithstanding anything to the contrary in this Agreement, in no event shall either Party be entitled to receive any punitive, indirect or consequential damages. If a Party terminates this Agreement pursuant to this Article IX, the Arizona Electric Purchase Agreement shall be automatically terminated, without any further liability to the parties thereto (including payment of liquidated damages or termination fees pursuant to Section 9.3 of the Arizona Electric Purchase Agreement, and both Parties agree that if the Arizona Electric Purchase Agreement is terminated pursuant to Article IX of the Arizona Electric Purchase Agreement, this Agreement shall be automatically terminated, without any further liability to the parties thereto. 67 9.3 Liquidated Damages; Termination Fees. (a) Seller shall pay to Buyer $10,000,000 if (i) Buyer terminates this Agreement pursuant to Section 9.1(e) or (ii) Buyer terminates this Agreement pursuant to Section 9.1(c) due to a Regulatory Material Adverse Effect on Buyer which is due in whole or in substantial part to concern by the ACC about the condition of the Assets and which is reasonably expected to have an aggregate economic impact on Buyer, taking into consideration all relevant circumstances, in excess of $25,000,000. (b) Buyer shall pay to Seller $25,000,000 if (i) Seller terminates this Agreement pursuant to Section 9.1(f), (ii) Seller terminates this Agreement pursuant to Section 9.1(d) because the requisite Required Regulatory Approval from the ACC or the FERC has not been obtained due in whole or in substantial part to concerns about Buyer's financial qualifications or capabilities, or (iii) Buyer terminates this Agreement pursuant to Section 9.1(c), because the requisite Required Regulatory Approval from the ACC or the FERC has not been obtained, due in whole or in substantial part to concerns about Buyer's financial qualifications or capabilities, or has been obtained and contains financial terms and conditions that are unacceptable to Buyer. (c) Buyer may terminate this Agreement upon payment of a $25,000,000 termination fee upon any of the following events: (i) There shall have occurred an Asset Material Adverse Effect having or reasonably expected to have a financial or economic impact, taking into account all relevant considerations, in excess of $25,000,000; (ii) Regulatory Exceptions (after Buyer's petition for rehearing objecting to such Regulatory Exceptions has been denied) shall have been imposed against Buyer having a financial or economic impact on Buyer, taking into account all relevant considerations in excess of $25,000,000; or (iii) There shall have occurred a casualty loss to the Assets having an aggregate financial or economic impact, taking into account all relevant considerations, in excess of $25,000,000. (d) Seller may terminate this agreement upon payment of a $10,000,000 termination fee if there shall have occurred a casualty loss to the Assets having or reasonably expected to have an aggregate financial or economic impact, taking into account all relevant considerations, in excess of $25,000,000. (e) In view of the difficulty of determining the amount of damages which may result to the non-terminating Party from a termination pursuant to any of Sections 9.3(a) through 9.3(d) or pursuant to any of the Sections of this Agreement referenced in Section 9.3(a) through 9.3(d), and the failure of the terminating Party to consummate the transactions contemplated by this Agreement, Buyer and Seller have mutually agreed that each of the payments set forth in Section 9.3(a) through 9.3(d) shall be made to the non-terminating Party as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. In the event of any such termination, the Parties have agreed that each of the payments set forth in Section 9.3(a) through Section 9.3(d) shall be the non-terminating Party's sole and exclusive remedy. ACCORDINGLY, THE PARTIES HEREBY ACKNOWLEDGE THAT (1) THE EXTENT OF DAMAGES TO THE NON-TERMINATING PARTY CAUSED BY THE FAILURE OF THIS TRANSACTION TO BE CONSUMMATED WOULD BE IMPOSSIBLE OR EXTREMELY DIFFICULT TO ASCERTAIN, (2) THE AMOUNT OF THE LIQUIDATED DAMAGES PROVIDED FOR IN EACH OF SECTIONS 9.3(a) THROUGH 9.3(d) ARE FAIR AND REASONABLE ESTIMATES OF SUCH DAMAGES UNDER THE CIRCUMSTANCES AND (3) RECEIPT OF SUCH LIQUIDATED DAMAGES BY THE NON-TERMINATING PARTY DOES NOT CONSTITUTE A PENALTY. THE PARTIES HEREBY FOREVER WAIVE AND AGREE TO FOREGO TO THE FULLEST EXTENT UNDER APPLICABLE LAW ANY AND ALL RIGHTS THEY HAVE OR IN THE FUTURE MAY HAVE TO BRING ANY ACTION OR ARBITRAL PROCEEDING DISPUTING OR OTHERWISE OBJECTING TO ANY OR ALL OF THE FOREGOING PROVISIONS OF THIS SECTION 9.3. 68 (f) All payments under this Section 9.3 shall be from payor to payee by wire transfer of immediately available funds to a bank account in the United States of America designated in writing by payee not later than three (3) business days following payor's receipt of such account designation from payee. ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Amendment and Modification. This Agreement may be amended, modified or supplemented only by written agreement of the Parties. 10.2 Waiver of Compliance; Consents. Except as otherwise provided in this Agreement, any failure of any of the Parties to comply with any obligation, covenant, agreement or condition herein may be waived by the Party entitled to the benefits thereof only by a written instrument signed by the Party granting such waiver, but any such waiver of such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent failure to comply therewith. 10.3 [Intentionally Omitted] 10.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission with completed transmission acknowledgment, or mailed by overnight delivery via a nationally recognized courier or registered or certified first class mail (return receipt requested), postage prepaid, to the recipient Party at its address (or at such other address or facsimile number for a Party as shall be specified by like notice; provided; however, that notices of a change of address shall be effective only upon receipt thereof): 69 (a) If to Seller, to: Citizens Communications Company 1460 Poydras Street, Suite 1800 New Orleans, LA 70112 Attention: Kenneth L. Cohen Telephone: (504) 299-4501 Telecopier: (504) 544-5822 with a copy to: Citizens Communications Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten Telephone: (203) 614-5047 Telecopier: (203) 614-4651 and: Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telephone: (202) 939-7914 Telecopier: (202) 387-3467 (b) if to Buyer, to: Tucson Electric Power Company One South Church Avenue, Suite 100 Tucson, Arizona 85701 Attention: Vincent Nitido, Jr. Telephone: (520) 884-3670 Telecopier: (520) 884-3612 with a copy to: Thelen Reid & Priest LLP 40 West 57th Street New York, NY 10019 Attention: J. Anthony Terrell Telephone: (212) 603-2108 Attention: John T. Hood Telephone: (212) 603-2140 Telecopier: (212) 603-2001 70 10.5 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party hereto, including by operation of law, without the prior written consent of each other Party, nor is this Agreement intended to confer upon any other Person except the Parties hereto any rights, interests, obligations or remedies hereunder; provided, however, in the event of any such assignment by a Party by operation of law without the consent of the other Party, this Agreement and all the provisions hereof shall be binding upon the Person receiving such assignment by operation of law. Notwithstanding the foregoing, Buyer may (i) assign any or all of its rights and obligations hereunder to a UniSource Designee, or (ii) make a security assignment to any lender providing financing in respect of the Buyer's acquisition of the Assets. Upon receipt of notice by Seller from Buyer of any such assignment to a UniSource Designee, such assignee will be deemed to have assumed, ratified, agreed to be bound by and perform all such obligations, and all references herein to "Buyer" shall thereafter be deemed to be references to such assignee, in each case without the necessity for further act or evidence by the Parties hereto or such assignee; provided, however, that no such assignment shall relieve or discharge UniSource from any of its obligations hereunder. 10.6 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Arizona (without giving effect to conflict of law principles) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies (except to such matters of real estate law that must be governed by the law of the State of Arizona). THE PARTIES HERETO AGREE THAT VENUE IN ANY AND ALL ACTIONS AND PROCEEDINGS RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE IN THE STATE AND FEDERAL COURTS IN AND FOR PHOENIX, ARIZONA, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION FOR SUCH PURPOSE, AND THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING. SERVICE OF PROCESS MAY BE MADE IN ANY MANNER RECOGNIZED BY SUCH COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 10.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.8 Interpretation. The articles, section and schedule headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement. 10.9 Schedules and Exhibits. Except as otherwise provided in this Agreement, all Exhibits and Schedules referred to herein are intended to be and hereby are specifically made a part of this Agreement. Any matter or item disclosed on any Schedule shall not be deemed to give rise to circumstances which result in an Asset Material Adverse Effect or a Material Adverse Effect solely by reason of it being so disclosed. Any matter or item disclosed pursuant to any Schedule shall be deemed to be disclosed for all purposes under this Agreement reasonably related thereto and any matter disclosed in one Schedule will be deemed disclosed with respect to another Schedule if such disclosure is made in such a way as to make its relevance with respect to such other Schedule readily apparent. 71 10.10 Entire Agreement. This Agreement, the Ancillary Agreements and the Exhibits, Schedules, documents, certificates and instruments referred to herein or therein, embody the entire agreement and understanding of the Parties hereto in respect of the transactions contemplated by this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or therein. This Agreement and the Ancillary Agreements supersede all prior agreements and understandings between the Parties other than the Confidentiality Agreement with respect to such transactions. 10.11 U.S. Dollars. Unless otherwise stated, all dollar amounts set forth herein are United States (U.S.) dollars. 10.12 Bulk Sales Laws. Buyer acknowledges that, notwithstanding anything in this Agreement to the contrary, Seller will not comply with the provision of the bulk sales laws of any jurisdiction in connection with the transactions contemplated by this Agreement. Buyer hereby waives compliance by Seller with the provisions of the bulk sales laws of all applicable jurisdictions to the extent permitted by law. 10.13 Construction of Agreement. The terms and provisions of this Agreement represent the results of negotiations between Buyer and Seller, each of which has been represented by counsel of its own choosing, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Accordingly, the terms and provisions of this Agreement shall be interpreted and construed in accordance with their usual and customary meanings, and Buyer and Seller hereby waive the application in connection with the interpretation and construction of this Agreement of any rule of law to the effect that ambiguous or conflicting terms or provisions contained in this Agreement shall be interpreted or construed against the Party whose attorney prepared the executed draft or any earlier draft of this Agreement. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the Parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the Parties as to whether any obligation, item or matter is or is not material for purposes hereof. 10.14 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the greatest extent possible. 72 10.15 Third Party Beneficiary. No provision of this Agreement shall create any third party beneficiary rights in any employee or former employee of Seller (including any beneficiary or dependant thereof) in respect of continued employment or resumed employment, and no provision of this Agreement shall create any rights in any such Persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement. 73 IN WITNESS WHEREOF, Buyer and Seller have caused this Agreement to be signed by their respective duly authorized officers as of the date first above written. UNISOURCE ENERGY CORPORATION CITIZENS COMMUNICATIONS COMPANY By: /s/ Michael J. DeConsini By: /s/ Kenneth L. Cohen --------------------------- ------------------------- Name: Michael J. DeConsini Name: Kenneth L. Cohen -------------------------- ----------------------- Title: Senior Vice President Title: Vice President ----------------------- ---------------------- LIST OF EXHIBITS AND SCHEDULES ------------------------------ EXHIBITS Exhibit A Form of Assignment and Assumption Agreement Exhibit B Form of Bill of Sale Exhibit C Special Warranty Deed Exhibit D Form of Seller General Counsel Opinion Exhibit E Form of Seller Bond Counsel Opinion Exhibit F Form of Buyer General Counsel Opinion SCHEDULES 1.1 Seller Employees on Whose Knowledge Buyer May Rely 2.2 Excluded Assets 2.3(g) Governmental Orders 2.3(i) Assumed Actions and Proceedings 4.3(a) Seller Conflicts, Defaults and Violations 4.3(b) Seller Required Regulatory Approvals 4.4 Seller Insurance 4.5 Seller Real Property Leases 4.6 Seller Environmental Matters 4.7 Seller Labor Matters 4.8 Seller Benefit Plans 4.9 Seller Real Property 4.10 Seller Condemnation Matters 4.11(a) Certain Seller Material Agreements 4.11(b) Certain Seller Material Agreements Requiring Consent to Transfer 4.11(c) Defaults Under Certain Material Agreements 4.12 Legal Proceedings Involving Seller 4.13 Seller Permit Violations 4.14 Seller Tax Matters 4.15 Seller Intellectual Property Exceptions 4.20 Seller Financial Statements 5.3(a) Buyer Conflicts, Defaults and Regulations 5.3(b) Buyer Required Regulatory Approvals 5.6 Legal Proceedings Involving Buyer 6.1(a) Exceptions to Conduct of Business and Operation of the Assets 6.12(d)(iii) Buyer Benefit Plans 6.12(d)(iii)(D) Retirees 6.14(a) Seller Revenue Bonds 6.15 Seller Surety Instruments EX-10.14 7 azelectricassetpurchagree.txt ARIZONA ELECTRIC ASSET PURCHASE AGREEMENT ARIZONA ELECTRIC EXECUTION VERSION ================================================================================ Exhibit 10.14 ------------- ASSET PURCHASE AGREEMENT by and between CITIZENS COMMUNICATIONS COMPANY, as SELLER, and UNISOURCE ENERGY CORPORATION, as BUYER, Dated October 29, 2002 ------------------------------ Relating to Purchase by Buyer of Seller's Electric Utility Business in the State of Arizona ================================================================================
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.............................................................................................1 1.1 Definitions...................................................................................1 1.2 Certain Interpretive Matters.................................................................14 ARTICLE II PURCHASE AND SALE.....................................................................................14 2.1 Transfer of Assets...........................................................................14 2.2 Excluded Assets..............................................................................15 2.3 Assumed Liabilities..........................................................................17 2.4 Excluded Liabilities.........................................................................19 2.5 Control of Litigation........................................................................20 ARTICLE III THE CLOSING..........................................................................................21 3.1 Closing......................................................................................21 3.2 Closing Payment..............................................................................21 3.3 Adjustment to Base Purchase Price............................................................21 3.4 Prorations...................................................................................24 3.5 Deliveries by Seller.........................................................................24 3.6 Deliveries by Buyer..........................................................................26 3.7 Work in Progress.............................................................................26 ARTICLE IV REPRESENTATIONS, WARRANTIES AND DISCLAIMERS OF SELLER.................................................27 4.1 Incorporation; Qualification.................................................................27 4.2 Authority....................................................................................27 4.3 Consents and Approvals; No Violation.........................................................27 4.4 Insurance....................................................................................28 4.5 Real Property Leases.........................................................................28 4.6 Environmental Matters........................................................................28 4.7 Labor Matters................................................................................29 4.8 Benefit Plans: ERISA........................................................................29 i 4.9 Real Property................................................................................30 4.10 Condemnation.................................................................................30 4.11 Assigned Agreements..........................................................................30 4.12 Legal Proceedings............................................................................31 4.13 Permits......................................................................................31 4.14 Taxes........................................................................................31 4.15 Intellectual Property........................................................................32 4.16 Capital Expenditures.........................................................................32 4.17 Compliance With Laws.........................................................................32 4.18 Title........................................................................................32 4.19 DISCLAIMERS..................................................................................32 4.20 Financial Statements.........................................................................33 4.21 SEC Filings; Financial Statements............................................................33 4.22 Sufficiency of Assets........................................................................34 ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER................................................................34 5.1 Organization.................................................................................34 5.2 Authority....................................................................................34 5.3 Consents and Approvals; No Violation.........................................................34 5.4 Availability of Funds........................................................................35 5.5 SEC Filings; Financial Statements............................................................35 5.6 Legal Proceedings............................................................................36 5.7 No Knowledge of Seller's Breach..............................................................36 5.8 Qualified Buyer..............................................................................36 5.9 Inspections..................................................................................36 5.10 WARN Act.....................................................................................36 ARTICLE VI COVENANTS OF THE PARTIES..............................................................................37 6.1 Conduct of Business and Operation of Assets..................................................37 6.2 Access to Information........................................................................38 ii 6.3 Environmental Inspections and Information....................................................40 6.4 Confidentiality..............................................................................41 6.5 Public Statements............................................................................42 6.6 Expenses.....................................................................................42 6.7 Further Assurances...........................................................................42 6.8 Consents and Approvals.......................................................................43 6.9 Fees and Commissions.........................................................................44 6.10 Tax Matters..................................................................................45 6.11 Advice of Changes............................................................................47 6.12 Seller Employees.............................................................................47 6.13 Risk of Loss.................................................................................52 6.14 Tax Exempt Financing.........................................................................53 6.15 Seller Guarantees and Surety Instruments.....................................................58 6.16 Citizens Marks...............................................................................58 6.17 Title Commitments............................................................................58 6.18 Joint Use Agreement re: Easements............................................................58 6.19 Leases.......................................................................................59 6.20 Post-Execution Delivery of Schedules.........................................................59 ARTICLE VII CONDITIONS...........................................................................................59 7.1 Conditions to Obligations of Buyer...........................................................59 7.2 Conditions to Obligations of Seller..........................................................60 ARTICLE VIII INDEMNIFICATION.....................................................................................61 8.1 Indemnification of Seller by Buyer...........................................................61 8.2 Indemnification of Buyer by Seller...........................................................62 8.3 Certain Limitations on Indemnification.......................................................62 8.4 Defense of Claims............................................................................65 ARTICLE IX TERMINATION...........................................................................................66 9.1 Termination..................................................................................66 iii 9.2 Procedure and Effect of Termination..........................................................67 9.3 Liquidated Damages; Termination Fees.........................................................68 ARTICLE X MISCELLANEOUS PROVISIONS...............................................................................69 10.1 Amendment and Modification...................................................................69 10.2 Waiver of Compliance; Consents...............................................................69 10.3 [Intentionally Omitted]......................................................................69 10.4 Notices......................................................................................69 10.5 Assignment...................................................................................71 10.6 Governing Law................................................................................71 10.7 Counterparts.................................................................................71 10.8 Interpretation...............................................................................71 10.9 Schedules and Exhibits.......................................................................72 10.10 Entire Agreement.............................................................................72 10.11 U.S. Dollars.................................................................................72 10.12 Bulk Sales Laws..............................................................................72 10.13 Construction of Agreement....................................................................72 10.14 Severability.................................................................................72 10.15 Third Party Beneficiary......................................................................73
iv ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated October 29, 2002 (this "Agreement"), by and among Citizens Communications Company, a Delaware corporation ("Seller") and UniSource Energy Corporation, an Arizona corporation ("Buyer"). Seller and Buyer are referred to, individually, as a "Party" and, together, as the "Parties." W I T N E S S E T H ------------------- WHEREAS, Seller owns all of the Assets (as defined below); and WHEREAS, Buyer desires to purchase and assume, and Seller desires to sell and assign, the Assets, and certain associated liabilities, upon the terms and conditions hereinafter set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements hereinafter set forth, and intending to be legally bound hereby, the Parties agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Agreement, the following terms have the meanings specified in this Section 1.1. "ACC" means the Arizona Corporation Commission and any successor agency thereto. "ADEQ" means the Arizona Department of Environmental Quality and any successor agency thereto. "Advances" has the meaning set forth in Section 3.3(e). "Adverse Environmental Condition" has the meaning set forth in Section 6.3(c). "Affiliate" of any Person means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. "Agreement" means this Asset Purchase Agreement together with the Schedules and Exhibits attached hereto, as the same may be from time to time amended. "Allocation" has the meaning set forth in Section 6.10(f). "ALTA" has the meaning set forth in Section 6.17. "Ancillary Agreements" means the agreements, contracts, documents, instruments and certificates provided for in this Agreement to be entered into by one or more of the Parties or any of their Affiliates in connection with the transactions contemplated by this Agreement. "APBO" has the meaning set forth in Section 6.12(d)(iii)(D). "Approved Capital Expenditures" means the Capital Expenditures that have been expressly approved by Buyer in writing and that are identified in said writing as Approved Capital Expenditures for purposes of this Agreement. "Arizona Gas Purchase Agreement" has the meaning set forth in Section 7.1(j). "Assets" has the meaning set forth in Section 2.1. "Asset Material Adverse Effect" means any occurrence or condition, arising after the date hereof, that has or would reasonably be expected to have a material adverse effect with an aggregate economic impact, taking into account all relevant considerations, in excess of $10,000,000 (except as provided otherwise in Sections 6.3(c), 6.13(b)(i) or 6.13(c)(ii)) on the condition of the Assets, taken as a whole, or on the business, operations, financial condition or results of operations of the Business, taken as a whole, other than any such occurrence or condition (a) arising from business, economic or financial market conditions, considered generally, (b) arising from the conditions in the electric utility industry, considered generally and not specifically as to the Business, (c) which is remedied, cured or otherwise reversed (including by the payment of money or application of insurance proceeds) before the Termination Date, or (d) arising from entering into this Agreement or the announcement of the transactions contemplated by this Agreement; it being understood that the occurrences and/or conditions which could, depending on the nature and extent thereof, be deemed to result in an Asset Material Adverse Effect shall include, without limitation, (x) the terms or conditions of a Final Order with respect to any Required Regulatory Approval, considered individually or together with any other such Final Order(s) with respect to any other Required Regulatory Approval(s), other than Regulatory Exceptions, and (y) facts or circumstances relating to the Assets and/or the Business which come to the attention of Buyer between the date of this Agreement and the Closing Date, whether as a result of Buyer's Inspection of the Assets or its examination of information and data relating to the Assets and/or the Business, as contemplated by Section 6.2 or 6.3, or otherwise. "Assigned Agreements" means any contracts, agreements, software licenses and related contracts, Easements, Real Property Leases and personal property leases entered into by Seller or any of its Affiliates with respect to the ownership, operation or maintenance of the Assets or the Business, including those disclosed on Schedules 4.5 and 4.11(a) and excluding those disclosed on Schedule 2.2, including without limitation, the IBEW CBAs and the Power Service Contract. 2 "Assignment and Assumption Agreement" means the Assignment and Assumption Agreement between Seller and Buyer substantially in the form of Exhibit A attached hereto. "Assumed Liabilities" has the meaning set forth in Section 2.3. "Balance Sheet" has the meaning set forth in Section 4.20. "Base Purchase Price" has the meaning set forth in Section 3.2. "Benefit Plans" means each of Seller's deferred compensation and each bonus or other incentive compensation, stock purchase, stock option and other equity compensation plan, program, agreement or arrangement; each severance or termination pay, medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program (within the meaning of Section 3(1) of ERISA); each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); each employment, termination or severance agreement; and each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by such Party or by any ERISA Affiliate, in any case maintained for employees of Seller connected with the Business, or in which such employees participate. "Bill of Sale" means the Bill of Sale, substantially in the form of Exhibit B attached hereto, to be delivered at the Closing by Seller with respect to the Tangible Personal Property included in the Assets transferred to Buyer. "Bond Counsel" has the meaning set forth in Section 6.14(c)(i). "Business" means, collectively, (a) the electricity generation, transmission and distribution business conducted by Seller within the State of Arizona; and (b) the provision of related services and products and the engagement in related activities by Seller within the State of Arizona. "Business Day" means any day other than Saturday, Sunday and any day which is a day on which banking institutions in the States of Arizona and New York are authorized by law or other governmental action to remain closed. "Buyer" has the meaning set forth in the Preamble. "Buyer Indemnifiable Loss" has the meaning set forth in Section 8.2. "Buyer Indemnitee" has the meaning set forth in Section 8.2. "Buyer Material Adverse Effect" means a Material Adverse Effect with respect to Buyer. "Buyer Required Regulatory Approvals" means the Required Regulatory Approvals set forth in Schedule 5.3(b). 3 "CERCLA" means the federal Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as amended. "Capital Expenditures" means capital additions to or replacements of property, plants and equipment included in the Assets or otherwise relating to the Business and other expenditures or repairs on property, plants and equipment included in the Assets or otherwise relating to the Business that would be capitalized by Seller in accordance with its normal accounting policies. "Capital Expenditures Schedule" has the meaning set forth in Section 4.16. "Citizens Marks" has the meaning set forth in Section 2.2(c). "Closing" has the meaning set forth in Section 3.1. "Closing Date" means one minute after 11:59 p.m. on the date which is five (5) Business Days following the date on which the last of the conditions precedent to the Closing set forth in Article VII of this Agreement have been either satisfied or waived by the Party for whose benefit such conditions precedent exist, subject to such extensions (not to exceed six (6) months) as may be required by Seller to repair or replace lost or damaged Assets in accordance with Section 6.13(c), or such other date as the Parties may mutually agree. "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1984. "COBRA Continuation Coverage" means the requirements of Section 4980B(f) of the Code. "Code" means the Internal Revenue Code of 1986, as amended. "Commercially Reasonable Efforts" means efforts by a Party which are reasonably within the contemplation of the Parties at the time of executing this Agreement and which do not require the performing Party to expend any funds other than expenditures which are customary and reasonable in transactions of the kind and nature contemplated by this Agreement in order for the performing Party to satisfy its obligations hereunder. "Current Retirees" has the meaning set forth in Section 6.12(d)(iii)(D). "Direct Claim" has the meaning set forth in Section 8.4(c). "Easements" means all easements, rights of way, permits, licenses, prescriptive rights and other ways of necessity, and other similar real property grants, whether or not of record, relating to real property. "Encumbrances" means any mortgages, pledges, liens, security interests, conditional and installment sale agreements, activity and use limitations, conservation easements, deed restrictions, encumbrances and charges of any kind. 4 "Environmental Claim" means any and all pending and/or threatened administrative or judicial actions, suits, orders, claims, liens, notices, notices of violations, investigations, complaints, requests for information, proceedings, or other written communication, whether criminal or civil, pursuant to or relating to any applicable Environmental Law or pursuant to a common law theory, by any Person (including, but not limited to, any Governmental Authority, private person and citizens' group) based upon, alleging, asserting, or claiming any actual or potential (a) violation of, or liability under any Environmental Law, (b) violation of any Environmental Permit, or (c) liability for investigatory costs, cleanup costs, removal costs, remedial costs, response costs, natural resource damages, property damage, personal injury, fines, or penalties arising out of, based on, resulting from, or related to any Environmental Condition or any Release or threatened Release into the environment of any Regulated Substances at any location related to the Assets, including, but not limited to, any Off-Site Location to which Regulated Substances, or materials containing Regulated Substances, were sent for handling, storage, treatment, or disposal. "Environmental Condition" means the presence or Release of a Regulated Substance (other than a naturally-occurring substance) on or in environmental media, or structures on Real Property, at an Off-Site Location or other property (including the presence in surface water, groundwater, soils or subsurface strata, or air), including the subsequent migration of any such Regulated Substance, regardless of when such presence or Release occurred or is discovered. "Environmental Data" has the meaning set forth in Section 6.3(e). "Environmental Laws" means all federal, state, local, provincial, foreign and international civil and criminal laws, regulations, rules, ordinances, codes, decrees, judgments, directives, or judicial or administrative orders relating to pollution or protection of the environment, natural resources or human health and safety, including, without limitation, laws relating to Releases or threatened Releases of Regulated Substances (including, without limitation, Releases to ambient air, surface water, groundwater, land, surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport, disposal or handling of Regulated Substances. "Environmental Laws" include: (a) with respect to federal law, CERCLA, the Hazardous Materials Transportation Act (49 U.S.C.ss.ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.ss.ss. 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C.ss.ss. 1251 et seq.), the Clean Air Act (42 U.S.C.ss.ss. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. ss.ss. 2601 et seq.), the Oil Pollution Act (33 U.S.C.ss.ss. 2701 et seq.), the Emergency Planning and Community Right-to-Know Act (42 U.S.C.ss.ss. 11001 et seq.), the Occupational Safety and Health Act (29 U.S.C.ss.ss. 651 et seq.), the Safe Drinking Water Act (42 U.S.C.ss. 300f et. seq.), the Surface Mine Conservation and Reclamation Act (30 U.S.C.ss.ss. 1251-1279), and regulations adopted pursuant thereto, and counterpart state and local laws, regulations adopted pursuant thereto; and (b) with respect to Arizona law, laws comparable to such federal statutes and regulations adopted pursuant thereto. 5 "Environmental Permits" means any permits, registrations, certificates, certifications, licenses and authorizations, consents and approvals of Governmental Authorities issued under Environmental Laws held by Seller with respect to the Assets. "Environmental Price Adjustment" has the meaning set forth in Section 6.3(c). "Environmental Reports" has the meaning set forth in Section 4.6. "Environmental Threshold" has the meaning set forth in Section 6.3(c). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means a trade or business, whether or not incorporated, that together with a Party would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA. "Estimated Adjustment" has the meaning set forth in Section 3.3(b). "Estimated Closing Statement" has the meaning set forth in Section 3.3(b). "Excluded Assets" has the meaning set forth in Section 2.2. "Excluded Liabilities" has the meaning set forth in Section 2.4. "Exempt Facilities" means those facilities listed in Exhibit A to each Loan Agreement included in the IDRB Documents. "FERC" means the Federal Energy Regulatory Commission or any successor agency thereto. "Final Order" means an action by the relevant Governmental Authority that has not been reversed, stayed, enjoined, set aside, annulled or suspended and/or with respect to which any waiting period prescribed by law before the transactions contemplated hereby may be consummated has expired and the time period permitted by statute or regulation for filing any request for a stay, petition for rehearing, reconsideration or application for review of the action or for filing a court appeal has passed. "Financial Statements" has the meaning set forth in Section 4.20. "FIRPTA Affidavit" means the Foreign Investment in Real Property Tax Act Certification and Affidavit to be executed by Seller. "GAAP" means U.S. generally accepted accounting principles. "Good Utility Practices" means any practices, methods, standards, guides, or acts, as applicable, that (a) are generally accepted in the region during the relevant time period for use in the electricity generation, transmission and distribution industry, (b) are commonly used in prudent electricity generation, transmission and distribution engineering, construction, project management and operations, and (c) would be expected if the Business is to be conducted at a reasonable cost in a manner consistent with laws, rules and regulations applicable to the Business and the objectives of reliability, safety, environmental protection, economy and expediency. Good Utility Practice is intended to be acceptable practices, methods, or acts generally accepted in the region, and is not intended to be limited to the optimum practices, methods, or acts to the exclusion of all others. 6 "Governmental Authority" means any foreign, federal, state, local or other governmental, regulatory or administrative agency, court, commission, department, board, or other governmental subdivision, legislature, rulemaking board, court, tribunal, arbitrating body or other governmental authority. "Grandfathered Active Employees" has the meaning set forth in Section 6.12(d)(iii)(D). "Grandfathered Individuals" has the meaning set forth in Section 6.12(d)(iii)(D). "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "IBEW" means International Brotherhood of Electrical Workers. "IBEW CBAs" has the meaning set forth in Section 6.12(a). "IDRB Documents" has the meaning set forth in Section 6.14(m). "IDRB Indebtedness" means the indebtedness of Seller owing to the issuers of the Revenue Bonds and arising under the Loan Agreements included among the IDRB Documents. "Income Tax" means any federal, state, local or foreign Tax (a) based upon, measured by or calculated with respect to gross or net income, profits or receipts (including, without limitation, capital gains Taxes and minimum Taxes) or (b) based upon, measured by or calculated with respect to multiple bases (including, without limitation, corporate franchise taxes) if one or more of the bases on which such Tax may be based, measured by or calculated with respect to, is described in clause (a), in each case together with any interest, penalties, or additions to such Tax. "Indemnifiable Loss" means any claim, demand, suit, loss, liability, damage, obligation, payment, cost or expense (including, without limitation, the cost and expense of any action, suit, proceeding, assessment, judgment, settlement or compromise relating thereto and reasonable attorneys' fees and reasonable disbursements in connection therewith). "Indemnifying Party" means a Party obligated to provide indemnification under this Agreement. 7 "Indemnitee" means a Person entitled to receive indemnification under this Agreement. "Independent Accounting Firm" means such independent accounting firm of national reputation as is mutually appointed by the Buyer and Seller. "Inspection" means all tests, reviews, examinations, inspections, investigations, interviews, verifications, samplings and similar activities conducted by Buyer or its Representatives prior to the Closing with respect to the Assets, including "Phase I" and/or "Phase II" environmental assessments. "Intellectual Property" means patents and patent rights, trademarks and trademark rights, inventions, copyrights and copyright rights, and all pending applications for registrations of patents, trademarks, and copyrights. "Inventories" means materials, spare parts, consumable supplies, fuel supplies and chemical inventories relating to the Assets or the operation of the Business. "Knowledge" means the actual knowledge, as of the date hereof or, with respect to any certificate delivered pursuant to this Agreement, the date of delivery of such certificate, of the Persons identified on Schedule 1.1 and successors to each such Person's employment responsibilities. "Material Adverse Effect" means any occurrence or condition, arising after the date hereof, that has or would reasonably be expected to have a material adverse effect with an aggregate an adverse economic impact, taking into account all relevant considerations, in excess of $10,000,000 on the business, operations, properties, financial condition or results of operations of any Party (including its Affiliates, taken as a whole) or on the ability of either Party to perform in all material respects its obligations under this Agreement and the Ancillary Agreements. "Material Taking" has the meaning set forth in Section 6.13(b). "Non-Union Employees" has the meaning set forth in Section 6.12(b). "Off-Site Location" means any real property other than the Real Property. "Order" means any award, decision, injunction, judgment, order, consent order, writ, decree, consent decree, ruling, subpoena, or verdict entered, issued, made or rendered by any court, administrative agency, other Governmental Authority, or by an arbitrator, each of which possesses competent jurisdiction. "Party" has the meaning set forth in the Recitals. "Permitted Encumbrances" means any of the following: 8 (a) mechanics', carriers', workers' and other similar liens arising in the ordinary course of business for charges that are not delinquent or that are being contested in good faith and have not proceeded to judgment; (b) liens for current Taxes and assessments not yet due and payable; (c) with respect to the Real Property, usual and customary nonmonetary Encumbrances, covenants, Easements, restrictions and other title matters (whether or not recorded) that do not and are not expected to materially interfere with the operation of that portion of the Business conducted on such Real Property or the Business as a whole; (d) Encumbrances securing the payment or performance of any of the Assumed Liabilities; (e) all applicable zoning ordinances and land use restrictions in effect as of the date of this Agreement and all changes to or new adoptions of zoning ordinances and land use restrictions prior to the Closing Date that do not and are not expected to materially interfere with the operation of that portion of the Business conducted on such Real Property or the Business as a whole; (f) with respect to any Asset which consists of a leasehold or other possessory interests in real property, all Encumbrances, covenants, Easements, restrictions and other title matters (whether or not recorded) to which the underlying fee estate in such real property is subject that do not or will not interfere materially with the operation of that portion of the Business currently conducted on such property or the Business as a whole; and (g) any other Encumbrances, obligations, defects or irregularities of any kind whatsoever affecting title to the Assets that will be terminated, released or waived on or before the Closing Date or that are not, individually or in the aggregate, reasonably likely to materially interfere with the present use of the Assets or to materially increase the cost of conducting the Business. "Permits" means any permits, licenses, registrations, franchises and other authorizations, consents and approvals of Governmental Authorities held by Seller with respect to the Assets or the Business. "Person" means any individual, partnership, limited liability company, joint venture, corporation, trust, unincorporated organization, or governmental entity or any department or agency thereof. "Post-Closing Adjustment" has the meaning set forth in Section 3.3(d). "Post-Retirement Welfare Benefits" has the meaning set forth in Section 6.12(d)(iii)(D). 9 "Power Service Agreement" means that certain Power Service Agreement, dated as of June 1, 2001, between Pinnacle West Capital Corporation and Seller. "Proposed Post-Closing Adjustment" has the meaning set forth in Section 3.3(c). "Proprietary Information" of a Party means all information about the Party or its Affiliates, including their respective properties or operations, furnished to the other Party or its Representatives by the Party or its Representatives, before or after the date hereof, regardless of the manner or medium in which it is furnished and all analyses, reports, tests or other information created or prepared by, or on behalf of, a Party during the performance of "Phase I" or "Phase II" environmental site assessments. Proprietary Information does not include information that: (a) is or becomes generally available to the public, other than as a result of a disclosure by the other Party or its Representatives; (b) was available to the other Party on a nonconfidential basis prior to its disclosure by the Party or its Representatives; (c) becomes available to the other Party on a nonconfidential basis from a person, other than the Party or its Representatives, who is not otherwise bound by a confidentiality agreement with the Party or its Representatives, or is not otherwise under any obligation to the Party or any of its Representatives not to transmit the information to the other Party or its Representatives; or (d) is independently developed by the other Party. "Purchase Price" has the meaning set forth in Section 3.2. "Qualifying Offer" means an offer to a Transferred Non-Union Employee of the same or similar job that is at least 100% of such employee's current total cash compensation at the time the offer was made (consisting of base salary and target incentive bonus), and does not require, as a condition of acceptance, a relocation of residence as described in Section 6.12(f). "Real Property" has the meaning set forth in Section 2.1(a). Any reference to the Real Property includes, by definition, Seller's right, title and interest in and to the surface and subsurface elements, including the soils and groundwater present at the Real Property, and any reference to items "at the Real Property" includes all items "at, on, in, upon, over, across, under and within" the Real Property. "Real Property Leases" has the meaning set forth in Section 4.5. "Recovery Costs" has the meaning set forth in Section 8.4(d). "Regulated Substances" means (a) any petrochemical or petroleum products, oil or coal ash, radioactive materials, radon gas, asbestos in any form that is or could become friable, urea formaldehyde foam insulation and dielectric fluid containing polychlorinated biphenyls; (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "hazardous constituents," "restricted hazardous materials," "extremely hazardous substances," "toxic substances," "contaminants," "pollutants," "toxic pollutants" or words of similar meaning and regulatory effect under any applicable Environmental Law; and (c) any other chemical, material or substance, exposure to which or whose discharge, emission, disposal or Release is prohibited, limited or regulated by any applicable Environmental Law. 10 "Regulations" has the meaning set forth in Section 6.14(a)(iii). "Regulatory Exceptions" means any of the following: (a) a refusal by the ACC or the FERC to authorize an increase in base rates for the Business, an imposition by the ACC or the FERC of a rate moratorium for the Business, or a requirement by the ACC or the FERC of the filing of a rate case for the Business; (b) an imposition by the ACC requiring Buyer to provide service, or to improve service, to Persons located in any authorized service area of the Business, provided such requirement has a corresponding rate recovery opportunity; (c) an imposition by the ACC of performance, safety or reliability standards for Buyer's operation of the Business that are substantially equivalent to those standards being met by Buyer or its Affiliates in their other utility operations in Arizona, provided (i) Buyer is given a reasonable period of time after Closing to meet such imposed standards and (ii) such imposed standards have a corresponding rate recovery opportunity; and (d) terms and conditions imposed by any Governmental Authority that is required to issue a Required Regulatory Approval that are either (i) usual and customary; (ii) applicable to the Business or to Buyer or any Affiliate of Buyer as of the date of this Agreement; or (iii) contemplated by this Agreement, including the understandings of the Parties referenced in Section 6.8(c)(i). "Regulatory Material Adverse Effect" means, with respect to any Party, a Material Adverse Effect resulting from the effect on such Party of the terms and conditions of a Final Order with respect to any Required Regulatory Approval other than Regulatory Exceptions. "Release" means release, spill, leak, discharge, dispose of, pump, pour, emit, empty, inject, leach, dump or allow to escape into or through the environment. "Remediation" means any action taken in the investigation, removal, confinement, cleanup, treatment, or monitoring of a Release or an Environmental Condition on Real Property or Off-Site Location, including, without limitation, (a) obtaining any Permits or Environmental Permits required for such remedial activities, and (b) implementation of any engineering controls and institutional controls. The term "Remediation" includes, without limitation, any action which constitutes "removal action" or "remedial action" as defined by Section 101 of CERCLA, Section 6901(23) and (24); or any action which constitutes "remediation" or "remedial action" as defined by Arizona Revised Statutes Sections 49-151(4), 49-171(8) and 49-282.02(C)(2). 11 "Representatives" of a Party means such Party's authorized representatives, including without limitation, its professional and financial advisors. "Required Regulatory Approvals" means with respect to a Party, any consent or approval of, filing with, or notice to, any Governmental Authority that is necessary for the execution and delivery of this Agreement and the Ancillary Agreements by such Party or the consummation thereby of the transactions contemplated hereby, other than such consents, approvals, filings or notices (i) which are not required in the ordinary course to be obtained or made prior to the Closing and the transfer of the Assets, (ii) which, if not obtained or made, will not prevent such Party from performing its material obligations hereunder, or (iii) that relate to a Permit that is not material to the Business, taken as a whole. "Revenue Bonds" has the meaning set forth in Section 6.14(a)(i). "Savings Plan" has the meaning set forth in Section 6.12(d)(iii)(E). "SEC" means the Securities and Exchange Commission and any successor agency thereto. "Seller" has the meaning set forth in the Preamble. "Seller Indemnifiable Loss" has the meaning set forth in Section 8.1. "Seller Indemnitee" has the meaning set forth in Section 8.1. "Seller Material Adverse Effect" means a Material Adverse Effect with respect to Seller. "Seller Required Regulatory Approvals" means the Required Regulatory Approvals set forth in Schedule 4.3(b). "Seller SEC Reports" has the meaning set forth in Section 4.21. "Seller's Pension Plan" has the meaning set forth in Section 6.12(d)(iii)(C). "Severance Cost" has the meaning set forth in Section 6.12(b). "Special Warranty Deed" means a special warranty deed substantially in the form of Exhibit C attached hereto. "Subsidiary" when used in reference to any Person means any entity of which outstanding securities having ordinary voting power to elect a majority of the Board of Directors or other Persons performing similar functions of such entity are owned directly or indirectly by such Person. "Sufficient Notice" has the meaning set forth in Section 6.14(c)(ii). "Taking" has the meaning set forth in Section 6.13(b). 12 "Tangible Personal Property" has the meaning set forth in Section 2.1(c). "Taxes" means all taxes, charges, fees, levies, penalties or other assessments imposed by any federal, state, local or foreign taxing authority, including, but not limited to, income, excise, property, sales, transfer, franchise, payroll, withholding, social security, gross receipts, license, stamp, occupation, employment or other taxes, including any interest, penalties or additions attributable thereto. "Tax Impact" has the meaning set forth in Section 6.14(a)(vi). "Tax Return" means any return, report, information return, declaration, claim for refund or other document (including any schedule or related or supporting information) required to be supplied to any taxing authority with respect to Taxes including amendments thereto. "Termination Date" has the meaning set forth in Section 9.1(b). "Terminated Power Service Agreement" means that certain Power Service Agreement, dated as of January 5, 1995, between Arizona Public Service Company and Seller, as heretofore terminated. "Third Party Claim" means any claim, action, or proceeding made or brought by any Person who is not (a) a Party to this Agreement, or (b) an Affiliate of a Party to this Agreement. "Title Commitment" has the meaning set forth in Section 6.17. "Title Company" has the meaning set forth in Section 6.17. "Title Policies" has the meaning set forth in Section 6.17. "Transfer Taxes" means any real property transfer or gains tax, sales tax, conveyance fee, use tax, stamp tax, stock transfer tax or other similar tax, including any related penalties, interest and additions to tax. "Transferable Permits" means those Permits and Environmental Permits with respect to the Assets or the Business which may be transferred to Buyer with or without a filing with, notice to, consent of or approval of any Governmental Authority, and excluding those Permits and Environmental Permits with respect to the Assets or the Business which are non-transferable to Buyer and with respect to which Buyer must apply for and obtain replacements. "Transferred Employees" means Transferred Non-Union Employees and Transferred Union Employees. "Transferred Employee Records" means records related to Seller's employees who become employees of Buyer but only to the extent such records pertain to (A) skill and development training and biographies, (B) seniority histories, (C) salary and benefit information, (D) Occupational, Safety and Health Administration reports, or (E) subject to the limitation of the Health Insurance Portability and Accountability Act of 1996 and any applicable state privacy legislation and regulations, active medical restriction forms. 13 "Transferred Non-Union Employees" has the meaning set forth in Section 6.12(b). "Transferred Union Employees" has the meaning set forth in Section 6.12(a). "Union Employees" has the meaning set forth in Section 6.12(a). "UniSource" means UniSource Energy Corporation, an Arizona corporation and a direct or indirect parent corporation of Buyer. "UniSource Designee" means a wholly-owned subsidiary, direct or indirect, of either UniSource or Tucson Electric Power Company, an Arizona corporation named in the approvals by the ACC and the FERC as an entity that may acquire the Assets. "UniSource SEC Reports" has the meaning set forth in Section 5.5. "WARN Act" means the Federal Worker Adjustment Retraining and Notification Act of 1988, as amended. "1954 Code" has the meaning set forth in Section 6.14(a)(iii). 1.2 Certain Interpretive Matters. In this Agreement, unless the context otherwise requires, the singular shall include the plural, the masculine shall include the feminine and neuter, and vice versa. The term "includes" or "including" shall mean "including without limitation." The terms "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement. References to a Section, Article, Exhibit or Schedule shall mean a Section, Article, Exhibit or Schedule of this Agreement, and reference to a given agreement or instrument shall be a reference to that agreement or instrument as modified, amended, supplemented or restated through the date as of which such reference is made. ARTICLE II PURCHASE AND SALE 2.1 Transfer of Assets. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, at the Closing, Seller will sell, assign, convey, transfer and deliver to Buyer or the UniSource Designee, and Buyer or such UniSource Designee will purchase, assume and acquire from Seller, free and clear of all Encumbrances (except for Permitted Encumbrances), all of Seller's right, title and interest in and to all the assets (except for Excluded Assets), real, personal or mixed, tangible, or intangible, used or held for use by Seller in or in connection with, or otherwise necessary for, the conduct of the Business, including, without limitation, those assets described below, each as in existence on the Closing Date (such assets, collectively, the "Assets"): 14 (a) those certain parcels of real property owned by Seller together with all buildings, facilities, and other improvements thereon and all appurtenances thereto as described in Schedule 4.9 (the "Real Property"); (b) all accounts receivable and earned but unbilled revenues attributable to the Business, and all Inventories; (c) all machinery (mobile or otherwise), equipment (including communications equipment and computers), vehicles, tools, furniture and furnishings and other personal property related to the Business, owned by Seller and located on the Real Property on the Closing Date, together with all the personal property of Seller used principally in the operation of the Business that are in the possession of Seller and whether or not located on the Real Property (collectively, the "Tangible Personal Property"); (d) subject to the provisions of Section 6.7(c), all Assigned Agreements, including the Power Service Agreement and any and all rights, claims or causes of action against Arizona Public Service Company or any other Person that Seller may have under the Terminated Power Service Agreement; (e) subject to the provisions of Section 6.7(c), all Real Property Leases; (f) all Transferable Permits; (g) all books, customer lists and customer information databases, meter reading and service data, accounts payable and receivable data, operating and maintenance records, warranty information, operating, safety and maintenance manuals, engineering design plans, blueprints and as-built plans, specifications, procedures and similar items of Seller relating specifically to the Assets and necessary for the operation of the Assets and the Business (subject to the right of Seller to retain copies of same for its use) other than such items which are proprietary to third parties and accounting records; (h) all unexpired, transferable warranties and guarantees from third parties with respect to any Asset as of the Closing Date; (i) Seller prepaid expenses; and (j) petty cash held locally for the benefit of the Business. 2.2 Excluded Assets. Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement will constitute a transfer to Buyer or a UniSource Designee of, or be construed as conferring on Buyer or a UniSource Designee, and neither Buyer nor said UniSource Designee is acquiring, any right, title or interest in or to the following specific assets which are associated with the Assets or the Business, but which are hereby specifically excluded from the sale and the definition of Assets herein (the "Excluded Assets"): 15 (a) assets that Seller uses in both the Business and Seller's gas or communications businesses, the material items of which are identified in Schedule 2.2 hereto and any contracts or agreements regarding the procurement of goods or services by Seller for use in its gas or communications businesses; (b) cash and cash equivalents (including checks) in transit, in hand or in bank accounts, other than petty cash held locally for the benefit of the Business; (c) the rights of Seller and its Affiliates to the names "Citizens Communications Company", "Citizens Utilities", "CZN" or "Citizens" or any other trade names, trademarks, service marks, corporate names, corporate symbols or logos or any part, derivative or combination thereof (the "Citizens Marks"); (d) the stock record and minute books of Seller, duplicate copies of all books and records transferred to Buyer, all records prepared in connection with the sale of the Business (including bids received from third parties and analyses relating to the Business and all original documents relating to the Revenue Bonds (provided that copies of such documents relating to the Revenue Bonds have been furnished to Buyer); (e) assets disposed of by Seller after the date of this Agreement to the extent such dispositions are not prohibited by this Agreement; (f) except in the case of causes of action against third parties (including indemnification and contribution) (i) relating to an Environmental Condition or Regulated Substance or arising under Environmental Laws and not relating to a Retained Liability or (ii) relating to the Terminated Power Service Agreement, the rights of Seller in and to any causes of action against third parties (including indemnification and contribution) relating to any Real Property or Tangible Personal Property, Permits, Environmental Permits, Taxes, Real Property Leases or the Assigned Agreements, if any, and not relating to the Assumed Liabilities, including any claims for refunds, prepayments, offsets, recoupment, insurance proceeds (subject to Section 6.13(c)), condemnation awards (subject to Section 6.13(b)), judgments and the like, whether received as payment or credit against future liabilities, relating specifically to the Real Property or any improvements thereon and relating to any period prior to the Closing Date; (g) all personnel records of Seller and its Affiliates relating to the Transferred Employees other than Transferred Employee Records or other records, the disclosure of which is required by law or legal or regulatory process or subpoena; (h) any and all of Seller's rights and interests in any contract that is not an Assigned Agreement or the Terminated Power Service Agreement, or that is an intercompany transaction between Seller and an Affiliate of Seller and all accounts owing by and among Seller and any of its Affiliates, whether or not any such intercompany transaction or account relates to the provision of goods and services, payment arrangements, intercompany charges or balances, or the like; (i) except to the extent set forth in Section 3.4, rights to refunds of Taxes payable with respect to the Business, the Assets, or any other assets, properties or operations of Seller or any Affiliate thereof; 16 (j) all deferred tax assets or collectibles; (k) any insurance policy, bond, letter of credit or similar item, and any cash surrender value in regard thereto; (l) except as otherwise set forth in Section 6.12, assets attributable to or related to a Benefit Plan; and (m) all other assets listed in Schedule 2.2 hereto. 2.3 Assumed Liabilities. On the Closing Date, Buyer or the UniSource Designee acquiring the Assets shall deliver to Seller the Assignment and Assumption Agreement pursuant to which Buyer or such UniSource Designee shall assume and agree to discharge when due, without recourse to Seller, in accordance with the respective terms and subject to the respective conditions thereof, all of the Assumed Liabilities. All of the following liabilities and obligations of Seller or Buyer which relate to, or arise by virtue of Seller's or Buyer's ownership of the Assets or operation of the Business (other than Excluded Liabilities) are referred to collectively as the "Assumed Liabilities": (a) all liabilities and obligations of Seller or Buyer arising on or after the Closing Date under the Assigned Agreements, the Real Property Leases, and the Transferable Permits in accordance with the terms thereof, including, without limitation, the Assigned Agreements entered into by Seller (i) prior to the date hereof and (ii) after the date hereof consistent with the terms of this Agreement, except in each case to the extent such liabilities and obligations, but for a breach or default by Seller, would have been paid, performed or otherwise discharged on or prior to the Closing Date and are not otherwise included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3 or to the extent the same arise out of any such breach or default or out of any event which after the giving of notice or passage of time or both would constitute a default by Seller; (b) all liabilities and obligations of Seller for accounts payable to the extent included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3; (c) all liabilities and obligations associated with the Assets or the Business in respect of Taxes for which Buyer is liable pursuant to Section 3.4 or 6.10(a) hereof; (d) all liabilities and obligations of Seller or Buyer with respect to the Transferred Employees incurred on or after the Closing Date for which Buyer is responsible pursuant to Section 6.12; 17 (e) all liabilities, responsibilities and obligations of Seller or Buyer arising under Environmental Laws or relating to Environmental Conditions or Regulated Substances (including common law liabilities relating to Environmental Conditions and Regulated Substances), whether such liability, responsibility or obligation is known or unknown, contingent or accrued as of the Closing Date, including but not limited to: (i) costs of compliance (including capital, operating and other costs) relating to any violation or alleged violation of Environmental Laws occurring prior to, on or after the Closing Date, with respect to the ownership of the Assets or operation of the Business; (ii) property damage or natural resource damage (whether such damages were manifested before or after the Closing Date) arising from Environmental Conditions or Releases of Regulated Substances at, on, in, under, adjacent to, or migrating from any Assets prior to, on or after the Closing Date; (iii) any Remediation (whether or not such Remediation commenced before the Closing Date or commences after the Closing Date) of Environmental Conditions or Regulated Substances that are present or have been Released prior to, on or after the Closing Date, at, on, in, adjacent to or migrating from the Assets; (iv) any violations or alleged violations of Environmental Laws occurring on or after the Closing Date with respect to the ownership of any Assets or operation of the Business; (v) any bodily injury or loss of life arising from Environmental Conditions or Releases of Regulated Substances at, on, in, under, adjacent to or migrating from any Asset on or after the Closing Date; (vi) any bodily injury, loss of life, property damage, or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, on or after the Closing Date, of Regulated Substances generated in connection with the ownership of the Assets or the operation of the Business; and (vii) any Remediation of any Environmental Condition or Release of Regulated Substances arising from the storage, transportation, treatment, disposal, discharge, recycling or Release, at any Off-Site Location, or arising from the arrangement for such activities, on or after the Closing Date, of Regulated Substances generated in connection with the ownership or operation of the Assets; provided, that nothing set forth in this Section 2.3 shall require Buyer to assume any liabilities, responsibilities or obligations that are expressly excluded in Section 2.4; (f) any Tax that may be imposed by any federal, state or local government on the ownership, sale (except as otherwise provided in Section 3.4 or 6.10(a)), operation of the Business or use of the Assets on or after the Closing Date, except for any Income Taxes attributable to the income of Seller; (g) all liabilities and obligations of Seller or Buyer arising on and after the Closing Date under those Orders specifically relating to the Assets or the Business issued by or entered into with any Governmental Authority and listed in Schedule 2.3(g) or imposed on Buyer in any Required Regulatory Approval; (h) customer advances, customer deposits and construction advances, unperformed service obligations, Easement relocation obligations, and engineering and construction required to complete scheduled construction, construction work in progress, and other capital expenditure projects, in each case directly related to the Business and outstanding on or arising after the Closing Date; and (i) actions and proceedings based on conduct, actions, circumstances or conditions arising or occurring on or after the Closing Date, actions and proceedings described in Schedule 2.3(i), actions and proceedings arising from or directly related to any other Assumed Liability, and generic or industry-wide actions and proceedings outstanding on or arising on or after the Closing Date that are applicable to the Business. 18 2.4 Excluded Liabilities. Notwithstanding anything to the contrary in this Agreement, Buyer shall not assume or be obligated to pay, perform or otherwise discharge the following liabilities or obligations of Seller (collectively, the "Excluded Liabilities"): (a) any liabilities or obligations of Seller in respect of any Excluded Assets or other assets of Seller that are not Assets; (b) any liabilities or obligations with respect to Taxes attributable to Seller's ownership, or use of the Assets or operation of the Business for taxable periods, or portions thereof, ending before the Closing Date, except for Taxes for which Buyer is liable pursuant to Section 3.4 or 6.10(a) hereof; (c) any liabilities or obligations of Seller accruing under any of the Assigned Agreements prior to the Closing Date or any liability, other than an Assumed Liability, underlying a Permitted Encumbrance, in each case to the extent not included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3; (d) any and all asserted or unasserted liabilities or obligations to third parties (including employees) for injuries or damages, whether arising from tortious conduct or otherwise, or similar causes of action relating to the Assets or the Business arising during or attributable to the period prior to the Closing Date, other than such that relate to liabilities or obligations assumed by Buyer; (e) any fines, penalties and associated costs for defending related enforcement actions, resulting from any violation or alleged violation of Environmental Laws with respect to the ownership of the Assets or the operation of the Business occurring prior to the Closing Date; (f) any payment obligations of Seller pursuant to the Assigned Agreements for goods delivered or services rendered prior to the Closing Date, including, but not limited to, rental payments pursuant to the Real Property Leases, in each case to the extent not included among the items causing an adjustment to the Base Purchase Price contemplated in Section 3.3; (g) any liabilities, responsibilities and obligations of Seller arising under Environmental Laws or relating to Environmental Conditions or Regulated Substances (including common law liabilities relating to Environmental Conditions and Regulated Substances), whether such liability, responsibility or obligation was known or unknown, contingent or accrued, which relates to (i) any bodily injury, loss of life, property damage or natural resource damage arising from the storage, transportation, treatment, disposal, discharge, recycling or Release of Regulated Substances generated in connection with the ownership of the Assets or the operation of the Business at any Off-Site Location, or arising from the arrangement for such activities, prior to the Closing Date; or (ii) any Remediation of any Environmental Condition or Regulated Substance at any Off-Site Location, arising from the storage, transportation, treatment, disposal, discharge, recycling or Release of Regulated Substances generated in connection with the ownership of the Assets or the operation of the Business at such Off-Site Location, or arising from the arrangement for such activities, prior to the Closing Date; provided, that for purposes of this paragraph, "Off-Site Location" does not include any location to which Regulated Substances disposed of or Released at the site of any Asset may have migrated; 19 (h) any liability to third parties (including employees) for personal injury or loss of life, to the extent caused (or allegedly caused) by Environmental Conditions or the Release of Regulated Substances at, on, in, under, or adjacent to, or migrating from, the Assets prior to the Closing; (i) subject to Section 6.12, any liabilities or obligations of Seller, any Seller Subsidiary or any ERISA Affiliate of Seller relating to any Benefit Plan including but not limited to any such liability (i) relating to benefits payable under any Benefit Plan; (ii) relating to the Pension Benefit Guaranty Corporation under Title IV of ERISA; (iii) relating to a multi-employer plan; (iv) with respect to non-compliance with the notice and benefit continuation requirements of COBRA; (v) with respect to any noncompliance with ERISA or any other applicable laws; or (vi) with respect to any suit, proceeding or claim which is brought against Seller, Buyer, any Benefit Plan, or any fiduciary or former fiduciary of any such Benefit Plan; (j) subject to Section 6.12, any liabilities or obligations arising from facts or circumstances prior to the Closing Date relating to the employment or termination of employment, including discrimination, wrongful discharge, unfair labor practices, or constructive termination by Seller of any individual, attributable to any actions or inactions by Seller prior to the Closing Date other than actions or inactions taken at the written direction of Buyer (it being understood and agreed that Buyer shall have no liability for action taken by Seller pursuant to Section 6.12 except as expressly provided therein); (k) subject to Section 6.12, any obligations of Seller for wages, overtime, employment taxes, severance pay, transition payments in respect of compensation or similar benefits accruing or arising prior to the Closing under any term or provision of any contract, plan, instrument or agreement relating to any of the employees of Seller; (l) all obligations of Seller with respect to the Revenue Bonds and any other indebtedness for money borrowed by Seller (including items due to Seller's Affiliates) other than payment obligations arising on or after the Closing Date under any equipment lease of the kind listed in Schedule 4.11(a) or under any line extension contracts or similar construction arrangements, it being understood and agreed that such leases, contracts and similar arrangements do not create indebtedness for money borrowed; and (m) any liability of Seller arising out of a breach by Seller or any of its Affiliates of any of their respective obligations under this Agreement or the Ancillary Agreements. 2.5 Control of Litigation. (a) The Parties agree and acknowledge that, from and after the Closing Date, Seller shall be entitled exclusively to control, defend and settle any litigation, administrative or regulatory proceeding, and any investigation or Remediation activity (including without limitation any environmental mitigation or Remediation activities), arising out of or related to any Excluded Liabilities, and Buyer agrees to cooperate fully in connection therewith and in connection therewith, shall comply with the provisions of Section 6.2, provided that, in no event shall Seller's exercise of its rights under this Section 2.5 (i) unreasonably interfere with Buyer's conduct or operation of the Business, (ii) place any environmental liens or deed restrictions on the Real Property, or (iii) cause Buyer to be responsible for maintaining any institutional or engineering controls that may be part of a Remediation activity. 20 (b) The Parties agree and acknowledge that, from and after the Closing Date, Buyer shall be entitled exclusively to control, defend and settle any litigation, administrative or regulatory proceeding, and any investigation or Remediation activity (including without limitation any environmental mitigation or Remediation activities), arising out of or related to any Assumed Liabilities, and Seller agrees to cooperate fully in connection therewith and in connection therewith, shall comply with the provisions of Section 6.2. ARTICLE III THE CLOSING 3.1 Closing. Upon the terms and subject to the satisfaction of the conditions in Article VII of this Agreement, each of (i) the sale, assignment, conveyance, transfer and delivery of the Assets to Buyer by Seller, (ii) the payment of the Purchase Price to Seller by Buyer, (iii) the assumption of the Assumed Liabilities by Buyer, and (iv) the consummation of the other respective obligations of the Parties contemplated by this Agreement to be consummated on the Closing Date shall take place at a closing (the "Closing"), to be held at the offices of Seller in Phoenix, Arizona, or another mutually acceptable location, at 9:00 a.m. local time on the Closing Date. 3.2 Closing Payment. Upon the terms and subject to the satisfaction of the conditions contained in this Agreement, in consideration of the aforesaid sale, assignment, assumption, conveyance, transfer and delivery of the Assets, Buyer will pay or cause to be paid to Seller at the Closing an aggregate amount in U.S. dollars of ninety-two million dollars ($92,000,000) (the "Base Purchase Price") plus or minus any adjustments pursuant to the provisions of this Agreement (the "Purchase Price"), by wire transfer of immediately available funds denominated in U.S. dollars or by such other means as are agreed upon by Seller and Buyer. 3.3 Adjustment to Base Purchase Price. (a) Subject to Section 3.3(b), at the Closing, the Base Purchase Price shall be adjusted to account for the items set forth in this Section 3.3(a): (i) the Base Purchase Price shall be decreased by four million dollars ($4,000,000) if the Closing occurs on or before July 28, 2003; (ii) [intentionally omitted] (iii) the Base Purchase Price shall be increased by two million dollars ($2,000,000) in the event the Closing occurs after the first anniversary of the date hereof; 21 (iv) the Base Purchase Price shall be increased by the aggregate amount of all accounts receivable and earned but unbilled revenues (other than any amounts that are due from any of Seller's Affiliates or that otherwise are Excluded Assets) attributable to the Business as of day immediately preceding the Closing Date net of Seller's reserve for allowance for bad debt (as reflected in Seller's written policy for allowance for bad debt as of the date hereof); (v) the Base Purchase Price shall be decreased by all accounts payable attributable to the Business as of the day immediately preceding the Closing Date (other than any liability that is an Excluded Liability); (vi) the Base Purchase price shall be decreased by (A) the aggregate amount of customer advances for construction times 25% and (B) the aggregate amount of customer deposits, in each case to the extent relating to the Business outstanding as of the day immediately preceding the Closing Date (other than any amounts due to any of Seller's Affiliates or that otherwise is an Excluded Liability); (vii) the Base Purchase Price shall increased by the aggregate amount of Inventories recorded on Seller's books and records as of day immediately preceding the Closing Date; (viii) the Base Purchase Price shall be adjusted to account for the net balance payable to or by Seller, if any, for items prorated pursuant to Section 3.4, other than the items addressed in Section 3.4(a); (ix) the Base Purchase Price shall be increased or decreased if and to the extent required by Sections 6.3(c), 6.12(b), 6.12(d)(iii)(D) and 6.13; and (x) the Base Purchase Price will be increased by the aggregate amount of all (i) Approved Capital Expenditures that are accrued by Seller between the date of this Agreement and the Closing Date (including expenditures recorded in the Construction Work in Progress account of the Business as of the day immediately preceding the Closing Date and relating to the Approved Capital Expenditures), (ii) without duplication, expenditures to purchase materials, supplies and other capital items that are dedicated to, but as of Closing have not been used in, the construction or improvement of the property, plant or equipment and relating to the Approved Capital Expenditures) and (iii) without duplication, other expenditures recorded as an asset of the Business as of the day immediately preceding the Closing Date and relating to such Approved Capital Expenditures. (b) At least ten (10), but no more than thirty (30) days prior to the Closing Date, Seller shall prepare and deliver to Buyer an estimated closing statement (the "Estimated Closing Statement") that shall set forth Seller's best estimate of the estimated adjustments to the Base Purchase Price required by Section 3.3(a) (regardless of whether notice of such Base Purchase Price adjustments have been previously delivered to Buyer) (the "Estimated Adjustment"). Within five (5) days following the delivery of an Estimated Closing Statement to Buyer, Buyer may object in good faith to such Estimated Closing Payment in writing. In the event of any such objection, the Parties shall attempt to resolve their differences by negotiation. If the Parties are unable to do so before three (3) days prior to the Closing Date, then (i) the full amount of the Estimated Adjustment shall be made at the Closing if the amount in dispute is less than $1,000,000, or (ii) the undisputed portion of the Estimated Adjustment shall be made at the Closing if the amount in dispute is $1,000,000 or more. The disputed portions shall be paid as a Post-Closing Adjustment if and to the extent required by Section 3.3(d). 22 (c) Within sixty (60) days following the Closing Date, Seller shall prepare and deliver to Buyer a final closing statement setting forth the final adjustments to the Base Purchase Price required by Section 3.3(a) (the "Proposed Post-Closing Adjustment"). All calculations of the Proposed Post-Closing Adjustments shall be prepared using the same accounting principles, policies and methods as Seller has historically used in connection with the calculation of the items reflected on such Proposed Post-Closing Adjustments. (d) Within thirty (30) days following the delivery of a Proposed Post-Closing Adjustment to Buyer, Buyer may object to such Proposed Post-Closing Adjustment in writing. Seller agrees to cooperate with Buyer to provide Buyer and Buyer's Representatives information used to prepare the Proposed Post-Closing Adjustments and information relating thereto. If Buyer objects to a Proposed Post-Closing Adjustment, the Parties shall attempt to resolve such dispute by negotiation. If such Parties are unable to resolve such dispute within thirty (30) days of any such objection by Buyer, the Parties shall appoint an Independent Accounting Firm. The fees and expenses of such Independent Accounting Firm shall be allocated between Buyer and Seller so that Seller's share of such fees and expenses shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Buyer to such auditor that is successfully disputed by Buyer (as finally determined by such auditor) bears to the total amount of such remaining disputed amounts so submitted by Buyer to such auditor. The Independent Accounting Firm shall review such Proposed Post-Closing Adjustment and determine the appropriate adjustment to the Base Purchase Price, if any, within thirty (30) days of such appointment. The Parties agree to cooperate with the Independent Accounting Firm and provide it with such information as it reasonably requests to enable it to make such determination. The finding of such Independent Accounting Firm shall be binding on the Parties hereto. Upon determination by agreement of the Parties or by binding determination of the Independent Accounting Firm of the appropriate adjustment to the Base Purchase Price (in either case, the "Post-Closing Adjustment"), if such Post-Closing Adjustment results in a change to the Base Purchase Price, the Party owing the difference shall deliver such difference to the Party owed such amount no later than two (2) Business Days after the determination of such Post Closing Adjustment, in immediately available funds or in any other manner as reasonably requested by the Party owed such amount, plus interest at 6.0% per annum on such determined amount from the Closing Date to (but not including) the date of payment. (e) If at any time following the Closing Date Buyer actually returns to customers greater than thirty-five percent (35%) of the aggregate customer advances for construction directly relating to the Business and outstanding as of the Closing Date ("Advances"), Seller shall reimburse Buyer for all amounts returned to customers to the extent said returns exceed twenty-five percent (25%) of Advances. Buyer may, at any time within seven (7) years from the Closing Date, provide notice to Seller of a reimbursement claim under this Section 3.3(e), which notice shall include reasonable documentary substantiation of returns to customers of Advances. In the event Seller agrees with said determination, it shall promptly pay such reimbursement to Buyer. In the event Seller disputes said determination, it shall initiate the dispute resolution procedures with regard to the Post-Closing Adjustment, as provided in Section 3.3(d), which shall be binding on the Parties. 23 3.4 Prorations. Buyer and Seller agree that all of the items normally prorated, including those listed below (but not including Income Taxes), relating to the Business and operation of the Assets shall be prorated as of the Closing Date, with Seller liable for such items to the extent such items relate to any time period prior to the Closing Date, and Buyer liable for such items to the extent such items relate to periods commencing with the Closing Date (measured in the same units used to compute the item in question, otherwise measured by calendar days). The Base Purchase Price shall be increased to the extent Buyer will benefit financially due to Seller's payment prior to the Closing Date of the portion of any such item allocable to Buyer, and (except with respect to the items addressed in clause (a) below) shall be decreased to the extent Seller will benefit financially due to Buyer's payment on or after the Closing Date of the portion of any such item allocable to Seller. The items subject to proration include the following: (a) Subject to Section 6.10(b), personal property, real estate and occupancy Taxes, assessments and other charges, if any, on or with respect to the Business and operation of the Assets; (b) rent, Taxes (other than Income Taxes) and all other items (including prepaid services or goods not included in Inventories) payable by or to Seller under any of the Assigned Agreements to the extent not included in the account payables of the Business outstanding as of the day immediately preceding the Closing Date; (c) any permit, license, registration, compliance assurance fees or other fees with respect to any Transferable Permit or other Asset; (d) sewer rents and charges for water, telephone, electricity and other utilities with respect to the Assets; (e) rent and Taxes payable by or to Seller under the Real Property Leases assigned to Buyer to the extent not included in the account payables of the Business outstanding as of the day immediately preceding the Closing Date; (f) deposits made by Seller to the extent transferred to Buyer; (g) prepaid expenses paid by Seller to the extent transferred to Buyer; and (h) petty cash held locally for the benefit of the Business to the extent transferred to Buyer. 3.5 Deliveries by Seller. At the Closing, Seller will deliver, or cause to be delivered, the following to Buyer: (a) The Bill of Sale, duly executed by Seller; 24 (b) Copies of any and all consents, waivers or approvals obtained or required to be obtained by Seller from Government Authorities or non-governmental Persons with respect to the transfer of the Assets, or the consummation of the transactions contemplated by this Agreement; (c) One or more Special Warranty Deeds conveying title to the Real Property to Buyer, duly executed and acknowledged by Seller and in recordable form; (d) An opinion from Seller's general counsel, dated the Closing Date, substantially in the form of Exhibit D attached hereto, and opinions from Seller's Bond Counsel, dated the Closing Date, substantially in the form of Exhibit E attached hereto; (e) The Assignment and Assumption Agreement, duly executed by Seller; (f) A FIRPTA Affidavit, duly executed by Seller; (g) Copies, certified by the Secretary or Assistant Secretary of Seller, of corporate resolutions authorizing the execution and delivery of this Agreement and all of the agreements and instruments to be executed and delivered by Seller in connection herewith, and the consummation of the transactions contemplated hereby; (h) A certificate of the Secretary or Assistant Secretary of Seller identifying the name and title and bearing the signatures of the officers of Seller authorized to execute and deliver this Agreement and the other agreements and instruments contemplated hereby; (i) Certificate of Good Standing with respect to Seller, issued by the Secretary of State of the State of Delaware; (j) To the extent available, originals of all Assigned Agreements, Real Property Leases and Transferable Permits and, if not available, true and correct copies thereof (delivery of the foregoing documents will be deemed made in the case of any such documents then located at any of the offices included in the Assets, but only to the extent that Seller delivers to Buyer a schedule generally identifying each such office and the general categories of documents located in each such office); (k) All such other instruments of assignment, transfer or conveyance as shall, in the reasonable opinion of Buyer and its counsel, be necessary to transfer the Assets to Buyer, in accordance with this Agreement and where necessary or desirable in recordable form; (l) Such other agreements, documents, instruments and writings as are required to be delivered by Seller at or prior to the Closing Date pursuant to this Agreement or otherwise reasonably requested by Buyer in connection herewith; and (m) A certificate dated the Closing Date executed by Seller's President, Public Services Sector, to the effect that, to such officer's Knowledge, the conditions set forth in Sections 7.1(e) and (f) have been satisfied by Seller. 25 3.6 Deliveries by Buyer. At the Closing, Buyer will deliver, or cause to be delivered, the following: (a) The Purchase Price, as adjusted pursuant to Section 3.3, by wire transfer of immediately available funds denominated in U.S. dollars in accordance with Seller's instructions or by such other means as are agreed upon by Seller and Buyer; (b) The Assignment and Assumption Agreement, duly executed by Buyer; (c) All such other instruments of transfer or assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for the sale, conveyance, assignment and transfer of the Assets to, or the assumption of the Assumed Liabilities by, Buyer in accordance with this Agreement; (d) Copies, certified by the Secretary or Assistant Secretary of Buyer, of resolutions authorizing the execution and delivery of this Agreement and all of the agreements and instruments to be executed and delivered by the Buyer in connection herewith, and the consummation of the transactions contemplated hereby; (e) A certificate of the Secretary or Assistant Secretary of Buyer, identifying the name and title and bearing the signatures of the officers of Buyer authorized to execute and deliver this Agreement and the other agreements and instruments contemplated hereby; (f) An opinion from Buyer's general counsel, dated the Closing Date, substantially in the form of Exhibit F attached hereto; (g) Certified copies of any and all consents, waivers or approvals obtained or required to be obtained by Buyer from Government Authorities or non-governmental Persons with respect to the transfer of the Assets or the consummation of the transactions contemplated by this Agreement; (h) Such other agreements, documents, instruments and writings as are required to be delivered by Buyer at or prior to the Closing Date pursuant to this Agreement or otherwise reasonably requested by Seller in connection herewith; (i) Certificate of Good Standing with respect to Buyer, issued by the Secretary of State of Arizona; and (j) A certificate dated the Closing Date executed by Buyer's Chief Financial Officer to the effect that, to such officer's knowledge, the conditions set forth in Sections 7.2(e), (f) and (g) have been satisfied by Buyer. 3.7 Work in Progress. The Parties agree to work together before the Closing Date to effect on the Closing Date an orderly transition with respect to work in progress. 26 ARTICLE IV REPRESENTATIONS, WARRANTIES AND DISCLAIMERS OF SELLER Seller hereby represents and warrants to Buyer as follows: 4.1 Incorporation; Qualification. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease, and operate its material assets and properties and to carry on its business as is now being conducted. Seller is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction in which its business, as now being conducted, shall require it to be so qualified, except where the failure to be so qualified would not have a Seller Material Adverse Effect. 4.2 Authority. Seller has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which Seller is a signatory and to consummate the transactions contemplated hereby or thereby. The execution and delivery by Seller of this Agreement and each of the Ancillary Agreements to which Seller is a signatory and the consummation by Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Seller and this Agreement has been duly and validly executed and delivered by Seller. Each of this Agreement and the Ancillary Agreements to which Seller is a signatory constitutes the legal, valid and binding agreement of Seller, enforceable against Seller in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 4.3 Consents and Approvals; No Violation. (a) Except as set forth in Schedule 4.3(a), neither the execution, delivery and performance of this Agreement nor the execution, delivery and performance of the Ancillary Agreements by Seller will (i) conflict with or result in any breach of any provision of the Certificate of Incorporation or Bylaws of Seller, (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Seller is a party or by which it, or any of the Assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or that would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect; or (iii) subject to obtaining the Seller Required Regulatory Approvals, constitute violations of any law, regulation, order, judgment or decree applicable to Seller, which violations, individually or in the aggregate, would result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. (b) Except as set forth in Schedule 4.3(b) (the filings and approvals referred to in Schedule 4.3(b) are collectively referred to as the "Seller Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for the execution and delivery of this Agreement and the Ancillary Agreements by Seller or the consummation by Seller of the transactions contemplated hereby and thereby, other than those the failure to obtain which would not result in a Seller Material Adverse Effect or an Asset Material Adverse Effect and would not otherwise result in a material violation of law by Buyer. 27 4.4 Insurance. Schedule 4.4 lists, as of the date of this Agreement, all material policies of fire, liability, workers' compensation and other forms of insurance (if any) owned or held by, or on behalf of, Seller with respect to the Assets and the Business. Except as set forth in such Schedule, all such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid (other than retroactive premiums which may be payable with respect to auto, general liability and workers' compensation insurance policies), and no notice of cancellation or termination has been received with respect to any such policy which was not replaced on substantially similar terms prior to the date of such cancellation. Except as described in Schedule 4.4, within the thirty-six (36) months preceding the date of this Agreement, Seller has not been refused any insurance with respect to the Assets or the Business nor has its coverage been limited by any insurance carrier to which it has applied for any such insurance or with which it has carried insurance during the last twelve (12) months. 4.5 Real Property Leases. Schedule 4.5 lists, as of the date of this Agreement, all material real property leases under which Seller is a lessee or lessor and which relate to the Assets, including a separate listing of all leases of office space used by Seller in the conduct of the Business (the "Real Property Leases"). Seller will deliver to Buyer true, correct and complete copies of each of the Real Property Leases in accordance with Section 6.20. 4.6 Environmental Matters. Seller has heretofore delivered to Buyer all environmental reports and all environmental site assessments relating to the Assets that have been identified by Seller after diligent inquiry, which reports have been identified in schedules delivered to Buyer on or prior to the date hereof ("Environmental Reports"). Except as disclosed in Schedule 4.6 or in the Environmental Reports: (a) Seller holds, and is in substantial compliance with, all Environmental Permits that are required for Seller to conduct the Business and operate the Assets, and Seller is otherwise in compliance with applicable Environmental Laws with respect to the Business and operation of the Assets, except for such failures to hold or comply with required Environmental Permits, or such failures to be in compliance with applicable Environmental Laws, as would not, individually or in the aggregate, result in an Asset Material Adverse Effect; (b) Seller has not received (i) any written request for information, or been notified that it is a potentially responsible party, under CERCLA or any similar state law with respect to any of the Real Property, or (ii) any written notification from a Governmental Authority with respect to pending or ongoing investigations or enforcement actions related to alleged or potential violations of any applicable Environmental Law with respect to any of the Real Property; (c) Seller has not entered into or agreed to any consent decree or order relating to the Assets, and is not subject to any outstanding judgment, decree, or judicial order relating to compliance with any Environmental Law or to Remediation of Regulated Substances under any Environmental Law relating to the Assets; and 28 (d) To Seller's Knowledge, no Release of Regulated Substances has occurred at, from, in, on, or under the Real Property, and, except as legally permitted, no Regulated Substances are present in, on, about or migrating from the Real Property, in each case that would give rise to an Environmental Claim related to the Assets for which Remediation would reasonably be required, except in any such case to the extent that any such Release or Environmental Claim would not, individually or in the aggregate, result in an Environmental Claim in excess of $500,000. 4.7 Labor Matters. Schedule 4.7 sets forth the collective bargaining agreements, and amendments thereto, to which Seller is a party in connection with the Business. Seller has previously delivered to Buyer true and correct copies of all such collective bargaining agreements and amendments thereto. With respect to the Assets and the Business, except to the extent set forth in Schedule 4.7 and except for such matters as would not, individually or in the aggregate, result in an Asset Material Adverse Effect, (a) Seller is in compliance with all applicable laws respecting employment and employment practices, occupational safety and health, plant closing, mass layoffs, terms and conditions of employment and wages and hours; (b) Seller has not received any written notice of any unfair labor practice complaint against Seller pending before the National Labor Relations Board; (c) no arbitration proceeding arising out of or under any collective bargaining agreement is pending against Seller; and (d) Seller has not experienced any work stoppage within the three-year period prior to the date hereof and to Seller's Knowledge none is currently threatened. 4.8 Benefit Plans: ERISA. (a) Schedule 4.8 lists all material Benefit Plans. True and complete copies of all such Benefit Plans have been made available to the Buyer. (b) No liability under Title IV or Section 302 of ERISA has been incurred by Seller or any ERISA Affiliate of Seller that has not been satisfied in full, and no condition exists that presents a material risk to Seller or any ERISA Affiliate of Seller of incurring any such liability, other than liability for premiums due to the Pension Benefit Guaranty Corporation (which premiums have been paid when due). Insofar as the representation made in this Section 4.8 applies to Sections 4064, 4069 or 4204 of Title IV of ERISA, it is made with respect to any employee benefit plan, program, agreement or arrangement subject to Title IV of ERISA to which Seller or any ERISA Affiliate of Seller made, or was required to make, contributions during the five (5)-year period ending on the last day of the most recent plan year ended prior to the Closing Date. (c) Except as expressly provided in this Agreement, the consummation of the transactions contemplated by this Agreement will not, either alone or in combination with another event, (i) entitle any current or former employee or officer of Seller or any ERISA Affiliate of Seller to severance pay, unemployment compensation or any other payment, or (ii) accelerate the time of payment or vesting, or increase the amount of compensation due any such employee or officer. 29 (d) There has been no material failure of any of the Benefit Plans that is a group health plan (as defined in Section 5000(b)(1) of the Code) to meet the requirements of Section 4980B(f) of the Code with respect to a qualified beneficiary (as defined in Section 4980B(g) of the Code). Neither the Seller nor any ERISA Affiliate of Seller has contributed to a nonconforming group health plan (as defined in Section 5000(c) of the Code) and no ERISA Affiliate of Seller has incurred a tax under Section 5000(e) of the Code that is or could become a liability of Buyer. (e) There are no pending, or to Seller's Knowledge, threatened claims by or on behalf of any Benefit Plans, by any employee or beneficiary covered under any such Benefit Plans, or otherwise involving any such Benefit Plans (other than routine claims for benefits). 4.9 Real Property. Schedule 4.9 contains a description of the Real Property included in the Assets. True and correct copies of any current surveys, abstracts, title commitments and title opinions identified by Seller after diligent inquiry to be in Seller's possession and all policies of title insurance currently in force and identified by Seller after diligent inquiry to be in the possession of Seller with respect to the Real Property have heretofore been made available to Buyer. 4.10 Condemnation. Except as set forth in Schedule 4.10, Seller has not received any written notices of and otherwise has no Knowledge of any pending or threatened proceedings or actions by any Governmental Authority to condemn or take by power of eminent domain all or any part of the Assets. 4.11 Assigned Agreements. (a) Schedule 4.11(a) lists each Assigned Agreement (other than Real Property Leases, line extension agreements and similar construction arrangements, railroad crossing agreements and similar arrangements, and Easements held by Seller) which is material to the Business, other than those (i) that are listed or described on another Schedule, (ii) that provide for annual payments by Seller after the date hereof of less than $100,000 or (iii) that, when aggregated with all other Assigned Agreements not listed on Schedule 4.5 or 4.11(a), provide for payments by Seller after the date hereof of less than $500,000 in the aggregate. Schedule 4.11(a) also lists each agreement that is material to the Assets or the Business that may expire or that Seller expects to terminate prior to the Closing Date other than any agreement that is an Excluded Asset. (b) Except as disclosed in Schedule 4.11(b), each Assigned Agreement listed on Schedule 4.5 or 4.11(a) constitutes a legal, valid and binding obligation of Seller and, to Seller's Knowledge, constitutes a valid and binding obligation of the other parties thereto, and may be transferred to the Buyer as contemplated by this Agreement without the consent of the other parties thereto and will continue in full force and effect thereafter, unless in such case the impact of such lack of legality, validity or binding nature, or inability to transfer, would not, individually or in the aggregate, result in an Asset Material Adverse Effect. (c) Except as set forth in Schedule 4.11(c), there is not, under the Assigned Agreements listed on Schedule 4.5 or 4.11(a), any default or event which, with notice or lapse of time or both, would constitute a default on the part of the Seller or to Seller's Knowledge, any of the other parties thereto, except such events of default and other events which would not, individually or in the aggregate, result in an Asset Material Adverse Effect. 30 4.12 Legal Proceedings. Except as set forth in Schedule 4.12, there is no action or proceeding pending or, to Seller's Knowledge, threatened against Seller before any court, arbitrator or Governmental Authority, which would, individually or in the aggregate, reasonably be expected to result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. Except as set forth in Schedule 4.12 Seller is not subject to any outstanding Order that would, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 4.13 Permits. Seller has all Permits (other than Environmental Permits, which are addressed in Section 4.6 hereof) necessary to own and operate the Assets except where the failure to have such Permits would not, individually or in the aggregate, create a Seller Material Adverse Effect or an Asset Material Adverse Effect. Except as disclosed on Schedule 4.13, Seller has not received any written notification that it is in violation of any such Permits, except notifications of violations which would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. Seller is in compliance with all Permits except where such non-compliance would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 4.14 Taxes. (a) Seller has filed or caused to be filed all Tax Returns that are required to be filed by it with respect to any Tax relating to the Assets, and has paid or caused to be paid all Taxes that have become due as indicated thereon, except where such Tax is being contested in good faith by appropriate proceedings, or where the failure to so file or pay would not result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. Seller has complied in all material respects with all applicable laws, rules and regulations relating to withholding Taxes relating to Transferred Employees. All Tax Returns relating to the Assets are true, correct and complete in all material respects. There are no liens for Taxes upon the Assets except for liens for Taxes not yet due and Permitted Encumbrances. (b) Except as set forth in Schedule 4.14, no notice of deficiency or assessment has been received from any taxing authority with respect to liabilities for Taxes of Seller in respect of the Assets, which have not been fully paid or finally settled, and any such deficiency shown in Schedule 4.14 is being contested in good faith through appropriate proceedings. (c) Except as set forth in Schedule 4.14, there are no outstanding agreements or waivers extending the applicable statutory periods of limitation for Taxes associated with the Assets that will be binding upon Buyer after the Closing. (d) Except as set forth on Schedule 4.14, none of the Assets is property that is required to be treated as being owned by any other person pursuant to the so-called safe harbor lease provisions of former Section 168(f) of the Code, and none of the Assets is "tax-exempt use" property within the meaning of Section 168(h) of the Code. 31 (e) Schedule 4.14 sets forth the taxing jurisdictions in which Seller owns assets or conducts business that require a notification to a taxing authority of the transactions contemplated by this Agreement, if the failure to make such notification, or obtain Tax clearance certificates in connection therewith, would either require Buyer to withhold any portion of the consideration or subject Buyer to any liability for any Taxes of Seller. 4.15 Intellectual Property. The Citizens Marks and the software licenses and related contracts described in Schedules 2.2 and 4.11(a) constitute all of the material Intellectual Property necessary for the operation and maintenance of the Assets or the conduct of the Business, each of which Seller either has all right, title and interest in or valid and binding rights under contract to use in connection with the operation of the Assets and the Business. Except as disclosed in Schedule 4.15, (a) Seller is not, nor has it received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default), under any contract to use such Intellectual Property, and (b) to Seller's Knowledge, such Intellectual Property is not being infringed by any other Person. Except as disclosed in Schedule 4.15, Seller has not received notice that it is infringing any Intellectual Property of any other Person in connection with the Assets or the Business, and Seller, to its Knowledge, is not infringing any Intellectual Property of any other Person which, individually or in the aggregate, would have an Asset Material Adverse Effect. 4.16 Capital Expenditures. Seller has heretofore delivered to Buyer a schedule of all Capital Expenditures that, as of the date of this Agreement, are planned by Seller from the date hereof through December 31, 2003 (the "Capital Expenditures Schedule"). 4.17 Compliance With Laws. Seller is in compliance with all applicable laws, rules and regulations with respect to its ownership of the Assets and operation of the Business except where the failure to be in compliance would not, individually or in the aggregate, result in a Seller Material Adverse Effect or an Asset Material Adverse Effect. 4.18 Title. Seller has, and will have as of the Closing Date, good, valid and indefeasible title to the Real Property and the other Assets purported to be owned by Seller, free and clear of all Encumbrances except Permitted Encumbrances. 4.19 DISCLAIMERS. (a) EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE IV, THE ASSETS ARE TRANSFERRED "AS IS, WHERE IS", AND SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND OR NATURE, EXPRESS OR IMPLIED, AS TO LIABILITIES, OPERATIONS OF THE ASSETS, CONDITION, VALUE OR QUALITY OF THE ASSETS OR THE PROSPECTS (FINANCIAL AND OTHERWISE), RISKS AND OTHER INCIDENTS OF THE ASSETS AND SELLER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO THE ASSETS, OR ANY PART THEREOF, OR AS TO THE WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL REQUIREMENTS, OR THE APPLICABILITY OF ANY GOVERNMENTAL REQUIREMENTS, INCLUDING BUT NOT LIMITED TO ANY ENVIRONMENTAL LAWS, OR WHETHER SELLER POSSESSES SUFFICIENT REAL PROPERTY OR PERSONAL PROPERTY TO OPERATE THE ASSETS. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SELLER FURTHER SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY REGARDING THE ABSENCE OF HAZARDOUS SUBSTANCES OR LIABILITY OR POTENTIAL LIABILITY ARISING UNDER ENVIRONMENTAL LAWS WITH RESPECT TO THE ASSETS. 32 (b) It is understood that Seller makes no representation or warranty with respect to the assigned rights in respect of the Terminated Power Service Agreement contemplated in Section 2.1(d). 4.20 Financial Statements. Schedule 4.20 sets forth the unaudited balance sheet for the Business as of December 31, 2001 (the "Balance Sheet") and the unaudited statement of income of the Business for the twelve-month period ended December 31, 2001 (collectively, the "Financial Statements"). Except as set forth in Schedule 4.20, the Financial Statements have been prepared on a pre-tax basis in accordance, in all material respects, with GAAP applied on a basis consistent with prior periods except for the omission of full footnotes to such Financial Statements. Except as set forth in Schedule 4.20, the Balance Sheet presents fairly in all material respects the financial condition of the Business as of its date and the income statement included in the Financial Statements presents fairly in all material respects the results of operations of the Business for the periods covered thereby. The books and records of Seller from which the Financial Statements were derived were complete and accurate in all material respects at the time of such preparation. 4.21 SEC Filings; Financial Statements. (a) Seller has filed, or caused to be filed, all forms, reports and documents required to be filed by Seller with the SEC since January 1, 2001, and has heretofore delivered or made available to Buyer in the form filed with the SEC, together with any amendments thereto, its (i) Annual Reports on Form 10-K for the fiscal year ended December 31, 2000 and 2001, (ii) Quarterly Reports on Form 10-Q for the fiscal quarter ended March 31 and June 30, 2002, and (iii) all other reports or registration statements filed by Seller with the SEC since January 1, 2001 (collectively, the "Seller SEC Reports"). The Seller SEC Reports were prepared substantially in accordance with the requirements of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations promulgated under each of such respective acts, and did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The financial statements, including all related notes and schedules, contained in the Seller SEC Reports (or incorporated by reference therein) fairly present the consolidated financial position of Seller as at the respective dates thereof and the consolidated results of operations and cash flows of Seller for the periods indicated in accordance with GAAP applied on a consistent basis throughout the periods involved (except for changes in accounting principles disclosed in the notes thereto) and subject in the case of interim financial statements to normal year-end adjustments. 33 4.22 Sufficiency of Assets. The Assets and the Excluded Assets are the only assets owned, used, or held for use by Seller in, or in connection with, or otherwise necessary for, the conduct of the Business as presently conducted, except for such assets the failure to own, use, or hold for use, as would not have an Asset Material Adverse Effect or a Material Adverse Effect for Buyer. ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 5.1 Organization. Buyer is an Arizona corporation, duly organized, validly existing and in good standing under the laws of the state of its organization and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as is now being conducted. 5.2 Authority. Buyer has full corporate power and authority to execute and deliver this Agreement and each of the Ancillary Agreements to which Buyer is a signatory and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Buyer of this Agreement and the Ancillary Agreements to which Buyer is a signatory and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Buyer and this Agreement and the Ancillary Agreements have been duly and validly executed and delivered by Buyer. Each of this Agreement and the Ancillary Agreements to which Buyer is a signatory, constitute the legal, valid and binding agreement of Buyer, enforceable against Buyer in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity). 5.3 Consents and Approvals; No Violation. (a) Except as set forth in Schedule 5.3(a), neither the execution, delivery and performance of this Agreement by Buyer nor the execution, delivery and performance of the Ancillary Agreements by Buyer or any of its Affiliates nor the consummation by Buyer of the transactions contemplated hereby and thereby will (i) conflict with or result in any breach of any provision of the Articles of Incorporation or Bylaws (or other similar governing documents) of Buyer, or any of its Affiliates, or (ii) result in a default (or give rise to any right of termination, cancellation or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, material agreement or other instrument or obligation to which Buyer or any of its Affiliates is a party or by which any of their respective assets may be bound, except for such defaults (or rights of termination, cancellation or acceleration) as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, have a Buyer Material Adverse Effect or (iii) subject to obtaining the Buyer Required Regulatory Approvals, constitute violations of any law, regulation, order, judgment or decree applicable to Buyer, which violations, individually or in the aggregate, would result in a Buyer Material Adverse Effect. 34 (b) Except as set forth in Schedule 5.3(b) (the filings and approvals referred to in such Schedule are collectively referred to as the "Buyer Required Regulatory Approvals"), no consent or approval of, filing with, or notice to, any Governmental Authority is necessary for Buyer's execution and delivery of this Agreement and the Ancillary Agreements or the consummation by Buyer of the transactions contemplated hereby and thereby, other than such consents, approvals, filings or notices, which, if not obtained or made, will not (i) prevent Buyer from performing its obligations under this Agreement and the Ancillary Agreements or (ii) result in a Buyer Material Adverse Effect. 5.4 Availability of Funds. Buyer acknowledges and agrees that on the Closing Date, it will have sufficient funds to pay the Purchase Price under this Agreement and the Arizona Gas Purchase Agreement (including sufficient cash to fund the equity portions thereof) and to timely perform all of its obligations under this Agreement, the Ancillary Agreements, and Arizona Gas Purchase Agreement. Tucson Electric Power Company has the ability to contribute cash as equity to a wholly-owned subsidiary which constitutes a "Utility" or "Public Utility" subject to the receipt of required approvals under Title 14, Chapter 2, Article 8 (Public Utility Holding Companies and Affiliated Interests) of the Arizona Administrative Code. As of September 30, 2002, Tucson Electric Power Company held cash in the amount of approximately $65,000,000. 5.5 SEC Filings; Financial Statements. (a) UniSource has filed, or caused to be filed, all forms, reports and documents required to be filed by UniSource with the SEC since January 1, 2001, and has heretofore delivered or made available to Seller in the form filed with the SEC, together with any amendments thereto, its (i) Annual Reports on Form 10-K for the fiscal year ended December 31, 2000 and 2001, (ii) Quarterly Reports on Form 10-Q for the fiscal quarter ended March 31 and June 30, 2002, and (iii) all other reports or registration statements filed by UniSource with the SEC since January 1, 2001 (collectively, the "UniSource SEC Reports"). The UniSource SEC Reports were prepared substantially in accordance with the requirements of the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, as the case may be, and the rules and regulations promulgated under each of such respective acts, and did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The financial statements, including all related notes and schedules, contained in the UniSource SEC Reports (or incorporated by reference therein) fairly present the consolidated financial position of UniSource as at the respective dates thereof and the consolidated results of operations and cash flows of UniSource for the periods indicated in accordance with GAAP applied on a consistent basis throughout the periods involved (except for changes in accounting principles disclosed in the notes thereto) and subject in the case of interim financial statements to normal year-end adjustments. 35 5.6 Legal Proceedings. Except as set forth in Schedule 5.6, (a) there are no actions or proceedings pending or, to Buyer's knowledge threatened against Buyer or any of its Affiliates before any court or arbitrator or Governmental Authority, which, individually or in the aggregate, would result in a Buyer Material Adverse Effect, and (b) neither Buyer nor any of its Affiliates is subject to any outstanding Orders, which would, individually or in the aggregate, result in a Buyer Material Adverse Effect. 5.7 No Knowledge of Seller's Breach. Buyer has no knowledge of any breach by Seller of any representation or warranty of Seller or of any other condition or circumstance that would excuse Buyer from its timely performance of its obligations hereunder. Buyer shall notify promptly Seller if any such information comes to Buyer's attention prior to the Closing. 5.8 Qualified Buyer. Buyer is qualified to obtain any Permits and Environmental Permits necessary for Buyer to own and operate the Assets as of the Closing. 5.9 Inspections. Buyer is knowledgeable about the Business as engaged in by Seller and of the usual and customary practices of companies engaged in businesses similar to the Business and has had access to the Assets, the officers and employees of Seller, and the books, records and files of Seller relating to the Business and the Assets. Buyer acknowledges and agrees that it has, prior to its execution of this Agreement, (i) reviewed the Environmental Reports and (ii) had an opportunity to conduct Inspections of the Assets, including the Real Property. Subject to Sections 6.2, 6.3 and 7.1(g), and without waiving Seller's representations and warranties in Section 4.6, Buyer acknowledges that it is satisfied with such review and Inspections to date and (ii) Buyer acknowledges and agrees that past, present, and future physical characteristics and Environmental Conditions may not have been revealed by its Inspections and the investigations of the Assets contained in the Environmental Reports. In making its decision to execute this Agreement, and to purchase the Assets, Buyer has relied on and will continue to rely upon the results of its Inspections, the Environmental Reports and Seller's representations and warranties in Section 4.6. Buyer acknowledges and agrees that the representations and warranties set forth in Article IV of this Agreement constitute the sole and exclusive representations and warranties of Seller to Buyer in connection with the transactions contemplated hereby and by the Ancillary Agreements, and there are no representations, warranties, covenants, understandings or agreements, oral or written, in relation thereto between the Parties other than those incorporated herein, including Section 6.3, and therein. Except for the representations and warranties expressly set forth in Article IV of this Agreement, Buyer disclaims reliance on any representations or warranties, either express or implied, by or on behalf of Seller or its Affiliates or Representatives. Without limiting the generality of the foregoing, Buyer acknowledges and agrees that, except as provided in Section 4.6, there are no representations or warranties of Seller with respect to the Environmental Condition of the Assets, compliance with Environmental Laws and Environmental Permits of the presence or Releases of hazardous material in the fixtures, soils, groundwater, surface water or air on, under or about or emanating from any of the Assets. 5.10 WARN Act. Buyer does not intend to engage in a "Plant Closing" or "Mass Layoff" as such terms are defined in the WARN Act within sixty days of the Closing Date. 36 ARTICLE VI COVENANTS OF THE PARTIES 6.1 Conduct of Business and Operation of Assets. (a) Except as described in Schedule 6.1(a), as required by an applicable law or by any Governmental Authority, as expressly contemplated by this Agreement or to the extent Buyer otherwise consents in writing (such consent not to be unreasonably withheld), during the period from the date of this Agreement to the Closing Date, Seller shall (i) operate the Assets in the ordinary course of business consistent with its past practices and Good Utility Practices, (ii) use all Commercially Reasonable Efforts to preserve intact the Assets in all material respects, and endeavor to preserve the goodwill and relationships with customers, suppliers and others having business dealings with it, (iii) maintain insurance described in Section 4.4 (or replacements thereto providing for substantially the same coverage), and (iv) comply with all applicable laws relating to the Assets, including without limitation, all Environmental Laws, except where the failure to so comply would not result in an Asset Material Adverse Effect. Seller agrees to incur Capital Expenditures in the ordinary course in respect of (A) growth of the customer base (see, e.g., items under the heading "Growth" in the Capital Expenditures Schedule) and (B) maintenance of the Assets and replacement activities (see, e.g., items under the heading "Replacement" in the Capital Expenditures Schedule). Buyer agrees that Seller's deferral of Capital Expenditures in respect of network growth (see, e.g., items under the heading "Infrastructure" in the Capital Expenditures Schedule) shall not be deemed to be inconsistent with or to violate Good Utility Practices. (b) Without limiting the generality of Section 6.1(a) and, except as contemplated in this Agreement or as described in Schedule 6.1(a), or as required under applicable law or by any Governmental Authority, prior to the Closing Date, without the prior written consent of Buyer (such consent not to be unreasonably withheld), Seller shall not: (i) Make any material change in the levels of Inventories customarily maintained by Seller with respect to the Business, other than changes which are consistent with Good Utility Practices; (ii) Sell, lease (as lessor), encumber, pledge, transfer or otherwise dispose of, any Asset (except for Inventories used, consumed or replaced in the ordinary course of business consistent with past practices of Seller or with Good Utility Practices) other than to encumber any such Asset with Permitted Encumbrances; (iii) Modify, amend or voluntarily terminate, prior to the respective expiration date of any of the Assigned Agreements or Real Property Leases or any of the Permits or Environmental Permits with respect to such Assets in any material respect, other than (A) in the ordinary course of business, to the extent consistent with the past practices of Seller or Good Utility Practices, (B) with cause, to the extent consistent with past practices of Seller or Good Utility Practices, or (C) as may be required in connection with transferring Seller's rights or obligations thereunder to Buyer pursuant to this Agreement; 37 (iv) Except as otherwise provided herein, enter into any commitment for the purchase, sale, or transportation of fuel for the Business having a term greater than six months and not terminable on or before the Closing Date either (A) automatically, or (B) by option of Seller (or, after the Closing, by Buyer) in its sole discretion, if the aggregate payment under such commitment for fuel and all other outstanding commitments for fuel for the Business not previously approved by Buyer would exceed $1,000,000; (v) Except as otherwise provided herein, enter into any contract, agreement, commitment or arrangement for the Business that individually exceeds $250,000 or in the aggregate exceeds $1,000,000 unless it is terminable by Seller (or, after the Closing Date, by Buyer) without penalty or premium upon no more than sixty (60) days notice; (vi) Except as otherwise required by the terms of the applicable IBEW CBA or as otherwise provided in Section 6.12, (A) hire, or transfer any employees of or for the Business prior to the Closing, other than to fill vacancies in existing positions in the reasonable discretion of Seller, (B) materially increase salaries or wages of employees employed in connection with such Asset prior to the Closing, (C) take any action prior to the Closing to affect a material change in the IBEW CBA(s) or (D) take any action prior to the Closing to materially increase the aggregate benefits payable to the employees (considered as a group) employed in connection with the Business; and (vii) Except as otherwise provided herein, enter into any written or oral contract, agreement, commitment or arrangement with respect to any of the proscribed transactions set forth in the foregoing paragraphs (i) through (vi). 6.2 Access to Information. (a) Between the date of this Agreement and the Closing Date, Seller will, at reasonable times and upon reasonable notice, provide Buyer and its Representatives: (i) reasonable access to their respective managerial personnel, to all books, records, plans, equipment, offices and other facilities and properties constituting part of the Assets; (ii) such historical financial and operating data and other information with respect to the Assets as Buyer may from time to time reasonably request, to the extent reasonably available; (iii) upon request, a copy of each material report, schedule or other document, if any, filed by Seller with respect to the Assets with the SEC, FERC, ACC, ADEQ or any other Governmental Authority; (iv) access to all Assets for Inspection by Buyer and its Representatives at reasonable times during regular business hours scheduled for such Inspections, and shall provide qualified management, engineering, operations and maintenance and other personnel to make presentations as required, to escort such Persons and to assist in all aspects of conducting the Inspections, provided that each of Buyer and Seller shall bear their own costs of participating in the Inspections; and 38 (v) access to all such other information in the possession or control of Seller as shall be reasonably necessary to enable Buyer or its Representatives to verify the accuracy of the representations and warranties of Seller contained in this Agreement; provided, however, that any such Inspections shall be conducted in such a manner as not to interfere unreasonably with the operation of the Assets. In the event that Seller's provision of information under this Section 6.2 would (A) constitute a waiver of any legal privilege, including the attorney-client privilege or work product privilege, or (B) violate any legal or contractual obligation of Seller to a third party, then Seller shall first notify Buyer with respect to the existence and general nature of the restricted information. If the restricted information relates to the Assets, the Parties shall thereupon mutually agree upon a reasonable procedure in order to provide Buyer with access to the information while protecting the legitimate interests of Seller thereto. The mutually agreed procedure may include, without limitation, a limited waiver by Seller of the relevant privilege, Buyer's agreement to maintain the information in strict confidence, limited review or inspection of the information by specified individuals, or any combination of the foregoing. Notwithstanding anything in this Section 6.2(a) to the contrary, with respect to employee records Seller will only furnish or provide such access to Transferred Employee Records and will not furnish or provide access to other employee personnel records or medical information unless required by law or specifically authorized by the affected employee. (b) The Parties shall cooperate to schedule Buyer's Inspections of the Assets so that, to the extent reasonably feasible, any interference with the operation of the Business is minimized, and Buyer may complete its Inspections of the Assets within ninety (90) working days of commencement of Inspections and within six (6) months after the execution of this Agreement. (c) Until the conclusion of Buyer's next rate case for the Business (or such longer period as may be required by applicable law), each Party and its Representatives shall have reasonable access to all of the books and records relating to the Assets and the Business (for the Seller, only to the extent relating to periods prior to the Closing Date), including all Transferred Employee Records in the possession of Buyer or Seller to the extent that such access may reasonably be required in connection with the Assumed Liabilities or the Excluded Liabilities, or other matters relating to or affected by the operation of the Assets. Such access shall be afforded by the Party in possession of any such books and records upon receipt of reasonable advance notice and during normal business hours. The Party exercising this right of access shall be solely responsible for any costs or expenses incurred by it or the holder of the information with respect to such access pursuant to this Section 6.2(c). If the Party in possession of such books and records shall desire to dispose of any books and records upon or prior to the expiration of such above-stated period (or any such longer period), such Party shall, prior to such disposition, give the other Party a reasonable opportunity, at the latter's expense, to segregate and remove such books and records as it may select. 39 (d) Buyer agrees that, prior to the Closing Date, neither it nor its Representatives will contact any vendors, suppliers, employees, or other contracting parties of Seller or its Affiliates with respect to any aspect of the Assets or the transactions contemplated hereby, without the prior written consent of Seller, which consent shall not be unreasonably withheld. 6.3 Environmental Inspections and Information. (a) Buyer may rely on certain Environmental Reports. Seller shall cause the consultants listed on Schedule 6.3, who were responsible for such Environmental Reports, to deliver written confirmation to Buyer prior to the Closing Date that Buyer may rely on such Environmental Reports. (b) Buyer has conducted various environmental assessment activities with respect to the Assets, including reviewing existing environmental reports, correspondence, permits and related materials regarding the Assets and certain other "Phase I" and "Phase II" activities as set forth in the ASTM protocol regarding "Phase I" and "Phase II" environmental assessments. Seller acknowledges that, between the date of this Agreement and the Closing Date, Buyer will continue to conduct Inspections with respect to environmental matters, including "Phase I" and "Phase II" environmental assessments to the extent Buyer reasonably concludes that such assessments are warranted by the Environmental Reports or the findings of Buyer's assessments prior to the date of this Agreement. Any such Inspections shall be conducted as provided in Section 6.2. (c) If any environmental inspection conducted by Buyer or Seller before or after the date of this Agreement and before the Closing Date results in the discovery of one or more Environmental Conditions that are reasonably likely to give rise to one or more Environmental Claims related to the Assets, for which Remediation would reasonably be required (an "Adverse Environmental Condition"), and if the Adverse Environmental Condition, aggregated with all other Adverse Environmental Conditions identified by Buyer or Seller prior to the Closing Date, is reasonably likely to give rise to Remediation expenses of Buyer after Closing in excess of $1,500,000 in the aggregate (the "Environmental Threshold"), then either (i) the Base Purchase Price shall be reduced, to the extent such Adverse Environmental Condition is not Remediated prior to the Closing Date, by a mutually agreed amount, which amount shall be equal to the excess of (A) the estimated out-of-pocket costs and expenses which Buyer reasonably can be expected to incur to Remediate, in accordance with Good Utility Practices, such Adverse Environmental Condition after the Closing over (B) the Environmental Threshold (the "Environmental Price Adjustment") or (ii) if the Parties are not able to mutually agree on an Environmental Price Adjustment, Seller shall reimburse Buyer for all actual out-of-pocket costs and expenses that Buyer reasonably incurs after Closing to Remediate such Adverse Environmental Condition in excess of the Environmental Threshold. Any Adverse Environmental Condition which has or is reasonably expected to have an aggregate economic impact on Buyer, taking into consideration all relevant circumstances, in excess of $25,000,000, shall be conclusively deemed to be an Asset Material Asset Effect. Notwithstanding the foregoing, any single Adverse Environmental Condition which is reasonably expected to give rise to Remediation expenses of less than $25,000 shall not be counted toward the Environmental Threshold and shall not result in an Environmental Price Adjustment. 40 (d) Buyer either has provided or shall provide to Seller, promptly following Buyer's receipt thereof, copies of all audits, reports, studies, assessments and other information composed or compiled, or to be composed or compiled, by Buyer or Buyer's Representatives in connection with environmental assessment activities. Buyer shall treat all such information delivered to, or composed or compiled by, Buyer or Buyer's Representative as Environmental Data in accordance with the procedures of Section 6.3(e). (e) All audits, reports, studies and assessments delivered to or prepared by Buyer and all other information collected and generated as a result of Buyer's environmental due diligence ("Environmental Data") will be subject to the terms and conditions of the Confidentiality Agreement, dated June 3, 2002, between Seller and Buyer, except as otherwise expressly provided in this Section 6.3(e). Neither Buyer nor its Representatives shall disclose or release any Environmental Data without the prior written consent of Seller and all such information shall be kept strictly confidential. To the extent reasonably practicable, the Environmental Data shall be prepared at the request of counsel to Buyer and, to the fullest extent permitted by law, shall be the work product of such counsel and constitute confidential attorney/client communications. The Environmental Data shall be transferred among Buyer and its Representatives in a manner that will preserve, to the extent reasonably practicable, such privileges. Buyer expressly agrees that until the Closing, it will not distribute the Environmental Data to any third party without Seller's prior written consent (such consent not to be unreasonably withheld). After the Closing, Buyer agrees that it will not distribute the Environmental Data to any third party without Seller's prior written consent, except as required by law or by express provisions of Buyer's corporate compliance program if Seller is provided written notice at least ten (10) days prior to such distribution; provided, however, that Buyer may distribute the Environmental Data to any potential purchaser of any of the Assets or an ownership interest therein (either directly or through the purchase of an ownership interest in an entity holding any of the Assets) only after first notifying the Seller. 6.4 Confidentiality. (a) Each Party shall, and shall use its reasonable best efforts to cause its Representatives to, (i) keep all Proprietary Information of any other Party confidential and not to disclose or reveal any such Proprietary Information to any person other than such Party's Representatives and (ii) not use such Proprietary Information other than in connection with the consummation of the transactions contemplated hereby. After the Closing Date and except as provided in Section 6.3(e), any Proprietary Information, to the extent related to the Assets acquired by Buyer, shall no longer be subject to the restrictions set forth herein. The obligations of the Parties under this Section 6.4(a) shall be in full force and effect for three (3) years from the date hereof and will survive the termination of this Agreement, the discharge of all other obligations owed by the Parties to each other and the Closing Date. (b) Notwithstanding the terms of Section 6.4(a) above, the Parties agree that prior to the Closing, Buyer may reveal or disclose Proprietary Information to any other Persons in connection with (i) the financing of Buyer's purchase of the Assets or any equity participation in Buyer's purchase of the Assets and (ii) obtaining insurance for the Assets; provided that such Persons agree in writing to maintain the confidentiality of the Proprietary Information in accordance with this Agreement. 41 (c) Upon the other Party's prior written approval (which shall not be unreasonably withheld), any of the Parties may provide Proprietary Information of the other Parties to the SEC, FERC, ACC, ADEQ or any other Governmental Authority with jurisdiction or any securities exchange, as may be necessary to obtain Required Regulatory Approvals or to comply generally with any relevant law or regulation. The disclosing Party will seek confidential treatment for the Proprietary Information provided to any Governmental Authority and the disclosing Party will notify the other Party as far in advance as is practicable of its intention to release to any Governmental Authority any Proprietary Information. 6.5 Public Statements. Subject to the requirements imposed by law, any Governmental Authority or securities exchange, prior to the Closing Date, no press release or other public announcement or public statement or comment in response to any inquiry relating to the transactions contemplated by this Agreement shall be issued or made by any Party without the prior approval of the other Party (which approval shall not be unreasonably withheld). The Parties agree to cooperate in preparing any such announcements. 6.6 Expenses. Except to the extent specifically provided herein, whether or not the transactions contemplated hereby are consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by the Party incurring such costs and expenses. Notwithstanding anything to the contrary herein, Buyer will be responsible for all filing fees under the HSR Act relating to the Assets it would acquire hereunder. 6.7 Further Assurances. (a) Subject to the terms and conditions of this Agreement, each Party shall use its Commercially Reasonable Efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the purchase, sale, transfer and delivery of the Assets and the assumption of the Assumed Liabilities pursuant to this Agreement. Such actions shall include, without limitation, each Party using its Commercially Reasonable Efforts to ensure satisfaction of the conditions precedent to its obligations hereunder, including obtaining all necessary consents, approvals, and authorizations of third parties and Governmental Authorities required to be obtained in order to consummate the transactions hereunder, and to effectuate a transfer of the Transferable Permits to Buyer. Seller shall cooperate with Buyer in its efforts to obtain all other Permits and Environmental Permits necessary for Buyer to operate the Assets. None of the Parties hereto shall, without prior written consent of the other Party, take or fail to take any action, which might reasonably be expected to prevent or materially impede, interfere with or delay the transactions contemplated by this Agreement. (b) In the event that any Asset shall not have been assigned, conveyed, transferred and delivered hereunder to Buyer at the Closing, Seller shall, subject to Section 6.7(c), use Commercially Reasonable Efforts to assign, convey, transfer and deliver such Assets to Buyer as promptly as is practicable after the Closing. (c) (i) To the extent that Seller's rights under any Assigned Agreement or Real Property Lease may not be assigned without the consent of another Person which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same, if an attempted assignment would constitute a breach thereof or be unlawful. 42 (ii) Seller agrees that if any consent to an assignment of any Assigned Agreement or Real Property Lease shall not be obtained or if any attempted assignment would be ineffective or would impair the Buyer's rights and obligations under the Assigned Agreement or Real Property Lease in question, so that Buyer would not in effect acquire the benefit of all such rights and obligations, Seller, at the Buyer's option and to the maximum extent permitted by law and such Assigned Agreement or Real Property Lease, shall, after the Closing Date, appoint Buyer to be Seller's agent with respect to such Assigned Agreement or Real Property Lease, or, to the maximum extent permitted by law and such Assigned Agreement or Real Property Lease, enter into such reasonable arrangements with Buyer or take such other actions as are necessary to provide Buyer with the same or substantially similar rights and obligations of such Assigned Agreement or Real Property Lease as Buyer may reasonably request. Seller shall cooperate and shall use Commercially Reasonable Efforts prior to and after the Closing Date to obtain an assignment to Buyer of each Assigned Agreement or Real Property Lease. (iii) To the extent that any fuel supply contract or power purchase agreement is not assignable or the contracting party withholds consent to assignment, then Seller agrees to continue to purchase fuel and/or power pursuant to such contract(s) and to resell it to Buyer at the purchase price for the remainder of the term of such contract(s), provided that the term of such contract(s) shall not be extended. Buyer shall make payment to Seller in this circumstance on an as-incurred basis. (d) To the extent that Seller's rights under any warranty or guaranty described in Section 2.1(h) may not be assigned without the consent of another Person, which consent has not been obtained by the Closing Date, this Agreement shall not constitute an agreement to assign the same, if an attempted assignment would constitute a breach thereof, or be unlawful. Seller agrees that if any consent to an assignment of any such warranty or guaranty shall not be obtained, or if any attempted assignment would be ineffective or would impair Buyer's rights and obligations under the warranty or guaranty in question, so that Buyer would not in effect acquire the benefit of all such rights and obligations, Seller, at Buyer's option and expense, shall use Commercially Reasonable Efforts, to the extent permitted by law and by such warranty or guaranty, to enforce such warranty or guaranty for the benefit of Buyer so as to provide Buyer to the maximum extent possible with the benefits and obligations of such warranty or guaranty. 6.8 Consents and Approvals. (a) As promptly as advisable after the execution of this Agreement, Buyer and Seller shall each file or cause to be filed with the Federal Trade Commission and the United States Department of Justice any notifications required to be filed under the HSR Act and the rules and regulations promulgated thereunder with respect to the transactions contemplated hereby. Each Party shall file any HSR Act notifications with respect to this Agreement and with respect to the Arizona Gas Purchase Agreement simultaneously and in the same filing. Buyer and Seller shall use their respective reasonable best efforts to respond promptly to any requests for additional information made by either of such agencies, and to cause the waiting periods under the HSR Act to terminate or expire at the earliest possible date after the date of filing of such notification. Buyer will pay all filing fees under the HSR Act relating to the Assets, but each of Seller and Buyer will bear its own costs of the preparation of any such filing. 43 (b) The Parties shall cooperate and use all Commercially Reasonable Efforts to promptly prepare and file all necessary documentation, to effect all necessary applications, notices, petitions, filings and other documents, and to obtain all necessary permits, consents, approvals and authorizations of all Governmental Authorities necessary or advisable to consummate the transactions contemplated by this Agreement, including, without limitation, the Required Regulatory Approvals. Buyer shall have the right to review and approve in advance all the information relating to Buyer, on the one hand, and Seller shall have the right to review and approve in advance all the information relating to Seller, on the other hand, in either case, which appear in any filing made in connection with the transactions contemplated by this Agreement. Buyer and Seller agree that they will consult and cooperate with each other with respect to the obtaining of all such necessary permits, consents, approvals and authorizations of Governmental Authorities. (c) In connection with applications and other filings for the Required Regulatory Approvals, and the prosecution of any pending regulatory proceedings material to the Business Buyer and Seller shall jointly, and on an equal basis, coordinate the overall development of the positions to be taken and the regulatory actions to be requested in such applications and filings for approval of the sale by the Seller and the purchase by the Buyer of the Assets and the Business, of all other matters contemplated by this Agreement which require regulatory approval and of all other regulatory matters incidental thereto which are to be addressed in such applications and filings. Efforts to obtain any necessary approvals (including from the ACC and the FERC) shall be prosecuted by counsel mutually agreed upon by the Parties, and acting as joint counsel to the Parties, it being understood, however, that (i) all positions taken in the filings with such Governmental Authorities shall be consistent with the mutual understandings of the Parties and (ii) any SEC approvals required by Buyer shall be prosecuted by Buyer's counsel. (d) Seller and Buyer shall cooperate with each other and promptly prepare and file notifications with, and request Tax clearances from, state and local taxing authorities in any jurisdictions in which a portion of the Purchase Price may be required to be withheld or in which Buyer would otherwise be liable for any Tax liabilities of Seller pursuant to such state and local Tax law. (e) Seller shall have primary responsibility for securing the transfer of the Transferable Permits, effective as of the Closing Date. Buyer shall have the primary responsibility for securing the transfer, reissuance or procurement of the Permits and Environmental Permits (other than Transferable Permits) effective as of the Closing Date. Seller shall cooperate with Buyer's efforts in this regard and assist in any transfer or reissuance of a Permit or Environmental Permit held by Seller, or the procurement of any other Permit or Environmental Permit when so requested by Buyer. 44 6.9 Fees and Commissions. Each of Seller and Buyer represent and warrant to the other that, except for Morgan Stanley & Co. Incorporated, which is acting for and at the expense of Seller, and Credit Suisse First Boston Corporation, which is acting for and at the expense of Buyer, no broker, finder or other Person is entitled to any brokerage fees, commissions or finder's fees in connection with the transactions contemplated hereby by reason of any action taken by the Party making such representation. Each of Seller and Buyer will pay to the others or otherwise discharge, and will indemnify and hold the others harmless from and against, any and all claims or liabilities for all brokerage fees, commissions and finder's fees (other than the fees, commissions and finder's fees payable to the party listed above) incurred by reason of any action taken by the indemnifying party. Buyer has a preexisting business relationship with New Harbor, Incorporated and agrees to be responsible for any brokerage fees, commissions or finder's fees of New Harbor, Incorporated, if any, arising from the transactions contemplated by this Agreement. 6.10 Tax Matters. (a) All Transfer Taxes incurred in connection with this Agreement and the transactions contemplated hereby, including, without limitation, (A) Arizona sales tax; (B) the Arizona transfer tax, conveyance fees or conveyances of interests in real and/or personal property; and (C) Arizona sales tax and transfer tax on deeds shall be borne as follows: fifty percent (50%) by the Buyer and fifty percent (50%) by the Seller. Seller shall file, to the extent required by, or permissible under, applicable law, all necessary Tax Returns and other documentation with respect to all such Transfer Taxes, and, if required by applicable law, Buyer shall join in the execution of any such Tax Returns and other documentation. Prior to the Closing Date, to the extent applicable, Buyer shall provide to Seller appropriate certificates of Tax exemption from each applicable taxing authority. (b) With respect to Taxes to be prorated in accordance with Section 3.4 of this Agreement, Buyer shall prepare and timely file all Tax Returns required to be filed after the Closing Date with respect to the Assets, if any, and shall duly and timely pay all such Taxes shown to be due on such Tax Returns. Buyer's preparation of any such Tax Returns shall be subject to Seller's approval, which approval shall not be unreasonably withheld. Buyer shall make such Tax Returns available for Seller's review and approval no later than fifteen (15) Business Days prior to the due date for filing each such Tax Return. Upon receipt by Buyer of the tax bill, invoice or other statement regarding such real and personal property Taxes, Buyer shall calculate the pro rata share of such tax bill, invoice or other statement attributable to Buyer and Seller. Buyer shall then forward, as soon as possible, to Seller a copy of such tax bill, invoice or statement along with the supporting documentation relating to the calculation of the pro rata share to Seller and Seller will promptly pay to Buyer Seller's pro rata share of such tax bill, invoice or statement. In the event Seller first receives a tax bill, invoice or statement relating to the Assets from a taxing authority, Seller shall promptly forward such tax bill, invoice or statement to Buyer. (c) Buyer and Seller shall provide the other with such assistance as may reasonably be requested by the other Party in connection with the preparation of any Tax Return, any audit or other examination by any taxing authority, or any judicial or administrative proceedings relating to liability for Taxes, and each shall retain and provide the requesting Party with any records or information which may be relevant to such return, audit, examination or proceedings. Any information obtained pursuant to this Section 6.10(c) or pursuant to any other Section hereof providing for the sharing of information or review of any Tax Return or other instrument relating to Taxes shall be kept confidential by the Parties hereto. 45 (d) In the event that a dispute arises between Buyer and Seller, with respect to Taxes in Sections 6.10(a) and 6.10(b), or concerning any amount due under this Section 6.10, the Parties shall attempt in good faith to resolve such dispute and any agreed upon amount shall be paid to the appropriate Party. If such dispute is not resolved within thirty (30) days, the Parties to such dispute shall submit the dispute to the Independent Accounting Firm for resolution, which resolution shall be final, conclusive and binding on such Parties. Notwithstanding anything in this Agreement to the contrary, the fees and expenses of such Independent Accounting Firm shall be allocated between the Parties so that the non-disputing Party's share of such fees and expenses shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by the disputing Party to such auditor that is successfully disputed by the disputing Party (as finally determined by such auditor) bears to the total amount of such remaining disputed amount so submitted by the disputing Party to such auditor. Any payment required to be made as a result of the resolution of the dispute by the Independent Accounting Firm shall be made within ten days after such resolution, together with any interest determined by the Independent Accounting Firm to be appropriate. (e) Buyer agrees that Seller may, at Seller's election prior to the Closing Date, direct that all or a portion of the Purchase Price be delivered to a "qualified intermediary" (as defined in Treasury Regulation Section 1.1031(k) - (g)(4)) as to enable Seller's relinquishment of the Assets to qualify as part of a like-kind exchange of property covered by Section 1031 of the Code. If Seller so elects, Buyer shall cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the Code (including any actions required to facilitate the use of a "qualified intermediary"), and Buyer agrees that Seller may assign all or part of its rights and delegate all or part of its obligations under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of like-kind exchange of property covered by Section 1031 of the Code. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts are not required to include an unreasonable delay in the consummation of the transactions contemplated by this Agreement. (f) Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Base Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Code. If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the Parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any Proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all Tax Returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of such Party's good faith Allocations, unless otherwise required because of a change in any applicable law. 46 6.11 Advice of Changes. Prior to the Closing, each Party will timely advise the other in writing with respect to any matter arising after execution of this Agreement which becomes known to that Party and which, if existing or occurring at the date of this Agreement, would have been required to be set forth in this Agreement, including any of the Schedules or Exhibits hereto. Any such written notice will not be deemed to have amended this Agreement, including the appropriate Schedule or Exhibit, or to have qualified any representation or warranty contained in this Agreement, or to have cured any misrepresentation or breach of warranty that otherwise might have existed hereunder by reason of the development. 6.12 Seller Employees. (a) Buyer shall give Qualifying Offers of employment to all employees of Seller who are covered by the IBEW Local Unions Nos. 387 and 769 collective bargaining agreements with Seller (the "IBEW CBA(s)") and are employed in positions relating to the Business (collectively, "Union Employees"). Each such person who becomes employed by Buyer pursuant to this section shall be referred to herein as a "Transferred Union Employee". (b) Buyer shall give Qualifying Offers of employment to substantially all of the salaried employees of Seller who are employed in positions relating to the Business (collectively, "Non-Union Employees"). Each such person who becomes employed by Buyer pursuant to this section shall be referred to herein as a "Transferred Non-Union Employee." Buyer shall reimburse Seller for 50 percent of the aggregate Severance Cost (as defined below) relating to those Non-Union Employees whose employment is terminated by Seller prior to or as of the Closing Date. "Severance Cost" means the sum of the following costs incurred by Seller resulting from a Non-Union Employee's termination of employment with Seller: (i) all cash severance benefits payable pursuant to Seller's severance policy, (ii) the cost of outplacement services provided pursuant to Seller's severance policy, (iii) Seller's subsidized portion of COBRA Continuation Coverage provided by Seller's health plan in accordance with Seller's severance policy, (iv) the additional severance benefits payable pursuant to arrangements with the specific individuals identified in a schedule delivered to Buyer prior to the date hereof; and (v) any retention bonuses paid by Seller to Non-Union Employees who do not receive Qualifying Offers of employment and who are deemed in Seller's discretion to be critical to the ongoing operation of the Business. With respect to the Severance Cost components described in clauses (i), (ii), (iv) and (v) of the preceding sentence, Buyer shall pay such reimbursement to Seller at the later of Closing or five days after receipt of a list of such terminated Non-Union Employees and the amount of such Severance Cost components with respect to such employees. With respect to the Severance Cost component described in clause (iii), Seller shall provide Buyer during the COBRA Continuation Coverage period with a monthly schedule setting forth the cumulative amount of such cost component for the preceding month, and Buyer shall pay such reimbursement to Seller within five days after receipt of each such schedule. 47 (c) All offers of employment made by Buyer pursuant to Sections 6.12(a) and (b) shall be made in accordance with all applicable laws and regulations, and for Union Employees, in accordance with the applicable IBEW CBA and shall remain open for a period of ten (10) working days. Any such offer which is accepted within such ten (10) working day period shall thereafter be irrevocable, except for good cause, until the earlier of the Closing Date or the termination of this Agreement pursuant to its terms. Additionally, such offers shall be contingent upon the Non-Union Employee's or Union Employee's successful completion of drug testing pursuant to Buyer's policies and in compliance with the applicable IBEW CBA. Following acceptance of such offers, Buyer shall provide written notice thereof to Seller and Seller shall provide Buyer with access to the files and records of employees accepting such offers, to the extent permitted by contract, the applicable IBEW CBA and/or applicable law. (d) The following shall be applicable with respect to Transferred Employees: (i) From and after the Closing Date, Transferred Employees shall accrue no additional benefits under any employee benefit plan, policy, program or arrangement of Seller or its Affiliates. (ii) For such Transferred Union Employees, Buyer shall recognize the IBEW as the exclusive collective bargaining representative and shall assume the terms and conditions of the applicable IBEW CBA, to the extent applicable to such Transferred Union Employees, until the expiration of said agreement, and will further comply with all applicable legal obligations with respect to collective bargaining under federal labor law thereafter. (iii) As of the Closing Date, Buyer shall cause Transferred Non-Union Employees to be covered by the Buyer benefit plans listed on Schedule 6.12(d)(iii), and shall cause Transferred Union Employees to be provided with benefits that are consistent with the terms of the applicable IBEW CBA or are otherwise acceptable to the applicable union. The commitments under this paragraph shall require the following: (A) With respect to health care plans, Buyer agrees to waive or to cause the waiver of all limitations as to pre-existing conditions and actively-at-work exclusions and waiting periods for such employees, except that Buyer may require the employee or his/her dependents who, on the Closing Date, is then in the process of satisfying any similar exclusion or waiting period under the Seller health care plans to satisfy fully the balance of the applicable time period for such exclusion or waiting period under the applicable Buyer plan. With respect to the calendar year in which the Closing Date occurs, all health care expenses incurred by any such employees and/or any eligible dependent thereof, including without limitation any alternate recipient pursuant to qualified medical child support orders, in the portion of the calendar year preceding the Closing Date that were qualified to be taken into account for purposes of satisfying any deductible or out-of-pocket limit under any Seller health care plans shall be taken into account for purposes of satisfying any deductible or out-of-pocket limit under the health care plan of Buyer for such calendar year. 48 (B) With respect to service and seniority, Buyer shall recognize each such employee's service and seniority with Seller and any affiliate of Seller for all non-pension purposes, including the determination of eligibility and extent of service or seniority-related welfare benefits such as vacation and sick pay benefits. Seller agrees to pay each such employee for all vacation benefits banked, accrued, and unused, as of the Closing Date, or otherwise according to Seller's policies and applicable law. For purposes of this Section 6.12(d)(iii)(B), Transferred Employees who have prior service with Southern Union Company, and who are identified on a schedule delivered to Buyer prior to the date hereof, shall be treated as service with Seller. (C) The Citizens Pension Plan ("Seller's Pension Plan") shall retain all liabilities and assets for pension benefits accrued by Transferred Employees through the day immediately preceding the Closing Date, and Seller shall cause all such accrued benefits to become fully vested as of the Closing Date. Seller shall, within 90 days following the Closing Date, notify Transferred Employees who are entitled to deferred vested benefits under Seller's Pension Plan of the amount of such benefits. Buyer shall take all actions necessary to cause the Buyer's qualified pension plan listed on Schedule 6.12(d)(iii) in which Transferred Employees are eligible to participate pursuant to Section 6.12(d)(iii) to provide benefits no less valuable than those provided in Seller's Pension Plan and to recognize the service that the Transferred Employees had under Seller's Pension Plan for purposes of such Transferred Employees' eligibility to participate, vesting, attainment of retirement dates, subsidized benefits, entitlement to optional forms of payment, and benefit accrual; provided, however that a Transferred Employee's benefit under Buyer's Pension Plan shall be offset by his or her accrued benefit under Seller's Pension Plan. The offset referred to in the preceding sentence shall be based on the benefit that would have been available with respect to such Transferred Employee under the terms of Seller's Pension Plan had such Seller's Pension Plan benefit commenced on the Transferred Employee's annuity starting date under Buyer's Pension Plan and been paid in the same form as the benefit paid under Buyer's Pension Plan. Notwithstanding the preceding sentence, in the event that a Transferred Employee is ineligible to commence receipt of his or her accrued benefit under Seller's Pension Plan on his or her annuity starting date under Buyer's Pension Plan or in the form elected under the Buyer's Pension Plan, the offset shall be based on the hypothetical benefit that is the actuarial equivalent (as determined using the then current actuarial assumptions of Seller's Pension Plan) of the Transferred Employee's accrued benefit under Seller's Pension Plan, such hypothetical benefit being assumed to be payable in the same form and with the same annuity starting date as the Transferred Employee's benefit under Buyer's Pension Plan. At Buyer's request, Seller shall provide Buyer with the benefit calculations applicable to a Transferred Employee under Seller's Pension Plan. 49 (D) Buyer shall assume all liabilities, obligations and responsibilities with respect to providing post-retirement health and life insurance benefits ("Post-Retirement Welfare Benefits") to (i) retirees of the Business as of the Closing Date (the "Current Retirees") and (ii) Transferred Employees who have satisfied the age and service eligibility requirements for Post-Retirement Welfare Benefits under the applicable Seller plans (the "Grandfathered Active Employees" and, together with the Current Retirees, the "Grandfathered Individuals"). The Grandfathered Individuals are listed in Schedule 6.12(d)(iii)(D). Buyer shall continue to provide to the Current Retirees Post-Retirement Welfare Benefits that are comparable to those Post-Retirement Welfare Benefits provided to such Current Retirees immediately prior to the Closing Date, under cost-sharing structures that are at least as favorable as the cost-sharing structures in effect for and available to the Current Retirees immediately prior to the Closing Date. Buyer shall provide to the Grandfathered Active Employees Post-Retirement Welfare Benefits that are comparable to those Post-Retirement Welfare Benefits provided to such Grandfathered Active Employees immediately prior to the Closing Date, commencing at the time such Grandfathered Active Employees retire. The Base Purchase Price shall be decreased by the amount by which the APBO (as hereinafter defined) exceeds two million dollars ($2,000,000). The "APBO" means the accumulated post-retirement benefit obligation (within the meaning of the Statement on Financial Accounting Standards No. 106) of the Grandfathered Individuals receiving or eligible for the Post-Retirement Welfare Benefits to the extent Buyer has committed to provide such Post-Retirement Welfare Benefits pursuant to this Section 6.12(d)(iii)(D), determined using a discount rate of 6.75% and the remaining assumptions disclosed in the January 1, 2001 Actuarial Valuation Report dated September 17, 2002, as set forth on Schedule 6.12(d)(iii)(D). (E) With respect to the Seller's 401(k) Savings Plan (the "Savings Plan"), Seller shall vest Transferred Employees in their Savings Plan account balances as of the Closing Date. Seller hereby represents to Buyer that the Savings Plan is intended to be qualified within the meaning of Section 401 of the Code. Buyer shall take all actions necessary to cause the Buyer's qualified 401(k) plan listed on Schedule 6.12(d)(iii) in which Transferred Employees are eligible to participate pursuant to Section 6.12(d)(iii) (x) to recognize the service that the Transferred Employees had in the Savings Plan for purposes of determining such Transferred Employees' eligibility to participate, vesting, attainment of retirement dates, contribution levels, and, if applicable, eligibility for optional forms of benefit payments, and (y) to accept direct-rollover transfers of Transferred Employees' account balances in the Savings Plan, including transfers of loan balances and related promissory notes, provided that such loans would not be treated as taxable distributions at any time prior to such transfer. (F) Within sixty (60) days after the Closing Date, Seller shall transfer to Buyer's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the day immediately preceding the Closing Date. As soon as practicable after the Closing Date, Seller shall provide to Buyer a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such account, and balances standing to their credit as of the day immediately preceding the Closing Date. 50 (e) With respect to severance benefits, Buyer shall provide to any Transferred Non-Union Employee who is terminated by Buyer (other than for cause) prior to the date which is one year following the Closing Date, severance benefits at the level set forth in a schedule provided to Seller prior to the date hereof. Any employee provided severance benefits under this section may be required to execute a release of claims against Seller and Buyer, in such form as Buyer shall prescribe, as a condition for the receipt of such benefits. (f) Each Transferred Non-Union Employee who is initially assigned, or assigned within twelve (12) months of the Closing Date, by Buyer to a principal place of work that requires such employee to relocate his residence will be reimbursed by Buyer for all relocation expenses in accordance with the relocation benefits plans set forth in a schedule provided to Seller prior to the date hereof. For purposes of the foregoing a required relocation of residence shall include a change in the principal place of work that is more than 30 miles farther from such employee's principal place of work immediately prior to the Closing Date and requires an average commute from his current residence of at least one hour in each direction. (g) Seller shall be responsible, with respect to the Business, for performing and discharging all requirements under the WARN Act and under applicable state and local laws and regulations for the notification of its employees of any "employment loss" within the meaning of the WARN Act which occurs on or prior to the Closing Date. (h) Buyer shall not be responsible for, but Seller shall be responsible for, extending COBRA Continuation Coverage to any employees and former employees of Seller, or to any qualified beneficiaries of such employees and former employees, who become or became entitled to COBRA Continuation Coverage on or before the Closing Date, including those for whom the Closing Date occurs during their COBRA election period. (i) Seller or its Affiliates shall pay or cause to be paid to all Transferred Employees, all compensation (including vacation pay), workers' compensation or other employment benefits to which they are entitled under the terms of the applicable compensation or Seller benefit plans or programs as of the Closing Date. Buyer shall pay to each Transferred Employee all unpaid salary or other compensation or employment benefits which have accrued to such employees following the Closing Date, at such times as provided under the terms of the applicable compensation or benefit programs. Notwithstanding the foregoing, if the Closing Date is on or after July 1 of any calendar year, Seller and Buyer shall pro-rate the obligation to pay any bonuses declared by Seller on or after the Closing Date (but prior to March 1 of the calendar year following the year in which the Closing Date occurs) that would have been payable to the Transferred Employees had the Transferred Employees remained employed by Seller or its Affiliates throughout the calendar year in which the Closing Date occurs, in accordance with the provisions of any policy, plan, practice or arrangement of Seller under which such bonus would have been paid. Buyer shall be obligated to pay that portion of each such bonus determined by multiplying the amount of such bonus by a fraction, the numerator of which is the number of days from and after the Closing Date through the end of the calendar year in which the Closing Date occurs, and the denominator of which is 365. 51 (j) Seller shall be responsible for maintaining workers' compensation coverage for all Union Employees and Non-Union Employees for claims relating to occurrences prior to the Closing Date. (k) Individuals who are otherwise Union Employees or Non-Union Employees but who on any date are not actively at work due to a leave of absence covered by the Family and Medical Leave Act (FMLA), or due to any other authorized leave of absence, including, without limitation, short-term disability, or who are on long-term disability, shall nevertheless be treated as "Union Employees" or as "Non-Union Employees", as the case may be, on such date if they are able (i) to return to work within the protected period under the FMLA or such other leave (which in any event shall not extend more than twelve (12) weeks after the Closing Date), whichever is applicable, and (ii) to perform the essential functions of their job, with or without a reasonable accommodation. (l) Buyer shall be responsible, with respect to the Business, for performing and discharging all requirements under the WARN Act and under applicable state and local laws and regulations for the notification of its employees of any "employment loss" within the meaning of the WARN Act which occurs following the Closing Date. (m) Buyer is responsible for extending and continuing to extend COBRA Continuation Coverage to all Transferred Employees, and qualified beneficiaries of such employees who become entitled to such COBRA Continuation Coverage following the Closing Date. (n) The provisions of this Section 6.12 shall not be construed as being for the benefit for any person other than the Parties hereto, and shall not be enforceable by persons other than such Parties (including, without limitations, the Transferred Employees). 6.13 Risk of Loss. (a) From the date hereof through the Closing Date, all risk of loss or damage to the assets included in the Assets shall be borne by Seller, other than loss or damage caused by the acts or negligence of Buyer or any Buyer Representative, which loss or damage shall be the responsibility of Buyer. (b) If, before the Closing Date, all or any portion of the Assets are taken by eminent domain, municipalization or condemnation or are the subject of a pending taking which has not been consummated, (such event being called, in either case, a "Taking"), then Seller shall notify Buyer promptly in writing of such Taking. (i) If such Taking relates to Assets of Seller having an aggregate net book value in excess of $50,000,000, then such Taking shall be a "Material Taking." Upon a Material Taking, Seller and Buyer shall negotiate to settle the loss, if any, resulting from such Material Taking (and such negotiation shall include, without limitation, the negotiation of a fair and equitable reduction in the Base Purchase Price to offset such loss, if any, based on consideration of all relevant circumstances). If Seller and Buyer shall fail to agree to settle the loss, if any, resulting from said Material Taking, said Material Taking shall be conclusively deemed to be an Asset Material Adverse Effect. Any Taking relating to any Assets of Seller's Santa Cruz division shall not be deemed to be a Material Taking. 52 (ii) If such Taking is not a Material Taking, then (A) Buyer may elect to, in the name of Seller, negotiate for, claim, contest and receive the portion of the award properly allocable to those Assets that are the subject of the Taking, (B) to the extent the Taking shall have been consummated prior to the Closing, Seller shall be relieved of its obligation to convey to Buyer those Assets that were the subject of the Taking, (C) at the Closing, Seller will assign to Buyer all of its rights to damages payable as a result of the Taking, and will pay to Buyer all damages previously paid to it in connection with the Taking, in each case to the extent properly allocable to those Assets that are the subject of the Taking, and (D) following the Closing, Seller will give to Buyer any further assurances of such rights and assignment with respect to the Taking as Buyer reasonably may request from time to time. (c) (i) If any casualty loss or damage to the Assets shall occur before the Closing Date, then the Base Purchase Price shall be reduced, to the extent such loss or damage is not remedied prior to the Closing Date, by an amount mutually acceptable to the Parties, which amount shall be equal to the estimated out-of-pocket costs and expenses which Buyer reasonably can be expected to incur to repair or replace, in accordance with Good Utility Practices, such lost or damaged Assets after Closing. If the actual out-of-pocket costs and expenses which Buyer reasonably incurred to repair or replace, in accordance with Good Utility Practices, such lost or damaged Assets exceeds such estimated amount, Seller shall reimburse Buyer for such excess costs. If the Parties do not agree to an adjustment to the Base Purchase Price in respect of the casualty loss, then the Closing shall be postponed for such period of time (not to exceed six (6) months), and Seller shall repair or replace the lost or damaged Assets in accordance with Good Utility Practices and Buyer or its Representatives will have the right to inspect and observe and approve, all repairs or replacements made by Seller to remedy such casualty loss. (ii) Notwithstanding anything to the contrary in Section 6.13(c)(i) above, if Seller shall have failed to remedy, cure or otherwise reverse by the Closing Date any casualty loss or damage to the Assets such that the estimated out-of-pocket costs and expenses that Buyer reasonably can be expected to incur to repair or replace such lost or damaged Assets exceeds $25,000,000, such loss or damage shall be conclusively deemed to be an Asset Material Adverse Effect. 6.14 Tax Exempt Financing (a) Seller represents that: (i) The Exempt Facilities have been financed, and refinanced, in whole or in part, with the proceeds of the issuance and sale by various governmental authorities of industrial development revenue bonds or private activity bonds the interest on which, with certain exceptions, is excluded from gross income for purposes of Federal income taxation (such bonds, as currently outstanding, the "Revenue Bonds"); and Seller is the economic obligor in respect of such Revenue Bonds; 53 (ii) The Revenue Bonds are described in Schedule 6.14(a); (iii) The basis for the exclusion of interest on the Revenue Bonds from gross income for Federal income tax purposes is the use of the Exempt Facilities for (A) "the local furnishing of electric energy or gas" under Sections 142(a)(8) and 142(f) of the Code or, if applicable, Section 103(b)(4)(E) of the Internal Revenue Code of 1954, as amended (the "1954 Code"), and in either case the applicable Treasury Regulations (the "Regulations") thereunder, or (B) "the furnishing of water" or "sewage facilities" under Sections 142(a)(4) and 142(a)(5) of the Code or, if applicable, Sections 103(b)(4)(G) or 103(b)(4)(E) of the 1954 Code, and in either case the applicable Regulations. Seller acknowledges and agrees that Buyer has and shall have no responsibility or obligation hereunder for the Exempt Facilities described in clause (B); (iv) The use of the Exempt Facilities for a purpose other than a qualifying purpose indicated in subsection (iii) above could impair (A) such exclusion from gross income of the interest on the Revenue Bonds, possibly with retroactive effect, unless appropriate remedial action were taken (which could include prompt defeasance or redemption of the Revenue Bonds) and/or (B) the deductibility of payments by Seller or Buyer of interest based on the restrictions in Section 150(b) of the Code; (v) After August 20, 1996, at least the following bonds exempt from tax under Section 103 of the Code and in whole or in part described in Section 142(a)(8) of the Code have been issued with respect to facilities of Seller for the "local furnishing of electric energy or gas": The Industrial Development Authority of the County of Navajo, Industrial Development Revenue Bonds (Citizens Utilities Company Project) 1997 Series B ($12,380,000), and The Industrial Development Authority of the County of Yavapai, Industrial Development Revenue Bonds (Citizens Utilities Company Project) 1998 Series ($20,000,000); and (vi) Any breach by Buyer of its obligations under this Section 6.14 could result in the incurrence by Seller of additional costs and expenses with respect to the Revenue Bonds, including, without limitation, increased interest costs, loss of the interest deduction for tax purposes and transaction costs relating to any refinancing, redemption and/or defeasance of all or part of the Revenue Bonds (cumulatively, the "Tax Impact"). (b) Buyer agrees that Buyer will indemnify Seller for costs incurred by Seller in respect of any Tax Impact that would not have arisen but for Buyer's breach of its obligations under Section 6.14(c) (except as excused elsewhere in this Section 6.14), provided that Buyer's agreements and representations as set out in this Section 6.14 shall be limited to and apply solely to those Exempt Facilities described by Section 6.14(a)(iii)(A). 54 (c) After August 20, 1996, at least the following bonds exempt from tax under Section 103 of the Code and described in whole or in part in Section 142(a)(8) of the Code have been issued with respect to facilities of Buyer for the "local furnishing of electric energy": The Industrial Development Authority of the County of Pima, Industrial Development Revenue Bonds (Tucson Electric Power Company Project) 1997 Series A, B and C ($247,460,000), and The Industrial Development Authority of the County of Apache, Pollution Control Revenue Bonds (Tucson Electric Power Company Project) 1998 Series A, B and C ($200,000,000). So long as any Revenue Bonds remain outstanding with respect to electric Exempt Facilities in any county, Buyer agrees that it shall not use, or take any deliberate act to permit the use of, or fail to take any act within its control that would prevent the use of, the electric Exempt Facilities within that county for any purpose or in any manner other than as shall be consistent with the Exempt Facility Operating Protocols (as such Exempt Facility Operating Protocols may have been updated, amended or corrected by Seller for the purpose of their accuracy on or before the Closing Date; provided that such changes do not materially impact Buyer's operation of the Assets) delivered by Seller to Buyer on or before the date of this Agreement, unless Buyer: (i) has obtained at its own expense an opinion addressed to Seller of nationally recognized bond counsel reasonably acceptable to Seller ("Bond Counsel") that such use will not impair (x) the exclusion from gross income of the interest on any issue of Revenue Bonds for Federal income tax purposes and (y) the deductibility of Seller's payments of interest based on the restrictions in Section 150(b) of the Code; or (ii) has provided written notice to Seller of any act or failure to act either (x) not later than 45 days after the effective date of such action, or (y) if any of such affected Revenue Bonds are not then eligible for optional or mandatory redemption by the terms thereof, sufficiently in advance of such act or failure to act to permit Seller to request from the IRS a private letter ruling to the effect that such action does not constitute an event that would adversely affect the exclusion of the interest on such Revenue Bonds from gross income for Federal income tax purposes, to receive a final ruling to such effect from the IRS, and to dispose of the Revenue Bonds in a manner not inconsistent with such ruling ("Sufficient Notice"). (Reference is made to Schedule 6.14(a) for a listing of the respective optional redemption dates of the Revenue Bonds.) (d) Notwithstanding any other provision of this Agreement, it is expressly understood and agreed that the provisions of Section 6.14(c) shall not prohibit Buyer from (and Buyer shall incur no liability to Seller for or in connection with Buyer) suspending the operation of the Exempt Facilities (in whole or in part) on a temporary basis, or from terminating the operation of the Exempt Facilities (in whole or in part) on a permanent basis and shutting down, retiring, abandoning and/or decommissioning the Exempt Facilities (in whole or in part); provided, however, that if the Exempt Facilities, in whole or in part, are dismantled and sold, including any sale for scrap, at any time when any Revenue Bonds remain outstanding, then the proceeds of such sale of Exempt Facilities shall within six months from the date of sale be expended to acquire replacement property to be used as described in the related Exempt Facility Operating Protocol, unless (I) Buyer has obtained at its own expense an opinion addressed to Seller of Bond Counsel that the failure to take this action will not impair (x) the exclusion from gross income of the interest on any issue of Revenue Bonds for Federal income tax purposes and (y) the deductibility of Seller's payments of interest based on the restrictions in Section 150(b) of the Code; (II) the proceeds of such sales are less than $50,000 in a calendar year; or (III) Buyer has provided Sufficient Notice of such action to Seller. 55 (e) Buyer agrees that it shall not issue, or have issued on its behalf, any tax-exempt bonds to finance or refinance its acquisition of the Exempt Facilities, provided that it is expressly understood and agreed that this clause (e) shall not prohibit Buyer's use of tax-exempt bonds to finance or refinance any improvement to the Exempt Facilities made after the date of acquisition or to any assets other than the Exempt Facilities. (f) Buyer agrees to provide prompt written notice to Seller of any condemnation of, or casualty loss with respect to, the Exempt Facilities, in whole or in substantial part, to cooperate in good faith with Seller in Seller's efforts to ascertain the consequences of any such eminent domain proceeding or casualty loss for the (A) exclusion of interest on the Revenue Bonds from gross income for Federal income tax purposes and (B) the deductibility of Seller's payments of interest based on the restrictions in Section 150(b) of the Code. (g) Seller agrees that the Revenue Bonds shall be redeemed no later than the earlier of (I) their respective stated maturity dates, and (II) their respective first optional redemption dates on or after the Closing Date. Seller also agrees that none of the Revenue Bonds shall be refunded. (h) Seller hereby represents that it has performed all duties and obligations of "Company" under the documents relating to the Revenue Bonds, that the representations and warranties under the documents relating to the Revenue Bonds remain true and correct, and that there has been no breach of any covenant or agreement by Seller under the documents relating to the Revenue Bonds. Seller hereby covenants that, until all of the Revenue Bonds have been redeemed, Seller will perform all duties and obligations of "Company" under the documents relating to the Revenue Bonds, that Seller's representations and warranties under such documents will remain true and correct and that Seller will not breach any covenant or agreement of Seller under such documents; provided that Seller's covenant in this sentence shall not extend to any such duties, obligations, representations, warrantees, covenants or agreements the necessary predicate for which is Seller's actual ownership, possession or control of the Exempt Facilities from and after the Closing Date. Seller acknowledges and agrees that although Seller from and after the Closing Date will not own, possess or control the Exempt Facilities, Seller shall remain primarily obligated under the documents relating to the Revenue Bonds and, as between itself and each issuer of the Revenue Bonds, shall remain subject to each of Seller's representations, warranties, covenants and agreements thereunder. Buyer shall have no liability under this Section 6.14 unless interest on the Revenue Bonds would be excluded from gross income for Federal income tax purposes absent an act or failure to act by Buyer in contravention of the terms of Section 6.14(c). (i) In any case where Buyer has provided notice to Seller under this Section 6.14, Buyer agrees that it will join and cooperate with Seller with respect to any request by Seller to the Internal Revenue Service to obtain a private letter ruling regarding any Tax Impacts of the act or failure to act by Buyer that prompted such notice. Seller will join and cooperate with Buyer with respect to any request by Buyer to the Internal Revenue Service to obtain a private letter ruling regarding any Tax Impacts. The Party seeking the private letter ruling shall bear all costs of the filing, legal and related out-of-pocket expenses incurred in the course of such request. 56 (j) Seller agrees that it has sole responsibility to make any required payments of principal and interest on the Revenue Bonds and that Buyer has no responsibility to make such payments. Seller agrees that it will indemnify, protect, defend and hold harmless Buyer from and against any claim that Buyer owes any payment of principal or interest on the Revenue Bonds. Seller agrees that Buyer shall retain any payments with respect to any casualty event or any condemnation of the Exempt Facilities and that, except as Buyer has otherwise agreed under Section 6.14(c), Buyer shall not be restricted in its use of any such proceeds. (k) If Buyer shall sell, exchange, transfer or otherwise dispose of the Exempt Facilities in whole or substantial part (aggregate price of $500,000 or more in a calendar year) to one or more third parties, Buyer shall cause to be included in the documentation relating to such transaction covenants and agreements on the part of such third party substantially identical to those on the part of Buyer contained in this Section 6.14. (l) The covenants and agreements on the part of Buyer and Seller contained in this Section 6.14 shall continue in effect so long as any of the Revenue Bonds shall remain outstanding. Seller shall notify Buyer promptly when there shall be no Revenue Bonds outstanding. (m) Buyer acknowledges and agrees that Seller's bond counsel may rely on Buyer's representations, warranties and covenants as hereinabove provided for the purpose of rendering legal opinions, as required by the Indentures of Trust, the Loan Agreements and the Tax Regulatory Agreements relating to the Revenue Bonds ("IDRB Documents") as a precondition to the sale by Seller of such Exempt Facilities, to the effect that the sale of such Exempt Facilities will not result in (I) the inclusion of the interest on the Revenue Bonds in the gross income of the recipient for purposes of Federal income taxation, and (II) disallowance of interest expense to Seller under Section 150(b) of the Code. Seller acknowledges and agrees that Buyer shall be an addressee of the above-described opinion letters of Seller's bond counsel or shall receive a reliance letter from Seller's bond counsel authorizing Buyer to rely on such opinion letters. (n) Nothing in this Agreement is intended to nor shall it be interpreted as (i) an assignment to, and assumption by, Buyer of any of the IDRB Documents, or (ii) as an undertaking or agreement by Buyer to assume, guarantee or pay any of Seller's loan or other payment obligations pursuant to the IDRB Documents. Other than as stated in this Section 6.14, Buyer shall have no liability in respect of the Revenue Bonds. (o) Each of Buyer and Seller shall use its Commercially Reasonable Efforts, and shall cooperate with the other Party in the other Party's efforts, to obtain all Consents, bond counsel opinions and IRS rulings as may be required under the IDRB Documents and the Code to enable Seller to defease, prepay, redeem or retain until the first possible redemption date the IDRB Indebtedness and to sell the Assets to Buyer without the result that the interest on the Revenue Bonds will be included in the gross income of the recipient for purposes of Federal income taxation; provided, however, that Buyer shall have no obligation in respect of its ownership or operation of the Exempt Facilities (including but not limited to rates imposed by Buyer in respect of utility service provided by the Exempt Facilities or by any other facilities of Buyer or affiliates of Buyer) other than to comply with the Exempt Facility Operating Protocols. 57 6.15 Seller Guarantees and Surety Instruments. Buyer shall use Commercially Reasonable Efforts to assist Seller in obtaining full and complete releases of the guarantees, letters of credit, bonds and other surety instruments listed in Schedule 6.15. In this connection, Buyer agrees to provide a guaranty, letter of credit, bond or other surety instrument at Closing to replace those listed in Schedule 6.15. 6.16 Citizens Marks. Buyer acknowledges and agrees with Seller that Seller has the absolute and exclusive proprietary right to the Citizens Marks, all rights to which and the goodwill represented thereby and pertaining thereto are being retained by Seller. Within ninety (90) days after the Closing Date, Buyer shall cease using any Citizens Mark and shall remove from the Assets any and all Citizens Marks. Thereafter, Buyer shall not use any Citizens Mark in connection with the sale of any products or services or otherwise in the conduct of the businesses. In the event that Buyer breaches this Section 6.16, Seller shall be entitled to specific performance and to injunctive relief against further violations, as well as any other remedies at law or in equity available to Seller. 6.17 Title Commitments. Prior to Closing, Seller shall cooperate with Buyer and use Commercially Reasonable Efforts to assist Buyer if Buyer desires to obtain American Land Title Association ("ALTA") title insurance commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final form, from one or more title insurance companies (collectively, the "Title Company"), committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment) to issue ALTA (or its local equivalent) form of title insurance policies in an amount acceptable to the Buyer and the Title Company insuring good, valid, indefeasible fee simple title to the Real Property in Buyer, in all cases, at Buyer's sole expense and in the respective amounts that Buyer requests prior to Closing, subject to no Encumbrances or other exceptions to title other than Permitted Encumbrances (collectively the "Title Policies"). On or prior to the Closing Date, Seller shall execute and deliver, or cause to be executed and delivered, to the Title Company, at no cost to Seller, any customary affidavits, standard gap indemnities, evidence of corporate existence and authority, and similar documents reasonably requested by the Title Company in connection with the issuance of the Title Commitments or the Title Policies; provided that such efforts and Buyer's request for Title Policies or Title Commitments shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement, except to the extent caused by or resulting from Seller's breach of this Agreement; and provided further, that nothing in this Section 6.17 shall obligate Seller to execute or deliver any document that affects, in a manner adverse to Seller, Seller's liability to Buyer as expressed herein and in the Special Warranty Deed. 6.18 Joint Use Agreement re: Easements. To the extent reasonably requested by either Party, at least sixty (60) days before Closing, Buyer and Seller (or its appropriate Affiliate) will commence good faith negotiations of a joint use agreement, to be fully executed and delivered by the Parties at Closing, regarding the shared Easements to be partially assigned to Buyer at Closing as contemplated in Schedule 2.2. Such joint use agreement will be partially assignable by Seller to any purchaser of Seller's or its Affiliate's other utility plant permitted to be located on the real property that is the subject of any such shared Easements. 58 6.19 Leases. If requested by Buyer at least sixty (60) days before Closing, Buyer and Seller (or its appropriate Affiliate) will commence good faith negotiations regarding Buyer's short-term lease (not to exceed one hundred eighty (180) days from the Closing Date) of space at the business office at 1760 McCulloch Boulevard, Lake Havasu City, Arizona, a portion of which is used by Seller in connection with the Business, on commercially reasonable terms acceptable to Buyer and Seller. 6.20 Post-Execution Delivery of Schedules. Within one hundred eighty days (180) following the date of execution of this Agreement, Seller shall deliver to Buyer a schedule, to be identified as Schedule 6.20, which sets forth all of the following identified by Seller after reasonable investigation (i) all Permits, (ii) all material items of Tangible Personal Property (other than Inventories), (iii) quantities of Inventories recorded in Seller's books and records for the Business as of the last day of the month preceding the date of this Agreement, together with the net book values of such Inventories as of such date, (iv) all Easements held by Seller in connection with the Business, (v) all line extension agreements and similar construction arrangements, railroad crossing agreements and similar arrangements, and (vi) all Real Property Leases. Schedule 6.20 will also designate those Permits that require the consent of the respective Governmental Authority to transfer and those that purport to be non-transferable. ARTICLE VII CONDITIONS 7.1 Conditions to Obligations of Buyer. The obligation of Buyer to effect purchase of the Assets and the other transactions contemplated by this Agreement shall be subject to the fulfillment of the following conditions, or waiver thereof, by Buyer at or prior to the Closing Date: (a) The waiting period under the HSR Act applicable to the consummation of the sale of the Assets contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any Governmental Authority which prevents the consummation of the sale of the Assets contemplated herein shall have been issued and remain in effect (each Party agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted) and no statute, rule or regulation shall have been enacted by any state or federal government or Governmental Authority prohibiting the consummation of the sale of the Assets; (c) Buyer shall have received all of Buyer's Required Regulatory Approvals by Final Order, and such Required Regulatory Approvals shall not contain terms and conditions that would result in a Regulatory Material Adverse Effect for Buyer or an Asset Material Adverse Effect; 59 (d) Seller shall have received all of Seller's Required Regulatory Approvals by Final Order, and such Required Regulatory Approvals shall not contain terms and conditions that would result in a Regulatory Material Adverse Effect for Buyer or an Asset Material Adverse Effect; (e) Seller shall have performed and complied with each of its covenants and agreements contained in this Agreement which are required to be performed and complied with by Seller on or prior to the Closing Date except where the failure to so perform or comply, when taken in the aggregate, would not have a Buyer Material Adverse Effect or an Asset Material Adverse Effect; (f) The representations and warranties of Seller set forth in this Agreement shall be true and correct as of the Closing Date as though made at and as of the Closing Date, except (i) subject to Section 6.11, to the extent due to changes expressly permitted by this Agreement or otherwise in writing by Buyer, (ii) that representations and warranties made as of, or in respect of, only a specified date or period shall be true and correct as of, or in respect of, such date or period and (iii) to the extent that any failure of such representations and warranties to be true and correct as aforesaid when taken in the aggregate would not have a Buyer Material Adverse Effect or an Asset Material Adverse Effect (it being understood and agreed that the economic impact of any Adverse Environmental Condition shall not be considered in the determination of an Asset Material Adverse Effect except as otherwise provided in Section 6.3); (g) No Asset Material Adverse Effect shall have occurred and be continuing; (h) Seller shall have delivered, caused to be delivered, or be standing ready to deliver, to Buyer at the Closing, Seller's closing deliveries described in Section 3.5; (i) Buyer shall have received any consents of third parties required for the assignment to Buyer of any of the Assigned Agreements other than consents that, if not obtained, would not have an Asset Material Adverse Effect or a Buyer Material Adverse Effect, in form and substance reasonably acceptable to Buyer; and (j) Buyer shall be reasonably satisfied that the consummation of the asset purchase and sale transaction contemplated by the Asset Purchase Agreement, dated as of the date hereof, between Seller and Buyer relating to purchase by Buyer of Seller's gas utility business in the State of Arizona (the "Arizona Gas Purchase Agreement"), will occur concurrently with the Closing. 7.2 Conditions to Obligations of Seller. The obligations of Seller to effect the sale of the Assets and the other transactions contemplated by this Agreement shall be subject to the fulfillment of the following conditions, or the waiver thereof, by Seller at or prior to the Closing Date: (a) The waiting period under the HSR Act applicable to the consummation of the sale of the Assets contemplated hereby shall have expired or been terminated; (b) No preliminary or permanent injunction or other order or decree by any Governmental Authority which prevents the consummation of the sale of the Assets contemplated herein shall have been issued and remain in effect (each of Seller and Buyer agreeing to use its reasonable best efforts to have any such injunction, order or decree lifted) and no statute, rule or regulation shall have been enacted by any state or federal government or Governmental Authority in the United States prohibiting the consummation of the sale of the Assets; 60 (c) Seller shall have received all of Seller's Required Regulatory Approvals by Final Order, and such Required Regulatory Approvals shall not contain terms and conditions that would have an Asset Material Adverse Effect or a Seller Material Adverse Effect; (d) Seller shall have received any consents of third parties required for the assignment to Buyer of any of the Assigned Agreements other than consents that, if not obtained, would not have a Seller Material Adverse Effect; (e) Buyer shall have performed and complied with each of its covenants and agreements contained in this Agreement which are required to be performed and complied with by Buyer on or prior to the Closing Date except where the failure to so perform or comply, when taken in the aggregate, would not have a Seller Material Adverse Effect; (f) The representations and warranties of Buyer set forth in this Agreement shall be true and correct as of the Closing Date as though made at and as of the Closing Date, except (i) subject to Section 6.11, to the extent due to changes expressly permitted by this Agreement or otherwise in writing by Seller, (ii) that representations and warranties made as of, or in respect of, only a specified date or period shall be true and correct as of, or in respect of, such date or period and (iii) to the extent that any failure of such representations and warranties to be true and correct as aforesaid when taken in the aggregate would not have a Seller Material Adverse Effect; (g) Buyer shall have assumed, as set forth in and subject to Section 6.12, all of the applicable obligations under the IBEW CBA(s); (h) Buyer shall have delivered, caused to be delivered or standing ready to deliver, to Seller at the Closing, Buyer's closing deliveries described in Section 3.6; (i) Seller shall be reasonably satisfied that the consummation of the Arizona Gas Purchase Agreement will occur concurrently with the Closing; and (j) Seller shall have received opinions from Seller's Bond Counsel, dated the Closing Date, substantially in the form attached hereto as Exhibit E. ARTICLE VIII INDEMNIFICATION 8.1 Indemnification of Seller by Buyer. Subject to Section 8.3, Buyer shall indemnify, defend and hold harmless Seller, its officers, directors, employees, shareholders, Affiliates and agents (each, a "Seller Indemnitee") from and against any and all Indemnifiable Losses asserted against or suffered by any Seller Indemnitee (each, a "Seller Indemnifiable Loss") in any way relating to, resulting from or arising out of or in connection with (i) any breach by Buyer of any covenant or agreement of Buyer contained in this Agreement or any failure or inaccuracy of any representation or warranty of Buyer contained in this Agreement, (ii) the Assumed Liabilities, (iii) any loss or damages resulting from or arising solely out of any Inspection of the Assets, and (iv) any Third Party Claims against a Seller Indemnitee to the extent arising out of or in connection with Buyer's ownership or operation of the Assets on or after the Closing Date. 61 8.2 Indemnification of Buyer by Seller. (a) Subject to Section 8.3, Seller shall indemnify, defend and hold harmless Buyer, its officers, directors, employees, shareholders, Affiliates and agents (each, a "Buyer Indemnitee") from and against any and all Indemnifiable Losses asserted against or suffered by any Buyer Indemnitee (each, a "Buyer Indemnifiable Loss") in any way relating to, resulting from or arising out of or in connection with (i) any breach by Seller of any covenant or agreement of Seller contained in this Agreement or failure or inaccuracy of any representation or warranty of Seller contained in this Agreement, (ii) the Excluded Liabilities, (iii) noncompliance by Seller with any bulk sales or transfer laws as provided in Section 10.12, and (iv) any Third Party Claims against a Buyer Indemnitee arising out of or in connection with Seller's ownership or operation of the Excluded Assets on or after the Closing Date. (b) Subject to Sections 8.3(a), (e), (f) and (g) and to the other provisions of this Section 8.2(b) and so long as Buyer complies with the Exempt Facilities Operating Protocols relating to an issue of outstanding Revenue Bonds, Seller agrees to indemnify, defend and hold harmless the Buyer Indemnitees from and against Buyer's Tax Losses (as defined below) upon a final decree or judgment of any federal court or a final action by the IRS (a "Final Determination") that the related Exempt Facilities are "tax-exempt bond financed property" under Section 168(g)(5) of the Code by reason of such issue of Revenue Bonds remaining outstanding from and after the Closing Date. No such decree or action shall be considered to be a Final Determination unless Seller has been given written notice and, if it is so desired and is legally allowed, has been afforded the opportunity to contest the same either directly or in the name of Buyer, and until conclusion of any appellate review, if sought. The maximum aggregate amount of Buyer's Tax Losses for which Seller shall be obligated to indemnify the Buyer Indemnitees both (i) under this Section 8.2(b) and (ii) under the corresponding Section 8.2(b) of the Arizona Gas Purchase Agreement shall be $1,500,000. "Buyer's Tax Losses" shall mean the amount equal to the present value (calculated using a discount rate of 10 percent per annum) of the difference (multiplied by the applicable combined federal and State of Arizona corporate tax rate of Buyer Indemnitee) for each affected tax year between the respective dollar amounts of (x) depreciation of the related Exempt Facilities allowed under Section 168(g) of the Code, and (y) the depreciation of such Exempt Facilities that would be allowable under Section 168 of the Code if the Exempt Facilities were not "tax-exempt bond financed property." The indemnity granted by Seller in this Section 8.2(b) shall terminate at 5:00 p.m., local time in New York, New York, on the seventh anniversary of the Closing Date, provided that such termination shall not affect Seller's obligations under this Section 8.2(b) if Buyer provided Seller with proper notice of the claim or event for which indemnification is sought prior to such termination. 8.3 Certain Limitations on Indemnification. 62 (a) Notwithstanding anything to the contrary contained herein: (i) any Indemnitee shall use Commercially Reasonable Efforts to mitigate all losses, damages and the like relating to a claim under these indemnification provisions, including availing itself of any defenses, limitations, rights of contribution, claims against third persons and other rights at law or equity. The Indemnitee's Commercially Reasonable Efforts shall include the reasonable expenditure of money to mitigate or otherwise reduce or eliminate any loss or expenses for which indemnification would otherwise be due, and the Indemnifying Party shall reimburse the Indemnitee for the Indemnitee's reasonable expenditures in undertaking the mitigation; and (ii) any Indemnifiable Loss shall be net of the dollar amount of any insurance or other proceeds actually received by the Indemnitee or any of its Affiliates with respect to the Indemnifiable Loss. Any Party seeking indemnity hereunder shall use Commercially Reasonable Efforts to seek coverage (including both costs of defense and indemnity) under applicable insurance policies with respect to any such Indemnifiable Loss. (b) Except as otherwise provided in this Section 8.3(b), the representations, warranties, covenants and agreements of the Parties set forth in this Agreement shall survive the Closing Date for a period of eighteen (18) months, and all representations, warranties, covenants and agreements of the Parties under this Agreement and the related indemnities granted in this Article VIII shall terminate at 5:00 p.m., local time in New York City, New York, on the day that is eighteen (18) months after the Closing Date. The expiration, termination or extinguishment of any covenant or agreement shall not affect the Parties' obligations under Section 8.1 or 8.2 hereof if the Indemnitee provided the Indemnifying Party with proper notice of the claim or event for which indemnification is sought prior to such expiration, termination or extinguishment. Notwithstanding the foregoing provisions of this Section 8.3(b), the representations, warranties, covenants and agreements contained in Sections 3.3(e), 6.2(c), 6.3(c), 6.3(e), 6.4(a), 6.10, 6.12, 6.14, 6.16, and in Articles VIII and X, will survive the Closing in accordance with their terms. (c) Notwithstanding anything to contrary in this Agreement, in no event shall Buyer indemnify Seller Indemnitees or Seller indemnify Buyer Indemnitees, or otherwise be liable in any way whatsoever to said Indemnitees, for any Losses otherwise subject to indemnification by the Indemnifying Party (determined after giving effect to the other provisions of this Section 8.3) until the Buyer Indemnitees or the Seller Indemnitees, as the case may be, have incurred otherwise indemnifiable Losses that in the aggregate exceed a threshold amount equal to one percent (1%) of the Purchase Price, after which Buyer or Seller, as the case may be, shall then be liable for all Losses incurred by the Seller Indemnitees or the Buyer Indemnitees, as applicable. The limitations on indemnification set forth in this Section 8.3(c) shall not apply to any losses asserted against or suffered by an Indemnitee in any way relating to, resulting from or arising out of or in connection with the failure of (i) the appropriate Party to make the payment required to be made by it in accordance with Section 3.3(d), (ii) Buyer to discharge Assumed Liabilities other than those specified in Sections 2.3(e) and 2.3(i), (iii) Seller to discharge Excluded Liabilities other than those specified in Sections 2.4(d), 2.4(g), 2.4(h), 2.4(j) and 2.4(n), (iv) Seller to make any payment to Buyer if and to the extent required by Section 3.3(e), 6.3(c), 6.10(b), 6.13(c) or 8.2(b), and (v) Buyer to make any payment to Seller if and to the extent required by Section 6.12(b). Any such losses also shall be disregarded when determining whether the threshold set forth in this Section 8.3(c) has been exceeded. 63 (d) Notwithstanding anything to the contrary in this Agreement, in no event shall Seller indemnify the Buyer Indemnitees or Buyer indemnify Seller Indemnitees, or be otherwise liable in any way whatsoever to said Indemnitees, for any Losses otherwise subject to indemnification by the Indemnifying Party (determined after giving effect to the other provisions of this Section 8.3) that in the aggregate exceed an amount equal to fifty percent (50%) of the Purchase Price. (e) Except to the extent otherwise provided in Section 3.3 (relating to adjustments to the Base Purchase Price), Section 6.3(c) (relating to post-Closing reimbursement of excess environmental Remediation costs), Section 6.10(b) (relating to post-Closing reimbursements for Taxes), Section 6.12(b) (relating to post-Closing reimbursements for Severance Costs), Section 6.13(c) (relating to post-Closing reimbursement of excess costs and expenses of repairing lost or damaged Assets), and Section 6.16 (relating to specific performance and injunctive relief with respect to Citizens Marks), the rights and remedies of Seller and Buyer under this Article VIII are exclusive and in lieu of any and all other rights and remedies which each of Seller and Buyer may have under this Agreement or otherwise for monetary relief, with respect to (i) all post-Closing claims relating to this Agreement, the events giving rise to this Agreement and the transactions provided for herein or contemplated hereby or thereby, or (ii) the Assumed Liabilities or the Excluded Liabilities, as the case may be. Notwithstanding any language contained in any Ancillary Agreement (including the Special Warranty Deed), the representations and warranties of Seller set forth in this Agreement will not be merged into any such Ancillary Agreement and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement shall control. No provision set forth in any such Ancillary Agreement shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. (f) Notwithstanding anything to the contrary contained herein, no Party (including an Indemnitee) shall be entitled to recover from any other Party (including an Indemnifying Party) for any liabilities, damages, obligations, payments, losses, costs, or expenses under this Agreement any amount in excess of the actual compensatory damages, court costs and reasonable attorney's and other advisor fees suffered by such Party. Each of Buyer and Seller waive any right to recover punitive, incidental, special, exemplary and consequential damages arising in connection with or with respect to this Agreement. The provisions of this Section 8.3(d) shall not apply to indemnification for a Third Party Claim. (g) The limitations set forth in this Section 8.3 do not apply to fraud or willful misconduct of a Party. (h) No amount shall be recovered from a Party for the breach or untruth of any of such Party's representations, warranties, covenants or agreements, or for any other matter, to the extent that the other such Party had knowledge of such breach, untruth or other matter at or prior to the Closing, nor shall the other Party be entitled to rescission with respect to any such matter. 64 8.4 Defense of Claims. (a) If any Indemnitee receives notice of the assertion or commencement of any Third Party Claim made or brought by any Person who is not a Party to this Agreement or any Affiliate of a Party to this Agreement with respect to which indemnification is to be sought from an Indemnifying Party, the Indemnitee shall give such Indemnifying Party reasonably prompt written notice thereof, but in any event such notice shall not be given later than ten (10) calendar days after the Indemnitee's receipt of notice of such Third Party Claim. Such notice shall describe the nature of the Third Party Claim in reasonable detail and shall indicate the estimated amount, if practicable, of the Indemnifiable Loss that has been or may be sustained by the Indemnitee. The Indemnifying Party will have the right to participate in or, by giving written notice to the Indemnitee, to elect to assume the defense of any Third Party Claim at such Indemnifying Party's expense and by such Indemnifying Party's own counsel, provided that the counsel for the Indemnifying Party who shall conduct the defense of such Third Party Claim shall be reasonably satisfactory to the Indemnitee. The Indemnitee shall cooperate in good faith in such defense at such Indemnitee's own expense. If an Indemnifying Party elects not to assume or to participate in the defense of any Third Party Claim, the Indemnitee may compromise or settle such Third Party Claim over the objection of the Indemnifying Party, which settlement or compromise shall conclusively establish the loss for which the Indemnified Party may seek indemnification from the Indemnifying Party pursuant to this Agreement. (b) (i) If, within ten (10) calendar days after an Indemnitee provides written notice to the Indemnifying Party of any Third Party Claims, the Indemnitee receives written notice from the Indemnifying Party that such Indemnifying Party has elected to assume the defense of such Third Party Claim as provided in Section 8.4(a), the Indemnifying Party will not be liable for any legal expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, however, that if the Indemnifying Party shall fail to take reasonable steps necessary to defend diligently such Third Party Claim within twenty (20) calendar days after receiving notice from the Indemnitee that the Indemnitee believes the Indemnifying Party has failed to take such steps, the Indemnitee may assume its own defense and the Indemnifying Party shall be liable for all reasonable expenses thereof. (ii) Without the prior written consent of the Indemnitee, the Indemnifying Party shall not enter into any settlement of any Third Party Claim which would lead to liability or create any financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnitee for which the Indemnitee is not entitled to indemnification hereunder and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to the Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer within ten (10) calendar days after its receipt of such notice, the Indemnifying Party shall be relieved of its obligations to defend such Third Party Claim and the Indemnitee may contest or defend such Third Party Claim at its own expense. In such event, the maximum liability of the Indemnifying Party as to such Third Party Claim will be the amount of such settlement offer plus reasonable costs and expenses paid or incurred by Indemnitee up to the date of said notice. 65 (c) Any claim by an Indemnitee on account of an Indemnifiable Loss which does not result from a Third Party Claim (a "Direct Claim") shall be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, stating the nature of such claim in reasonable detail and indicating the estimated amount, if practicable, but in any event such notice shall not be given later than ten (10) calendar days after the Indemnitee becomes aware of such Direct Claim, and the Indemnifying Party shall have a period of thirty (30) calendar days within which to respond to such Direct Claim. If the Indemnifying Party does not respond within such thirty (30) calendar day period, the Indemnifying Party shall be deemed to have accepted such claim. If the Indemnifying Party rejects such claim, the Indemnitee will be free to seek enforcement of its right to indemnification under this Agreement. (d) If the amount of any Indemnifiable Loss, at any time subsequent to the making of an indemnity payment in respect thereof, is reduced by recovery, settlement or otherwise under or pursuant to any insurance coverage or pursuant to any claim, recovery, settlement or payment by, from or against any other entity, the amount of such reduction (less any out-of-pocket costs incurred in connection therewith and the cost of any adjusted premium charges to the extent directly relating to the claim for such Indemnifiable Loss ("Recovery Costs"), together with interest thereon from the date of payment thereof at the publicly announced prime rate then in effect of Citibank, shall promptly be repaid by the Indemnitee to the Indemnifying Party. (e) A failure to give timely notice as provided in this Section 8.4 shall not affect the rights or obligations of any Party hereunder except if, and only to the extent that, as a result of such failure, the Party which was entitled to receive such notice was actually prejudiced as a result of such failure. ARTICLE IX TERMINATION 9.1 Termination. (a) This Agreement may be terminated at any time prior to the Closing Date by mutual written consent of Seller and Buyer. (b) This Agreement may be terminated by Seller or Buyer if (i) any federal or state court of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappeallable; (ii) any statute, rule, nonappeallable order or regulation shall have been enacted or issued by any Governmental Authority which prohibits the consummation of the Closing; or (iii) the Closing shall have not occurred on or before the day which is fifteen (15) months from the date of this Agreement, subject to such extensions (not to exceed six months) as may be required by Seller to repair or replace lost or damaged Assets in accordance with Section 6.13(c) (the "Termination Date"); provided that the right to terminate this Agreement under this Section 9.1(b)(iii), and any other Section, shall not be available to any Party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in the event giving rise to the applicable termination right. 66 (c) Except as otherwise provided in this Agreement, this Agreement may be terminated by Buyer if any of the Buyer Required Regulatory Approvals, the receipt of which is a condition to the obligation of Buyer to consummate the Closing as set forth in Section 7.1(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied) or, if such Required Regulatory Approval is obtained, contains terms or conditions that would have a Regulatory Material Adverse Effect for Buyer (after Buyer's petition for rehearing objecting to such terms and conditions has been denied) or an Asset Material Adverse Effect, in either case that is not cured or otherwise addressed in a manner reasonably acceptable to Buyer by the Closing Date. (d) Except as otherwise provided in this Agreement, this Agreement may be terminated by Seller if any of the Seller Required Regulatory Approvals, the receipt of which is a condition to the obligation of Seller to consummate the Closing as set forth in Section 7.2(c), shall have been denied (and a petition for rehearing or refiling of an application initially denied without prejudice shall also have been denied) or, if such Required Regulatory Approval is obtained, contains terms or conditions that would have a Regulatory Material Adverse Effect for Seller (after Seller's petition for rehearing objecting to such terms and conditions has been denied), in either case that is not cured or otherwise addressed in a manner reasonably acceptable to Seller by the Closing Date. (e) This Agreement may be terminated by Buyer if there has been a violation or breach by Seller of any covenant, representation or warranty contained in this Agreement provided that such violation or breach would have an Asset Material Adverse Effect or a Buyer Material Adverse Effect that is not cured or otherwise addressed by Seller in a manner reasonably acceptable to Buyer by the Closing Date and such violation or breach has not been waived by Buyer. (f) This Agreement may be terminated by Seller, if there has been a violation or breach by Buyer of any covenant, representation or warranty contained in this Agreement provided that such violation or breach would have a Seller Material Adverse Effect, (including, without limitation, Buyer's failure to pay the Purchase Price on the Closing Date) and such violation or breach is not cured or otherwise addressed by Buyer in a manner reasonably acceptable to Seller by the Closing Date, and such violation or breach has not been waived by Seller. 9.2 Procedure and Effect of Termination. In the event of termination of this Agreement by either or both Seller and Buyer pursuant to this Article IX, written notice thereof shall forthwith be given by the terminating Party to the other Party, whereupon the liabilities of the Parties hereunder will terminate, except as otherwise expressly provided in this Agreement (including Section 9.3), and thereafter none of the Parties shall have any recourse against any other Party by reason of this Agreement. If prior to Closing either Party resorts to legal proceedings to enforce this Agreement, the prevailing Party in such proceedings shall be entitled to recover all costs incurred by such Party, including reasonable attorney's fees, in addition to any other relief to which such Party may be entitled; provided, however, and notwithstanding anything to the contrary in this Agreement, in no event shall either Party be entitled to receive any punitive, indirect or consequential damages. If a Party terminates this Agreement pursuant to this Article IX, the Arizona Gas Purchase Agreement shall be automatically terminated, without any further liability to the parties thereto (including payment of liquidated damages or termination fees pursuant to Section 9.3 of the Arizona Gas Purchase Agreement, and both Parties agree that if the Arizona Gas Purchase Agreement is terminated pursuant to Article IX of the Arizona Gas Purchase Agreement, this Agreement shall be automatically terminated, without any further liability to the parties thereto. 67 9.3 Liquidated Damages; Termination Fees. (a) Seller shall pay to Buyer $10,000,000 if (i) Buyer terminates this Agreement pursuant to Section 9.1(e) or (ii) Buyer terminates this Agreement pursuant to Section 9.1(c) due to a Regulatory Material Adverse Effect on Buyer which is due in whole or in substantial part to concern by the ACC about the condition of the Assets and which is reasonably expected to have an aggregate economic impact on Buyer, taking into consideration all relevant circumstances, in excess of $25,000,000. (b) Buyer shall pay to Seller $25,000,000 if (i) Seller terminates this Agreement pursuant to Section 9.1(f), (ii) Seller terminates this Agreement pursuant to Section 9.1(d) because the requisite Required Regulatory Approval from the ACC or the FERC has not been obtained due in whole or in substantial part to concerns about Buyer's financial qualifications or capabilities, or (iii) Buyer terminates this Agreement pursuant to Section 9.1(c), because the requisite Required Regulatory Approval from the ACC or the FERC has not been obtained, due in whole or in substantial part to concerns about Buyer's financial qualifications or capabilities, or has been obtained and contains financial terms and conditions that are unacceptable to Buyer. (c) Buyer may terminate this Agreement upon payment of a $25,000,000 termination fee upon any of the following events: (i) There shall have occurred an Asset Material Adverse Effect having or reasonably expected to have a financial or economic impact, taking into account all relevant considerations, in excess of $25,000,000; (ii) Regulatory Exceptions (after Buyer's petition for rehearing objecting to such Regulatory Exceptions has been denied) shall have been imposed against Buyer having a financial or economic impact on Buyer, taking into account all relevant considerations in excess of $25,000,000; or (iii) There shall have occurred a casualty loss to the Assets having an aggregate financial or economic impact, taking into account all relevant considerations, in excess of $25,000,000. (d) Seller may terminate this agreement upon payment of a $10,000,000 termination fee if there shall have occurred a casualty loss to the Assets having or reasonably expected to have an aggregate financial or economic impact, taking into account all relevant considerations, in excess of $25,000,000. 68 (e) In view of the difficulty of determining the amount of damages which may result to the non-terminating Party from a termination pursuant to any of Sections 9.3(a) through 9.3(d) or pursuant to any of the Sections of this Agreement referenced in Section 9.3(a) through 9.3(d), and the failure of the terminating Party to consummate the transactions contemplated by this Agreement, Buyer and Seller have mutually agreed that each of the payments set forth in Section 9.3(a) through 9.3(d) shall be made to the non-terminating Party as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. In the event of any such termination, the Parties have agreed that each of the payments set forth in Section 9.3(a) through Section 9.3(d) shall be the non-terminating Party's sole and exclusive remedy. ACCORDINGLY, THE PARTIES HEREBY ACKNOWLEDGE THAT (1) THE EXTENT OF DAMAGES TO THE NON-TERMINATING PARTY CAUSED BY THE FAILURE OF THIS TRANSACTION TO BE CONSUMMATED WOULD BE IMPOSSIBLE OR EXTREMELY DIFFICULT TO ASCERTAIN, (2) THE AMOUNT OF THE LIQUIDATED DAMAGES PROVIDED FOR IN EACH OF SECTIONS 9.3(a) THROUGH 9.3(d) ARE FAIR AND REASONABLE ESTIMATES OF SUCH DAMAGES UNDER THE CIRCUMSTANCES AND (3) RECEIPT OF SUCH LIQUIDATED DAMAGES BY THE NON-TERMINATING PARTY DOES NOT CONSTITUTE A PENALTY. THE PARTIES HEREBY FOREVER WAIVE AND AGREE TO FOREGO TO THE FULLEST EXTENT UNDER APPLICABLE LAW ANY AND ALL RIGHTS THEY HAVE OR IN THE FUTURE MAY HAVE TO BRING ANY ACTION OR ARBITRAL PROCEEDING DISPUTING OR OTHERWISE OBJECTING TO ANY OR ALL OF THE FOREGOING PROVISIONS OF THIS SECTION 9.3. (f) All payments under this Section 9.3 shall be from payor to payee by wire transfer of immediately available funds to a bank account in the United States of America designated in writing by payee not later than three (3) business days following payor's receipt of such account designation from payee. ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Amendment and Modification. This Agreement may be amended, modified or supplemented only by written agreement of the Parties. 10.2 Waiver of Compliance; Consents. Except as otherwise provided in this Agreement, any failure of any of the Parties to comply with any obligation, covenant, agreement or condition herein may be waived by the Party entitled to the benefits thereof only by a written instrument signed by the Party granting such waiver, but any such waiver of such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent failure to comply therewith. 10.3 [Intentionally Omitted] 10.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission with completed transmission acknowledgment, or mailed by overnight delivery via a nationally recognized courier or registered or certified first class mail (return receipt requested), postage prepaid, to the recipient Party at its address (or at such other address or facsimile number for a Party as shall be specified by like notice; provided; however, that notices of a change of address shall be effective only upon receipt thereof): 69 (a) If to Seller, to: Citizens Communications Company 1460 Poydras Street, Suite 1800 New Orleans, LA 70112 Attention: Kenneth L. Cohen Telephone: (504) 299-4501 Telecopier: (504) 544-5822 with a copy to: Citizens Communications Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten Telephone: (203) 614-5047 Telecopier: (203) 614-4651 and: Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telephone: (202) 939-7914 Telecopier: (202) 387-3467 (b) if to Buyer, to: Tucson Electric Power Company One South Church Avenue, Suite 100 Tucson, Arizona 85701 Attention: Vincent Nitido, Jr. Telephone: (520) 884-3670 Telecopier: (520) 884-3612 with a copy to: Thelen Reid & Priest LLP 40 West 57th Street New York, NY 10019 Attention: J. Anthony Terrell Telephone: (212) 603-2108 Attention: John T. Hood Telephone: (212) 603-2140 Telecopier: (212) 603-2001 70 10.5 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the Parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any Party hereto, including by operation of law, without the prior written consent of each other Party, nor is this Agreement intended to confer upon any other Person except the Parties hereto any rights, interests, obligations or remedies hereunder; provided, however, in the event of any such assignment by a Party by operation of law without the consent of the other Party, this Agreement and all the provisions hereof shall be binding upon the Person receiving such assignment by operation of law. Notwithstanding the foregoing, Buyer may (i) assign any or all of its rights and obligations hereunder to a UniSource Designee, or (ii) make a security assignment to any lender providing financing in respect of the Buyer's acquisition of the Assets. Upon receipt of notice by Seller from Buyer of any such assignment to a UniSource Designee, such assignee will be deemed to have assumed, ratified, agreed to be bound by and perform all such obligations, and all references herein to "Buyer" shall thereafter be deemed to be references to such assignee, in each case without the necessity for further act or evidence by the Parties hereto or such assignee; provided, however, that no such assignment shall relieve or discharge UniSource from any of its obligations hereunder. 10.6 Governing Law. This Agreement shall be governed by and construed in accordance with the law of the State of Arizona (without giving effect to conflict of law principles) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies (except to such matters of real estate law that must be governed by the law of the State of Arizona). THE PARTIES HERETO AGREE THAT VENUE IN ANY AND ALL ACTIONS AND PROCEEDINGS RELATED TO THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE IN THE STATE AND FEDERAL COURTS IN AND FOR PHOENIX, ARIZONA, WHICH COURTS SHALL HAVE EXCLUSIVE JURISDICTION FOR SUCH PURPOSE, AND THE PARTIES HERETO IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING. SERVICE OF PROCESS MAY BE MADE IN ANY MANNER RECOGNIZED BY SUCH COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 10.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.8 Interpretation. The articles, section and schedule headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the Parties and shall not in any way affect the meaning or interpretation of this Agreement. 71 10.9 Schedules and Exhibits. Except as otherwise provided in this Agreement, all Exhibits and Schedules referred to herein are intended to be and hereby are specifically made a part of this Agreement. Any matter or item disclosed on any Schedule shall not be deemed to give rise to circumstances which result in an Asset Material Adverse Effect or a Material Adverse Effect solely by reason of it being so disclosed. Any matter or item disclosed pursuant to any Schedule shall be deemed to be disclosed for all purposes under this Agreement reasonably related thereto and any matter disclosed in one Schedule will be deemed disclosed with respect to another Schedule if such disclosure is made in such a way as to make its relevance with respect to such other Schedule readily apparent. 10.10 Entire Agreement. This Agreement, the Ancillary Agreements and the Exhibits, Schedules, documents, certificates and instruments referred to herein or therein, embody the entire agreement and understanding of the Parties hereto in respect of the transactions contemplated by this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein or therein. This Agreement and the Ancillary Agreements supersede all prior agreements and understandings between the Parties other than the Confidentiality Agreement with respect to such transactions. 10.11 U.S. Dollars. Unless otherwise stated, all dollar amounts set forth herein are United States (U.S.) dollars. 10.12 Bulk Sales Laws. Buyer acknowledges that, notwithstanding anything in this Agreement to the contrary, Seller will not comply with the provision of the bulk sales laws of any jurisdiction in connection with the transactions contemplated by this Agreement. Buyer hereby waives compliance by Seller with the provisions of the bulk sales laws of all applicable jurisdictions to the extent permitted by law. 10.13 Construction of Agreement. The terms and provisions of this Agreement represent the results of negotiations between Buyer and Seller, each of which has been represented by counsel of its own choosing, and neither of which has acted under duress or compulsion, whether legal, economic or otherwise. Accordingly, the terms and provisions of this Agreement shall be interpreted and construed in accordance with their usual and customary meanings, and Buyer and Seller hereby waive the application in connection with the interpretation and construction of this Agreement of any rule of law to the effect that ambiguous or conflicting terms or provisions contained in this Agreement shall be interpreted or construed against the Party whose attorney prepared the executed draft or any earlier draft of this Agreement. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the Parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the Parties as to whether any obligation, item or matter is or is not material for purposes hereof. 72 10.14 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any Party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the greatest extent possible. 10.15 Third Party Beneficiary. No provision of this Agreement shall create any third party beneficiary rights in any employee or former employee of Seller (including any beneficiary or dependant thereof) in respect of continued employment or resumed employment, and no provision of this Agreement shall create any rights in any such Persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement. 73 IN WITNESS WHEREOF, Buyer and Seller have caused this Agreement to be signed by their respective duly authorized officers as of the date first above written. UNISOURCE ENERGY CORPORATION CITIZENS COMMUNICATIONS COMPANY By: /s/ Michael J. DeConsini By: /s/ Kenneth L. Cohen ------------------------- -------------------------- Name: Michael J. DeConsini Name: Kenneth L. Cohen ----------------------- ------------------------ Title: Senior Vice President Title: Vice President ---------------------- ----------------------- LIST OF EXHIBITS AND SCHEDULES ------------------------------ EXHIBITS Exhibit A Form of Assignment and Assumption Agreement Exhibit B Form of Bill of Sale Exhibit C Special Warranty Deed Exhibit D Form of Seller General Counsel Opinion Exhibit E Form of Seller Bond Counsel Opinion Exhibit F Form of Buyer General Counsel Opinion SCHEDULES 1.1 Seller Employees on Whose Knowledge Buyer May Rely 2.2 Excluded Assets 2.3(g) Governmental Orders 2.3(i) Assumed Actions and Proceedings 4.3(a) Seller Conflicts, Defaults and Violations 4.3(b) Seller Required Regulatory Approvals 4.4 Seller Insurance 4.5 Seller Real Property Leases 4.6 Seller Environmental Matters 4.7 Seller Labor Matters 4.8 Seller Benefit Plans 4.9 Seller Real Property 4.10 Seller Condemnation Matters 4.11(a) Certain Seller Material Agreements 4.11(b) Certain Seller Material Agreements Requiring Consent to Transfer 4.11(c) Defaults Under Certain Material Agreements 4.12 Legal Proceedings Involving Seller 4.13 Seller Permit Violations 4.14 Seller Tax Matters 4.15 Seller Intellectual Property Exceptions 4.20 Seller Financial Statements 5.3(a) Buyer Conflicts, Defaults and Regulations 5.3(b) Buyer Required Regulatory Approvals 5.6 Legal Proceedings Involving Buyer 6.1(a) Exceptions to Conduct of Business and Operation of the Assets 6.3 Environmental Consultants on Which Buyer will Rely 6.12(d)(iii) Buyer Benefit Plans 6.12(d)(iii)(D) Retirees 6.14(a) Seller Revenue Bonds 6.15 Seller Surety Instruments EX-10.15 8 bldgpurchagreemt.txt BUILDING PURCHASE AGREEMENT - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Exhibit 10.15 ------------- PURCHASE AGREEMENT by and between CITIZENS TELECOM SERVICES COMPANY LLC, as Seller, and PEPSICO, INC., as Purchaser Premises: 5600 Headquarters Drive Plano, Texas Date: January 31, 2003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PURCHASE AGREEMENT ------------------ THIS PURCHASE AGREEMENT (this "Contract") is made and entered into as of this 31st day of January, 2003 (the "Effective Date") by and between CITIZENS TELECOM SERVICES COMPANY llc, a Delaware limited liability company ("Seller"), whose principal place of business is located at Three High Ridge Park, Stamford, Connecticut 06905 and PEPSICO, INC., a North Carolina corporation and/or its permitted successors, affiliates and assigns ("Purchaser"), whose principal place of business is located at 700 Anderson Hill Road, Purchase, New York 10577-1444. ARTICLE I PROPERTY -------- Section 1.01. Property. Seller hereby agrees to sell and convey to Purchaser, and Purchaser hereby agrees to purchase from Seller, upon the terms and conditions set forth herein, the following properties and assets: (a) That certain tract of real property located in Plano, Texas, more particularly described in Exhibit A attached hereto and made a part hereof for all purposes, together with (i) all and singular the rights and appurtenances pertaining to such real property, including all right, title and interest of Seller, if any, in and to any easements, adjacent streets, alleys and rights-of-way and all oil and mineral rights and reservations, and (ii) all of Seller's right, title and interest in any and all water, water rights or similar rights or privileges (including tap rights), if any, appurtenant to or used in connection with the ownership or operation of such real property (all of the foregoing being hereinafter collectively referred to as the "Real Property"). (b) All improvements, structures and fixtures now constructed and completed with respect to and situated on the Real Property and owned by Seller, including without limitation that certain building and related facilities (containing approximately 254,653 rentable square feet/285,000 gross square feet (without any representation or warranty as to such square footage)) located at 5600 Headquarters Drive, Plano, Texas, together with all of Seller's right, title and interest in all parking areas, loading dock facilities, landscaping and other improvements, structures and fixtures owned by Seller located on the Real Property (all of the foregoing being hereinafter collectively referred to as the "Improvements"). (c) All of Seller's interest in all leases covering all or any portion of the Real Property and/or the Improvements (collectively, the "Leases"), together with all security deposits, prepaid rents and similar items attributable to periods after Closing, any receivables attributable to periods after Closing for common area maintenance, taxes, insurance and/or other items, if any, due and payable under any lease for all or any portion of the Real Property and/or the Improvements, and to the extent assignable, all of Seller's right, title and interest in all parking agreements, all contract rights approved by Purchaser (including service contracts) and all other intangible rights which are appurtenant to the Real Property and/or the Improvements (all of the foregoing being hereinafter collectively referred to as the "Intangible Property"). -1- (d) All of Seller's right, title and interest, if any, in all plans and specifications, equipment, furniture, furnishings, machinery, heating, plumbing, ventilation and air conditioning systems and equipment, carpet, tile, floor coverings, security devices, sprinkler systems, office supplies, telephone exchange numbers, leasing files and records, tenant credit reports, PBX Systems, audio systems, keys, computers, servers, cables, modems, maintenance equipment and supplies and all other tangible personal property situated on the Real Property and used in connection therewith or with the Improvements along with Seller's interest as lessee in any rented or leased personal property, to the extent approved by Purchaser, including without limitation, all of the personal property listed on Exhibit G attached hereto and made a part hereof for all purposes (all of the foregoing being hereinafter collectively referred to as the "Personal Property"). All of the foregoing items purchased under this Contract are collectively referred to as the "Property". ARTICLE II PURCHASE PRICE -------------- Section 2.01. Purchase Price. The purchase price (the "Purchase Price") is an amount equal to TWENTY-SIX MILLION FIVE HUNDRED THIRTY-TWO THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($26,532,500.00). The sum of ONE MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($1,500,000.00) (the "Cash Portion") will be paid by Purchaser to Seller at the Closing (as hereinafter defined) in cash or other immediately available wire transferred funds. The balance of the Purchase Price shall be evidenced by a promissory note (the "Note"). The Note shall be secured by a deed of trust (the "Deed of Trust"). In the event PepsiCo, Inc. assigns the Contract pursuant to Section 12.05 hereof, PepsiCo, Inc. shall execute and deliver at the Closing a guaranty (the "Guaranty"). The forms of the Note, the Deed of Trust and the Guaranty shall be as set forth in Exhibits H, I and J, respectively, attached hereto and made a part hereof for all purposes. Section 2.02. Earnest Money. Purchaser will, within two (2) business days after the Effective Date, deposit the amount of ONE HUNDRED fifty THOUSAND AND NO/100 DOLLARS ($150,000.00) as earnest money hereunder (the "Purchaser's Deposit"), with Republic Title of Texas, Inc. (the "Title Company"). As used herein, the term "Earnest Money Deposit" means the Purchaser's Deposit, together with all interest accrued from time to time thereon. The Purchaser's Deposit may, at the option of Purchaser, be in the form of cash, certified check, cashier's check or other immediately available funds. The Title Company must hold the Earnest Money Deposit in an interest-bearing account, with all interest being paid to Purchaser or Seller, as the case may be, in accordance with the terms of this Contract. At the Closing, the Earnest Money Deposit will be applied toward the Cash Portion of the Purchase Price, but otherwise the Earnest Money Deposit will be held by the Title Company, and returned to Purchaser, or delivered to Seller, in accordance with the terms of this Contract. In addition to the Earnest Money Deposit, Purchaser has, concurrently with its execution hereof, delivered to Seller a check in the amount of FIFTY AND NO/100 DOLLARS ($50.00) (the "Independent Contract Consideration"), which amount Seller and Purchaser agree has been bargained for as consideration for Seller's execution and delivery of this Contract. The Independent Contract Consideration is in addition to and independent of any other consideration or payment provided for in this Contract and is non-refundable in all events. -2- ARTICLE III REVIEW ITEMS ------------ Section 3.01. Survey. Seller shall deliver to Purchaser, within twenty (20) days following the Effective Date, a new or recertified survey of the Property (the "Survey") dated no earlier than thirty (30) days prior to the Effective Date. The Survey must comply with the "Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys" as adopted in 1992 (revised 1999) and meet the accuracy requirements of an Urban Survey, as defined therein, and include items 1-4, 6 (setbacks only), 7(a), 7(b)(1), and 8-10, 11(a) (visible evidence of utilities only), 12-14 and 16 of Table A thereof. The surveyor shall show all building set-back lines as shown on the recorded subdivision plats which define the boundaries of the Survey and all building set-back lines required under applicable zoning regulations. Further, the surveyor must certify to Seller, Purchaser and the Title Company, by the surveyor's placement and execution on the face of the Survey of a surveyor's certificate in the form attached hereto as Exhibit F and made a part hereof. If the legal description on the Survey differs from that attached hereto as Exhibit A, Seller agrees to execute a quitclaim deed to Purchaser transferring whatever right, interest and interest Seller might own in the legal description contained on the Survey. Section 3.02. Title Review Items. Seller shall deliver to Purchaser, within five (5) days following the Effective Date, a Texas form commitment for title insurance (the "Title Commitment"), issued by the Title Company which shall set forth the state of title to the Real Property and the Improvements and shall list all exceptions, including all liens, easements, claims, encumbrances, rights-of-way, covenants, encroachments, reservations, restrictions, and other conditions or matters affecting the Real Property which would appear in an owner's policy of title insurance if one were issued, together with legible copies of all items, matters, and documents referred to in the Title Commitment. The Title Commitment must contain the expressed commitment of the Title Company to issue the Owner Policy to Purchaser in the amount of the Purchase Price, insuring the title to the Real Property as is specified in the Title Commitment. All items set forth or disclosed in the Title Commitment and Survey not objected to by Purchaser prior to the end of the Review Period or which Seller does not agree to remove, in Seller's sole discretion, shall be referred to herein as "Permitted Exceptions". Seller shall not have any obligation to remove any items reflected by the Title Commitment or Survey except as provided in Section 4.04 hereof and those matters which Seller agrees in writing to cure in response to a letter from Purchaser delivered prior to the end of the Review Period specifying matters to be cured by Seller. -3- Section 3.03. Other Review Items. Seller must, within five (5) business days following the Effective Date, deliver to Purchaser copies of the items shown on Schedule 3.03 to this Contract to the extent in Seller's possession and control. Section 3.04. Inspection/ Confidentiality. Purchaser has the right, at all reasonable times (after giving at least four (4) hours advance notice to Seller), to conduct on-site inspections of the Property and physical inspections and tests of the Property during the Review Period, including, without limitation, the right to enter and inspect all portions of the Property, to interview any service contractors and to inspect and audit all of Seller's books and records relating to the Property; provided, however, Purchaser agrees not to cause any damage to the Property. The parties agree that no invasive testing (other than test borings for environmental testings [provided, further, no borings shall be done within the Improvements or any paving improvements without Seller's prior consent], asbestos sampling or radon testing) may be conducted by Purchaser on the Property without the written consent of Seller, such consent not to be unreasonably withheld or delayed. Seller hereby directs the manager of the Property to cooperate with the reasonable requests of Purchaser. Seller's property manager or other designated Seller representative must be present during Purchaser's on-site inspections and service contractor interviews. Purchaser shall, at its sole cost and expense, repair any damage to the Property caused by Purchaser's inspection or testing thereof, and shall indemnify and hold harmless Seller from and against any and all claims, actions, suits, liens, damages, liabilities, losses and expenses, including, but not limited to, attorney fees, and damage to personal property or personal injury, to the extent directly attributable to any acts performed in exercising Purchaser's rights under this Article III. Purchaser further agrees to maintain the confidentiality of all matters disclosed therein or thereby, and not to disclose the same to any person, except (a) to potential investors; (b) to Purchaser's agents, attorneys, employees and contractors who are advising, consulting with or performing services for Purchaser in connection with its proposed acquisition of the Property; and (c) in response to a valid subpoena or court order. The provisions of this Section 3.04 shall survive the Closing and any termination of this Contract. ARTICLE IV REVIEW PERIOD ------------- Section 4.01. Review Period. Subject to extension as provided in Section 4.05 below, Purchaser has from the Effective Date until 5:00 p.m., Dallas, Texas time, on the forty-fifth (45th) day following the Effective Date, being March 17, 2003 (the "Review Period") to review and approve the due diligence items and to conduct such inspections, interviews, tests and audits as Purchaser, in its sole discretion, deems appropriate. Section 4.02. Purchaser's Notice. Purchaser shall have the right to terminate this Contract for any or no reason, in its sole and absolute discretion, prior to the expiration of the Review Period. If Purchaser fails to deliver Seller written notice (the "Waiver Notice") waiving this termination right on or before the end of the Review Period, this Contract shall be deemed automatically terminated. Purchaser's failure to deliver the Waiver Notice on or before the expiration of the Review Period shall be deemed Purchaser's election to terminate this Contract under this Section 4.02. -4- Section 4.03. Termination. If Purchaser elects to terminate this Contract in its entirety in accordance with, and subject to the terms of this Article IV, the parties hereto shall thereupon be relieved of all liabilities and obligations hereunder, unless a provision provided for herein provides that such liability shall continue notwithstanding the termination of this Contract and such provision shall therefore survive such termination, and the Earnest Money Deposit must be refunded fully and promptly to Purchaser. Seller expressly acknowledges and agrees that, if Purchaser requests the Title Company on or before the expiration of the Review Period to return the Earnest Money Deposit as a result of Purchaser's election to terminate this Contract under Section 4.02 and/or Section 4.05, then the Title Company shall have no obligation to independently determine whether Purchaser has the right to receive the Earnest Money Deposit, and the Title Company may rely solely upon the written instructions set forth in any written notice delivered by Purchaser in connection with such election, without the joinder, approval or consent of Seller. Purchaser will promptly return to Seller any due diligence materials delivered by Seller. Purchaser will also furnish Seller, promptly following Purchaser's receipt, with the final reports issued by any third party consultants retained at Purchaser's request. Such reports will be delivered without representation, warranty or recourse against Purchaser. Section 4.04. Seller's Obligation to Remove Liens. Notwithstanding anything to the contrary in this Contract, Seller must remove at or prior to the Closing any mortgages, deeds of trust, notices of commencement, mechanics and materialman's liens created, suffered or incurred against the Property by Seller, and Seller's failure or refusal to remove same at or prior to Closing shall be a default under this Contract; provided, however, Seller shall not be in default under this Contract in the event Seller furnishes the Title Company with such bonds, indemnities or other assurances sufficient to cause the Title Company to issue the Owner Policy to Purchaser without exception to any such liens. Section 4.05. Environmental Audit. Purchaser has the right, at Purchaser's cost, to have a Phase I environmental study of the Property performed during the Review Period. In addition, in the event the Phase I environmental study conducted on behalf of Purchaser recommends that a Phase II environmental study be performed on the Property because of any conditions discovered or reflected in the Phase I environmental study, Purchaser shall have the right, at Purchaser's cost, to have a Phase II environmental study of the Property performed during the Review Period. Any intrusive testing is subject to Seller's approval, such approval not to be unreasonably withheld, delayed or conditioned so long as such invasive testing is not performed within the Improvements. In the event (i) the Phase I environmental study recommends that a Phase II environmental study be performed on the Real Property because of any conditions discovered or reflected in the Phase I environmental study, (ii) Purchaser elects, in Purchaser's sole discretion, to conduct such Phase II environmental investigation, and (iii) Purchaser sends Seller written notice of such election prior to the end of the original Review Period, then the Review Period will automatically be extended one (1) time by an additional thirty (30) days. -5- Section 4.06. Service Contracts. Seller agrees that all service, maintenance, and management contracts (collectively, the "Service Contracts") must be terminated by Seller, at Seller's sole cost, on or before the Closing Date unless Purchaser otherwise elects, by written notice delivered to Seller at least thirty (30) days prior to Closing, to assume same. On or before the Closing Date, Seller shall provide Purchaser with written evidence of the termination of such Service Contracts which Purchaser does not elect to assume. ARTICLE V GOOD AND MARKETABLE TITLE ------------------------- Section 5.01. Conveyance. At the Closing, Seller will convey fee simple title to the Real Property and the Improvements to Purchaser by the Deed (as hereinafter defined) and title to the Personal Property and the Intangible Property by the Bill of Sale (as hereinafter defined), free and clear of any and all deeds of trust, mortgages or other liens or indebtedness; subject, however, to the following (collectively, the "Permitted Exceptions"): (a) General real estate taxes for the year in which the Closing occurs and subsequent years not yet due and payable. (b) All easements, restrictions, rights-of-way, party wall agreements, encroachments, covenants, reservations, agreements, leases, tenancies, licenses, conditions and other matters affecting all or any portion of the Property to the extent defined as "Permitted Exceptions" under Section 3.02. Section 5.02. Owner Policy. At the Closing, Purchaser must be able to obtain a standard Texas form Owner Policy of Title Insurance (the "Owner Policy") issued by the Title Company in Purchaser's favor in the amount of the Purchase Price, insuring Purchaser's fee simple title to the Real Property and the Improvements in accordance with the provisions of Section 3.02 and subject only to the standard printed exceptions (as modified as hereinafter set forth) and the Permitted Exceptions. The Owner Policy must contain the following modifications: (i) the exception for taxes in the Owner Policy shall be limited to real estate taxes for the calendar year in which the Closing occurs and subsequent years to the extent not yet due and payable, and subsequent taxes and assessments by any taxing authority for prior years due to change of land usage or ownership (however, Purchaser shall have no liability for any rollback taxes); (ii) there shall be no exception for "visible and apparent easements" or words to that effect; and (iii) there shall be no exception for "rights of parties in possession". ARTICLE VI CLOSING ------- Section 6.01. Closing. The purchase and sale of the Property (the "Closing") will be held through escrow at the offices of the Title Company and will occur, subject to satisfaction of all conditions precedent set forth in this Contract, at 11:00 a.m. Dallas, Texas time on the fifteenth (15th) day following the end of the Review Period, being April 1, 2003, or at such other time and place as the parties may agree. -6- Section 6.02. Seller's Obligations. At the Closing, Seller shall execute and deliver to Purchaser, and/or cause the execution and delivery by all parties other than Purchaser of, the following with respect to the Property: (a) That certain special warranty deed (the "Deed") in the form attached hereto as Exhibit B and made a part hereof for all purposes. (b) That certain bill of sale and assignment ("Bill of Sale") in the form attached hereto as Exhibit C and made a part hereof for all purposes. (c) That certain affidavit (the "FIRPTA Affidavit") in the form attached hereto as Exhibit D and made a part hereof for all purposes. (d) To the extent not previously delivered to Purchaser and to the extent being assigned to Purchaser under this Contract, original counterparts (to the extent available - otherwise copies certified by Seller to be true and correct to Seller's knowledge) of all Leases, lease files (including all correspondence, applications and credit reports), currently effective letters of intent with prospective tenants, operating agreements, reciprocal easement agreements, options, warranties, guarantees, permits and other agreements related to the Property, including all modifications, supplements or amendments to each of the foregoing. (e) All keys to the Property in the possession of Seller. (f) To the extent necessary to permit the Title Company to remove any exception in the Owner Policy for mechanics' and materialmen's liens and general rights of parties in possession, an affidavit as to debts and liens and parties in possession executed by Seller, made to the Title Company and in a form reasonably acceptable to the Title Company, along with a GAP Affidavit and any other items reasonably required by the Title Company. (g) Seller's certification that all representations and warranties made by Seller under this Contract are true, complete and correct in all material respects as of the Closing Date (if accurate or, if not accurate, a description of the basis for such inaccuracy). Such certificate will survive for a period of one (1) year following the Closing Date. (h) Appropriate evidence of Seller's authority to consummate the transactions contemplated by this Contract as may be required by the Title Company or Purchaser. -7- (i) Assignments of all warranties relating to the Property and all improvements thereon, including those relating to the construction of the building and all components thereof (to the extent same are assignable). (j) Such disclosure form, affidavits and other instruments as may be required (or which is otherwise customary) to be executed by a seller upon any transfer of real estate in the state in which the Property is located. Section 6.03. Purchaser's Obligations. At the Closing, Purchaser shall deliver the Cash Portion of the Purchase Price to Seller in cash or by wire transfer of immediately available funds, and shall execute and deliver to Seller the following with respect to the Property: (a) The Note. (b) The Deed of Trust. (c) The Bill of Sale. (d) Appropriate evidence of Purchaser's authority to consummate the transactions contemplated by this Contract as may be required by the Title Company or Seller, including a legal opinion from Purchaser's in-house or outside counsel to Seller regarding the authority to enter into the loan evidenced by the Note and execute all documents in connection therewith, including without limitation, the Note, the Deed of Trust and the Guaranty (if the Guaranty is executed). (e) Such disclosure forms, affidavits and other instruments as may be required (or which is otherwise customary) to be executed by buyers upon any transfer of real estate in the State in which the Property is located. (f) The Guaranty, if PepsiCo, Inc. has assigned the Contract pursuant to Section 12.05 hereof, and evidence of PepsiCo's authority to enter into the Guaranty. Section 6.04. Management Transition. From and after the date hereof, Seller will provide Purchaser with copies of all management reports concerning the Property and any reports which are in the nature of capital appropriations or describe capital expenditures on the Property, as and when received by Seller. Seller agrees that Purchaser may contact Seller and its property manager to obtain copies of and to discuss any such reports and to discuss the operation and maintenance of the Property. Seller shall allow Purchaser's management personnel and agents to work with Seller's property manager commencing no earlier than five (5) days prior to the Closing Date for the purpose of installing a computer at the Property, loading information onto Purchaser's computer network, determining the exact amount of unpaid and prepaid bills and otherwise preparing to take over management of the Improvements. Seller shall also reasonably cooperate with Purchaser following the Closing to effectuate the transition in operation and management of the Property. -8- Section 6.05. Possession. Possession of the Property must be delivered by Seller to Purchaser at the Closing, subject only to the Permitted Exceptions. Section 6.06. Section 1031 Exchange. Either party ("exchanging party") may consummate the purchase of the Property as part of a so-called like kind exchange (the "Exchange") pursuant to ss. 1031 of the Internal Revenue Code of 1986, as amended (the "Code"), provided that: (a) the Closing shall not be delayed or affected by reason of the Exchange nor shall the consummation or accomplishment of the Exchange be a condition precedent or condition subsequent to the exchanging party's obligations under this Contract; (b) the exchanging party shall effect the Exchange through an assignment of this Contract, or its rights under this Contract, to a qualified intermediary and the other party ("accommodating party") shall not be required to take an assignment of the purchase agreement for the relinquished property or be required to acquire or hold title to any real property for purposes of consummating the Exchange; and (c) the exchanging party shall pay any additional costs that would not otherwise have been incurred by the exchanging party or the accommodating party had the exchanging party not consummated its purchase through the Exchange. The accommodating party shall not by this agreement or acquiescence to the Exchange (i) have its rights under this Contract affected or diminished in any manner or (ii) be responsible for compliance with or be deemed to have warranted to the exchanging party that the Exchange in fact complies with ss. 1031 of the Code. ARTICLE VII CLOSING ADJUSTMENTS ------------------- Section 7.01. General Prorations. The following will be apportioned at the Closing: (a) Rents, if any, as and when collected (the term "rents" as used in this Contract including base rent, percentage rent, common area maintenance, parking, tax, insurance and other payments due and payable under the Leases for all or any portion of the Improvements, together with all taxes thereon) and all other income generated by all or any portion of the Property, including parking revenue. There will be no proration of rents accrued but not collected as of the Closing Date. (b) Taxes and other assessments (including personal property taxes on the Personal Property), for the current calendar year shall be prorated to the Closing Date, and thus Purchaser shall receive a credit against the Purchase Price at Closing equal to Seller's pro rata portion of such taxes and standby fees, and Purchaser shall assume the liability to pay such taxes (and Purchaser shall pay such taxes) on or before the delinquency date thereof. Special assessments certified by any municipal utility district or other taxing authority prior to the Closing Date, payable in installments, must be paid in their entirety by Seller at or before the Closing. If the tax rate or assessed valuation or both have not yet been fixed, the proration shall be based on the prior year's assessment after adjustment for any increase in value or tax rate reasonably expected by Purchaser's tax consultant; provided that the parties hereto agree that to the extent the actual taxes for the current year differ from the amount so apportioned at the Closing, the parties hereto will make all necessary adjustments by appropriate payments between themselves following the Closing, and this provision shall survive delivery of the Deed. -9- (c) Payments under any Service Contracts which Purchaser approves in writing and agrees to assume at the Closing. (d) Gas, electricity and other utility charges, if any, to be apportioned on the basis of the last meter reading. (e) Other operating expenses of the Property actually paid by Seller and accepted by Purchaser with respect to the month in which the Closing occurs, to the extent not included in clause (a) above. In making such apportionments, Purchaser will receive credit for all rents and other income paid with respect to the day of the Closing, and Purchaser will be charged for taxes and other expenses incurred with respect to the day of the Closing. All apportionments are to be subject to post-closing adjustments as necessary to reflect later relevant information not available at the Closing and to correct any errors made at the Closing with respect to such apportionments; provided, however, that such apportionments shall be deemed final and not subject to further post-closing adjustments if no such adjustments have been requested in writing after a period of sixty (60) days from such time as all necessary information is available to make a complete and accurate determination of such apportionments. All apportionments (regardless of whether all relevant information has been received or errors have been made) are final and not subject to further post-closing adjustment as of June 30 of the year following the year in which the Closing Date occurs. Section 7.02. Specific Prorations. Anything hereinabove contained to the contrary notwithstanding: (a) Seller shall retain and be entitled to receive any tax refunds issued after Closing to the extent applicable to the period prior to the Closing, but not otherwise. After Closing, Seller may not initiate nor demand Purchaser initiate or continue any litigation to collect such tax refunds. (b) As to gas, electricity and other utility charges, Seller may on written notice to Purchaser on or before the Closing Date elect to pay one or more of said items accrued to the date hereinabove fixed for apportionment directly to the person or entity entitled thereunto and to the extent Seller so elects, such item shall not be apportioned hereunder, and Seller's obligation to pay such item directly in such case shall survive the delivery of the Deed; provided, however, that Seller will not take any action or fail to take any action which would result in the cessation or termination of utility service to the Property. (c) Seller and Purchaser agree that all rents received after the Closing after reasonable third party out-of-pocket costs of collection (excluding any management fees or leasing expenses), if any, incurred by Purchaser shall be applied first to current rentals, and then to delinquent rentals, if any, in the inverse order of their maturity, and Purchaser will promptly deliver to Seller any such delinquent rentals owed Seller and received following the Closing. Seller may not initiate (nor demand that Purchaser initiate) legal or other proceedings for collection of delinquent rentals against tenants or any other tenants in occupancy at the Closing. Seller will deliver to Purchaser, within five (5) business days following receipt, any rents received by Seller after the Closing and attributable to the period from and after the Closing. -10- (d) At the Closing, Seller shall credit to the account of Purchaser against the Purchase Price (i) any security deposit (to the extent not properly applied against tenant delinquencies) reflected as being made under any leases executed with respect to the Property or otherwise actually collected by Seller, together with all interest, if any, which must be paid thereon to any tenant thereunder; and (ii) all prepaid rents and other charges paid in advance by any tenants of the Property and attributable to the period from and after the Closing. Any security deposits not in the form of cash (e.g., letters of credit) must be transferred and reissued in Purchaser's name and delivered to Purchaser at the Closing, at Seller's sole cost and, if not so reissued, Purchaser will receive a cash credit at Closing which will be repaid by Purchaser to Seller when the letters of credit are so reissued. (e) Any leasing commissions and tenant improvement allowances due under any Leases in effect as of the Effective Date shall be the sole obligation of Seller. Any such leasing commissions and tenant improvement allowances relating to leases executed between the Effective Date and the Closing Date shall be the sole obligation of Seller unless Purchaser approve such lease, in which event such expenses shall be the obligation of Purchaser. Section 7.03. Transaction Costs. Purchaser shall be responsible for (a) all attorneys' fees and expenses of Purchaser's counsel; (b) any inspection or other costs incurred by Purchaser as a result of Purchaser's due diligence investigations; (c) one-half of any escrow fees charged by the Title Company; (d) the cost of any endorsements requested by Purchaser to the Owner Policy (including without limitation, the deletion of the "survey exception" (except for shortages in area)); and (e) the cost of a mortgagee title policy insuring Seller's lien under the Deed of Trust and any recording fees and expenses incurred with respect to the Deed of Trust. Seller shall be responsible for (i) all attorneys' fees and expenses of Seller's counsel; (ii) the cost of the Survey; (iii) the cost of the Owner Policy, except for any endorsements thereto requested by Purchaser; (iv) the cost to record the Deed and other conveyancing documents; and (v) one-half of any escrow fees charged by the Title Company. All other transaction costs actually incurred shall be apportioned in accordance with local custom for commercial sales in the Dallas/Ft. Worth metropolitan area and in the absence of any such custom, must be paid one-half by Seller and one-half by Purchaser. -11- Section 7.04. Brokerage Commissions. Seller shall pay a commission to The Staubach Company and to Cushman & Wakefield of Texas, Inc. (collectively, the "Brokers"), in the amount of $685,000.00 shared equally between The Staubach Company and Cushman & Wakefield of Texas, Inc. Such commission shall only be owed if, as and when Closing actually occurs and not otherwise. In addition, when the Note is paid in full, Purchaser shall pay The Staubach Company an additional commission (the "Additional Commission") equal to $467,500.00 Except for Brokers, Seller and Purchaser acknowledge and agree that neither has dealt with any other real estate broker, agent or salesman, and any other fees or real estate commissions occasioned by the execution and/or consummation of this Contract shall be the sole responsibility of the party contracting therefor. Each such party agrees to indemnify, protect, defend and hold harmless the other party for the payment of the above-described commissions owed by the indemnifying party, and from any and all other fees or real estate commissions claimed by any brokers or agents claiming by, through or under the indemnifying party. By their signatures hereto, Brokers represent to Seller and Purchaser that (i) Brokers will look solely to Seller for payment of Brokers' commission (other than the Additional Commission) and solely to Purchaser for payment of the Additional Commission; and (ii) Brokers have not entered into any arrangement with any other party whereby such other party is entitled to any commission or finder's fee in connection with this transaction, and Brokers agree that should any claim be made for brokerage commissions or finder's fees by any other party by, through or on account of any acts of Brokers or their representatives, Brokers shall hold Purchaser and Seller free and harmless from and against any and all loss, cost, damage and expense in connection therewith. If the transaction envisioned hereby fails to close and fund for any or no reason, including without limitation either parties' default, neither party shall have any obligation for the payment to Brokers or any other person of any commission or similar type fee hereunder, or otherwise. Section 7.05. Survival. The terms of this Article shall survive the termination of this Contract and the Closing and delivery of the Deed for a period of one (1) year thereafter. ARTICLE VIII TERMINATION AND REMEDIES ------------------------ Section 8.01. Purchaser's Default. If Purchaser fails to close for any reason, except Seller's default or the permitted termination of this Contract by Purchaser pursuant to Article IV or Seller as herein expressly provided, Seller shall be entitled, as Seller's sole and exclusive remedy, to terminate this Contract and to request the Title Company to deliver the Earnest Money Deposit, together with all accrued and unpaid interest thereon, to Seller. Seller and Purchaser acknowledge and agree that delivery of the Earnest Money Deposit shall be deemed liquidated damages for Purchaser's breach of this Contract, it being further agreed that the actual damages to Seller in the event of such breach are impractical to ascertain and the Earnest Money Deposit is a reasonable estimate thereof. Seller has no right to specifically enforce Purchaser's obligations under this Contract nor to seek or otherwise collect any actual, out-of-pocket, lost profit, punitive, consequential, treble, or other damages from or against Purchaser. In no event shall any officer, director, agent or employee of Purchaser or its partners be personally liable for any of Purchaser's obligations under this Contract or the documents to be delivered at the Closing. Purchaser's indemnity obligation under Section 3.04 will not be subject to this Section 8.01 (except the previous sentence hereof). -12- Section 8.02. Seller's Default. If any of Seller's warranties or representations are knowingly made in a materially false, misleading and inaccurate manner, or if Seller fails to close for any reason, except Purchaser's default or the permitted termination of this Contract by either Seller or Purchaser (other than under this Section 8.02) as herein expressly provided, Purchaser shall be entitled, as Purchaser's sole and exclusive remedies, to either (a) terminate this Contract upon written notice to Seller and to request the Title Company to return the Earnest Money Deposit, together with all accrued interest thereon, to Purchaser or (b) pursue an action to enforce specific performance of Seller's obligations under this Contract. If Seller's default is willful, Purchaser may as Purchaser's sole and exclusive remedies, either (i) enforce specific performance or (ii) terminate this Contract, receive the return of the Earnest Money Deposit, and collect its actual out-of-pocket expenses from Seller incurred in connection with this Contract. In no event shall any officer, director, agent or employee of Seller be personally liable for any of Seller's obligations under this Contract or the documents to be delivered at the Closing. ARTICLE IX REPRESENTATIONS, WARRANTIES AND COVENANTS ----------------------------------------- Section 9.01. Seller's Representations. Seller hereby represents and warrants to Purchaser, except as set forth in that certain schedule (the "Disclosure Schedule") attached hereto as Exhibit E and made a part hereof for all purposes, as follows: (a) Seller is a duly organized, validly existing limited liability company in good standing under the laws of the State of Delaware. Seller has the full right and authority to enter into this Contract and consummate the sale, transfers and assignments contemplated by it herein and each of the persons signing this Contract and any other document or instrument contemplated hereby on behalf of Seller is authorized to do so. This Contract has been duly authorized, executed and delivered by Seller, and is and at the time of the Closing will be a legal, valid and binding obligation of Seller enforceable against Seller, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. All the documents executed by Seller which are to be delivered to Purchaser at the Closing are and at the time of Closing will be duly authorized, executed and delivered by Seller, and are and at the time of Closing will be legal, valid, and binding obligations of Seller enforceable against Seller, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. (b) Seller has received no written notice of (and otherwise has no knowledge of) any plan or study by any governmental authority or agency which in any way will materially impair the continued use and operation of the Property as currently used and operated. -13- (c) Seller has received no written notice of (and otherwise has no knowledge of) any current, proposed or threatened eminent domain or similar proceeding, or private purchase in lieu of such proceeding, which would affect the Property in any way whatsoever. (d) To the best of Seller's knowledge, Seller has no knowledge of, and Seller has received no written notice of, any violation of any federal, state, county, city or any other laws, ordinances, rules and regulations, including, but not limited to, those relating to environmental, zoning, land use and division, building, fire, health and safety matters, of any government or any agency, body or subdivision thereof bearing on the construction of the Improvements and on the operation, ownership or use of the Property (collectively, "Applicable Laws"). (e) Seller has received no written notice of any pending litigation which does or would affect the Property or Seller's ability to fulfill all of its obligations under this Contract. To Seller's knowledge, there exist no writs, injunctions, decrees, orders or judgments outstanding, nor any lawsuits, claims, proceedings, citations, directives, summons or investigations, pending or threatened in writing, relating to the ownership, use, maintenance or operation of the Property by any person or entity. Except as set forth in the Disclosure Schedule, there are, to Seller's knowledge, no outstanding claims on Seller's insurance policies which claims relate to the Property. (f) The execution, delivery and performance of this Contract by Seller (i) does not and will not conflict with or result in a breach of or default under the organizational documents of Seller, (ii) to the knowledge of Seller, does not and will not conflict with or result in a breach of any condition or provision of, or constitute a default under, or result in the acceleration, creation or imposition of any lien, charge or encumbrance upon any of the Property by reason of the terms of any contract, mortgage, lien, agreement, indenture, instrument, decree or judgment to which the Seller is a party or which is binding upon Seller. (g) Seller has not entered into any and there are no leases relating to any portion of the Property; and no person (other than Seller) has any right of possession to the Property or any part thereof. There are no leasing commissions or tenant finish costs or allowances due under any Leases which would be payable by Purchaser after the Closing. (h) Seller is not a foreign corporation, foreign partnership, foreign trust or foreign estate (as defined in the Internal Revenue Code ("Code")), and is not subject to the provisions of Sections 897(a) or 1445 of the Code related to the withholding of sales proceeds to foreign persons. (i) Seller has delivered to Purchaser complete copies of Service Contracts and, to Seller's knowledge, Seller has delivered or made available all other due diligence materials requested in writing by Purchaser which are in Seller's possession and to Seller's knowledge, Seller has not failed to make available, at a reasonably accessible central location, to Purchaser for inspection any books, records, reports, or engineering or other studies relevant to the construction, maintenance, leasing, or operation of the Property which are in Seller's possession. -14- (j) "As Is", "Where Is". Except as otherwise set forth in this Contract or in the Deed and any other closing documents to be executed and delivered by Seller at Closing (and without limiting any representations and warranties set forth herein or therein), Seller makes no representation or warranty, express or implied or arising by operation of law with respect to any matter concerning the Property, including without limitation, the following: (i) title (other than the special warranty of title included in the Deed), (ii) habitability, merchantability or suitability or fitness of the Property for a particular purpose or use, (iii) the nature and condition of the Property, including without limitation, water, drainage and grading, soil and geology, zoning, utility availability or hook-up or easement rights, sewage facilities (including, without limitation, availability or nonavailability of appropriate water and sewer capacity) or other governmental rights or obligations, (iv) completeness or accuracy of permits, surveys or reports concerning the Property, (v) tax consequences, (vi) compliance of the Property with applicable environmental laws, rules and regulations (collectively, "Environmental Laws"), (vii) the existence of asbestos, oil, petroleum or chemical liquids or solids, liquid or gaseous products or hazardous substances as those terms and similar terms are defined or used in applicable Environmental Laws, (viii) the nature and extent of rights-of-way and licenses, or (ix) compliance with any law, ordinance or regulation of any governmental entity or body. PURCHASER HEREBY ACKNOWLEDGES AND AGREES THAT PURCHASER HAS OR WILL HAVE, PRIOR TO THE END OF THE REVIEW PERIOD, THOROUGHLY INSPECTED AND EXAMINED THE PROPERTY AS DEEMED NECESSARY BY PURCHASER TO EVALUATE THE PURCHASE OF THE PROPERTY. PURCHASER HEREBY FURTHER ACKNOWLEDGES AND AGREES THAT PURCHASER IS RELYING AND WILL RELY SOLELY UPON THE INSPECTION, EXAMINATION, AND EVALUATION OF THE PROPERTY AND SELLER'S PROPERTY FILES BY PURCHASER AND THAT PURCHASER IS PURCHASING THE PROPERTY ON AN "AS IS," "WHERE IS" AND "WITH ALL FAULTS" BASIS, WITHOUT REPRESENTATIONS, WARRANTIES AND COVENANTS, EXPRESS OR IMPLIED, OF ANY KIND OR NATURE OTHER THAN THOSE EXPRESSLY SET FORTH IN THIS CONTRACT OR ANY DOCUMENT EXECUTED BY SELLER PURSUANT TO THIS CONTRACT BEFORE OR AT THE CLOSING AND DELIVERED TO PURCHASER AT THE CLOSING. PURCHASER FURTHER AGREES THAT THE PURCHASE PRICE IS BASED IN PART UPON THE FACT THAT THE CONVEYANCE TO BE MADE BY SELLER IS WITHOUT WARRANTY OR REPRESENTATION OTHER THAN AS EXPRESSLY SET FORTH IN THIS CONTRACT OR ANY DOCUMENT EXECUTED AND DELIVERED BY SELLER AT THE CLOSING. The provisions of this Section 9.01(j) shall survive Closing. -15- Section 9.02. Purchaser's Representations. Purchaser hereby represents and warrants to Seller, as of the date hereof and as of the Closing Date, as follows: (a) Purchaser is a corporation, duly organized, validly existing and in good standing under the laws of the State of North Carolina, and has all requisite power and authority to carry on its business as now conducted. Neither the execution and the delivery of this Contract by Purchaser nor Purchaser's performance of its obligations hereunder will result in a violation or breach of any term or provision or constitute a default or accelerate the performance required under any other agreement or document to which Purchaser is a party or otherwise bound and will not constitute a violation of any law, ruling, regulation or order to which Purchaser is subject. This Contract constitutes a valid and binding obligation of Purchaser enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. (b) Purchaser has the capacity and complete authority to enter into and perform this Contract, and no consent, approval or other action by any person or entity (other than the person signing this Contract on behalf of Purchaser and any approval to be obtained by Purchaser during the Review Period) will be needed thereafter to authorize Purchaser's execution and performance of this Contract. Section 9.03. Discovery. If either Seller or Purchaser discovers, prior to or at the Closing, that any representation or warranty of the other party is false, misleading or inaccurate in any material respect, the discovering party may, at its option, terminate this Contract and the parties hereto shall be relieved of all liabilities and obligations hereunder and (a) if Purchaser is the discovering party, Purchaser shall be entitled to the immediate return of the Earnest Money Deposit, together with all accrued interest thereon, and to pursue its remedies under Section 8.02 of this Contract; and (b) if Seller is the discovering party after the end of the Review Period, Seller shall be entitled to pursue its remedies under Section 8.01 of this Contract. If the discovering party elects to proceed to Closing such party cannot later bring a claim against the other as to such discovered matter, it being agreed that in such event, the discovering party shall have waived all claims related to the discovered matter. Notwithstanding anything in this Contract to the contrary, with respect to any claims made by Purchaser against Seller under this Contract for matters discovered after Closing, (i) the amount in controversy must exceed $10,000 in order for Purchaser to assert a claim against Seller and (ii) Purchaser shall be limited to Purchaser's actual damages incurred on account of Seller's breach, and Seller shall not be liable for any punitive or consequential damages. Representations and warranties under this Article IX shall fully survive the Closing for a period of one (1) year after Closing; however, Purchaser shall have two (2) years in which to bring an action against Seller for said breach of representation or warranty first discovered by Purchaser after Closing, provided that Purchaser shall have notified Seller within said one (1) year survival period of the breach of said representation or warranty -16- Section 9.04. Operating Covenants. Seller agrees to maintain the Property prior to the Closing in a manner consistent with its current procedures, and shall not, without the prior written consent of Purchaser (not to be unreasonably withheld or delayed), do any of the following: (a) Enter into any contract that will not be fully performed by Seller on or before the Closing Date or that will not be susceptible of cancellation by Purchaser on or after the Closing Date upon thirty (30) days or less prior written notice, without cost or liability to Purchaser, or amend, modify or supplement any existing contract (other than leases which are subject to clause (b) below) or agreement in any material respect. (b) Enter into any lease of the Property without Purchaser's consent. (c) Fail to maintain its current insurance covering Seller's interest in the Property or advise Purchaser promptly of the occurrence of any fire or other casualty affecting the Property. (d) Sell, assign or create any right, title or interest whatsoever in or to the Property (including any so-called "back-up" contracts which are expressly prohibited) or create any lien thereon, other than liens or encumbrances noted in the Title Commitment, without promptly discharging same or otherwise complying with the terms of Section 4.04. (e) Intentionally take any action which would have the effect of violating any of the representations and warranties of Seller contained in this Contract. Section 9.05. Conditions Precedent. Purchaser is not obligated to perform under this Contract unless all of the following conditions precedent are satisfied as of the Closing Date (or waived in writing by Purchaser) and are otherwise true and correct in all material respects as of the Closing Date: (a) There has been no material adverse change in the matters reflected in the Title Commitment or the Survey (provided that any change in the matters reflected in the Title Commitment or the Survey is not caused by any action of Purchaser or its agents or representatives). (b) All of Seller's representations and warranties are true and correct in all material respects. (c) Seller has performed all of its covenants, agreements, and obligations under this Contract in all material respects and is otherwise not in default. Notwithstanding the generality of the foregoing, Seller shall use reasonable efforts to satisfy all of the foregoing conditions precedent. If Seller is unable to satisfy all of the foregoing conditions precedent, Purchaser may, as Purchaser's sole and exclusive remedies, (i) waive one or more conditions precedent and proceed to the Closing or (ii) terminate this Contract by written notice to Seller and receive a refund of the Earnest Money Deposit. If Purchaser elects to close, Purchaser will be deemed to have waived any conditions actually known by Purchaser to be unsatisfied at the Closing. -17- ARTICLE X NOTICES ------- Section 10.01. Notices. Any notice, demand or other communication which may or is required to be given under this Contract must be in writing and must be: (a) personally delivered; (b) transmitted by United States postage prepaid mail, registered or certified mail, return receipt requested; (c) transmitted by reputable overnight courier service, such as Federal Express; or (d) transmitted by legible facsimile (with answer back confirmation) to Purchaser and Seller as listed below. Except as otherwise specified herein, all notices and other communications shall be deemed to have been duly given on (i) the date of receipt if delivered personally, (ii) five (5) business days after the date of posting if transmitted by registered or certified mail, return receipt requested, (iii) the first (1st) business day after the date of deposit, if transmitted by reputable overnight courier service, or (iv) the date of transmission with confirmed answer back if transmitted by facsimile, whichever shall first occur. Any notice sent by facsimile shall also be sent by one of the other methods set forth above, but the effective date of such fax notice will remain as set forth in clause (iv) above. A notice or other communication not given as herein provided shall only be deemed given if and when such notice or communication and any specified copies are actually received in writing by the party and all other persons to whom they are required or permitted to be given. Purchaser and Seller may change its address for purposes hereof by notice given to the other parties in accordance with the provisions of this Section, but such notice shall not be deemed to have been duly given unless and until it is actually received by the other parties. Notices hereunder shall be directed as follows: If to Purchaser: PepsiCo, Inc. 700 Anderson Hill Road Purchase, New York 10577-1444 Attention: Ken O'Gara Telephone: (914) 253-2063 Facsimile: (914) 253-3545 E-mail: ken.o'gara@pepsi.com -18- With copies to: Stutzman, Bromberg, Esserman & Plifka A Professional Corporation 2323 Bryan Street, Suite 2200 Dallas, Texas 75201 Attention: Michael J. Rowan Telephone: (214) 969-4900 Facsimile: (214) 969-4999 E-mail: rowan@sbep-law.com And: Law Department Frito-Lay, Inc. 7701 Legacy Drive Plano, Texas 75024 Attention: Kelly M. Tullier Telephone: (972) 334-3809 Facsimile: (972) 334-3871 E-mail: Kelly.Tullier@fritolay.com If to Seller: Citizens Communications Company Administrative Offices Three High Ridge Park Stamford, Connecticut 06905 Attention: Russ Mitten, General Counsel Telephone: (203) 614-5047 Facsimile: (203) 614-4651 E-mail: rmitten@czn.com With a copy to: Citizens Communications Company Administrative Offices Three High Ridge Park Stamford, Connecticut 06905 Attn: Dean Jackson, VP of Business Support Services Telephone: (203) 614-5028 Facsimile: (203) 614-6743 E-mail: djackson@czn.com And: Locke Liddell & Sapp LLP 2200 Ross Avenue, Suite 2200 Dallas, Texas 75201-6776 Attention: Mark M. Sloan Telephone: (214) 740-8715 Facsimile: (214) 740-8800 E-mail: msloan@lockeliddell.com -19- Notwithstanding the foregoing, any notices delivered by one party to the other party under Article IV may be sent by facsimile and will be deemed given as of the date and time shown on the confirmation slip (or, if busy, delivery attempt slip) generated by the sender's facsimile machine. Purchaser's or Seller's counsel may deliver any notice required or otherwise permitted to be given by Purchaser or Seller hereunder with the same effect as if given directly by Purchaser or Seller. ARTICLE XI RISK OF LOSS ------------ Section 11.01. Minor Damage. In the event of "minor" loss or damage [being defined for the purpose of this Contract as damage to the Property such that the Property could be repaired or restored, in the opinion of an architect mutually acceptable to Seller and Purchaser (with any fees, costs or expenses pertaining to such opinion to be borne equally by Purchaser and Seller), to a condition substantially identical to that of the Property immediately prior to the event of damage at a cost equal to or less than $250,000, or which is actually restored by Seller prior to the Closing Date to a condition substantially identical to that of the Property immediately prior to the event of damage], neither Seller nor Purchaser shall have the right to terminate this Contract as to the Property due to such damage but Seller shall assign to Purchaser at Closing all of Seller's right, title and interest to any claims and proceeds Seller may have with respect to any casualty insurance policies relating to the Property, and the Purchase Price shall be reduced by an amount equal to the deductible amount under such policies. Nothing contained in this Article XI shall operate to restrict in any way Purchaser's right to terminate this Contract pursuant to Article IV. Section 11.02. Major Damage. In the event of a "major" loss or damage (being defined as any loss or damage which is not "minor" as defined hereinabove), Purchaser shall have the option of terminating this Contract by written notice to Seller, in which event Seller and Purchaser shall thereupon be released from any and all liability hereunder. If Purchaser elects not to terminate this Contract, Purchaser and Seller shall proceed with the Closing, provided Seller shall assign all of Seller's right, title and interest to any claims and proceeds Seller may have with respect to any casualty, rent loss or other insurance policies relating to the Property, and Purchaser shall receive a credit against the Purchase Price in an amount equal to the aggregate amount of any deductible(s) under the insurance policies assigned to Purchaser. Section 11.03. Vendor and Purchaser Risk. Except as set forth in Section 11.01 and Section 11.02, Seller shall bear the full risk of loss until Closing. Upon the Closing, full risk of loss with respect to the Property shall pass to Purchaser. Section 11.04. Condemnation. If before the Closing any condemnation or eminent domain proceedings are threatened or initiated against all or any material portion of the Property and, in the reasonable opinion of Purchaser, such condemnation or eminent domain proceedings would materially interfere with the current use of the Property, then Purchaser may terminate this Contract upon written notice to Seller and Seller and Purchaser shall thereupon be released from any and all further liability hereunder. If Purchaser does not elect to terminate this Contract within ten (10) business days after receipt of written notice of the commencement of any such proceedings, or if, in the reasonable opinion of Purchaser, such condemnation or eminent domain proceedings would not materially interfere with Seller's current use of the Property, Seller shall assign to Purchaser at the Closing all rights and interest of Seller in and to any condemnation awards payable or to become payable on account of such condemnation or eminent domain proceedings. -20- ARTICLE XII MISCELLANEOUS ------------- Section 12.01. Entire Agreement; Confidentiality. This Contract constitutes the entire agreement between the parties hereto and supersedes any prior understanding, letter of intent or written or oral agreements between the parties concerning the Property. The terms, covenants and conditions of this Contract shall be kept confidential and no press release or other publicity regarding the terms of this Contract or Purchaser's acquisition of the Property shall be authorized by either party without the other party's prior written consent, provided that the foregoing shall not prohibit (a) Purchaser from disclosing the terms hereof to any potential investor; (b) Seller from disclosing the terms hereof to its shareholders, creditors, regulatory authorities or rating agencies or any purchasers of the Note; or (c) any disclosures required in connection with any proposed financing of the Purchase Price, or any portion thereof or otherwise required by applicable law or court order. The terms of this Section 12.01 shall survive any termination of this Contract. Section 12.02. No Rule of Construction. This Contract has been drafted by both Seller and Purchaser and no rule of construction shall be invoked against either party with respect to the authorship hereof or of any of the documents to be delivered by the respective parties at the Closing. Section 12.03. Multiple Counterpart; Governing Law. This Contract may be executed in multiple counterparts each of which shall be deemed an original but together shall constitute one and the same instrument. THE VALIDITY, INTERPRETATION AND PERFORMANCE OF THIS CONTRACT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES AND THE STATE OR FEDERAL DISTRICT COURTS LOCATED IN DALLAS OR COLLIN COUNTY, TEXAS SHALL HAVE JURISDICTION OVER ALL LEGAL ACTION CONCERNING OR RELATING TO THIS CONTRACT. Section 12.04. Attorneys' Fees. In the event of any litigation or other proceeding brought by either party hereunder, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs of suit. Section 12.05. Assignment. Except as hereinafter provided, this Contract may not be assigned by Purchaser. This Contract may be assigned by Purchaser without the prior written consent of Seller to any affiliate or entity related, directly or indirectly, to Purchaser, provided Purchaser gives Seller at least five (5) days prior to Closing (i) written notice of such assignment, (ii) a copy of the instrument assigning Purchaser's rights and obligations under this Contract and (iii) corporate and authority documents for the assignee evidencing the assignee's existence and good standing and authority to assume the obligations of Purchaser under this Contract. Any such assignment shall not relieve Purchaser of its duties and obligations hereunder; provided, further, in the event of an assignment of this Contract, PepsiCo, Inc. shall execute and deliver the Guaranty to Seller at the Closing. The Earnest Money Deposit will remain on deposit with the Title Company following any such assignment. This Contract and all rights hereunder shall inure to and be binding upon the respective heirs, personal representatives, successors and permitted assigns of Seller and Purchaser. -21- Section 12.06. Interpretation. This Contract shall, unless otherwise specified herein, be subject to the following rules of interpretation: (a) the singular includes the plural and the plural the singular; (b) words importing any gender include the other genders; (c) references to persons or entities include their permitted successors and assigns; (d) words and terms which include a number of constituent parts, things or elements, including the terms Improvements, Permitted Exceptions, Personal Property, Intangible Property and Property, shall be construed as referring separately to each constituent part, thing or element thereof, as well as to all of such constituent parts, things or elements as a whole; (e) references to statutes are to be construed as including all rules and regulations adopted pursuant to the statute referred to and all statutory provisions consolidating, amending or replacing the statute referred to; (f) references to agreements and other contractual instruments shall be deemed to include all subsequent amendments thereto or changes therein entered into in accordance with their respective terms; (g) the words "approve" or "consent" or "agree" or derivations of said words or words of similar import mean, unless otherwise expressly provided herein or therein, the prior approval, consent, or agreement in writing of the person holding the right to approve, consent or agree with respect to the matter in question, and the words "require" or "judgment" or "satisfy" or derivations of said words or words of similar import mean the requirement, judgment or satisfaction of the person who may make a requirement or exercise judgment or who must be satisfied, which approval, consent, agreement, requirement, judgment or satisfaction shall, unless otherwise expressly provided herein or therein, be in the sole and absolute discretion of the person holding the right to approve, consent or agree or who may make a requirement or judgment or who must be satisfied; (h) the words "include" or "including" or words of similar import shall be deemed to be followed by the words "without limitation"; (i) the words "hereto" or "hereby" or "herein" or "hereof" or "hereunder," or words of similar import, refer to this Contract in its entirety; (j) references to sections, articles, paragraphs or clauses are to the sections, articles, paragraphs or clauses of this Contract; and (k) numberings and headings of sections, articles, paragraphs and clauses are inserted as a matter of convenience only and shall not affect the construction of this Contract. Section 12.07. Exhibits. The exhibits attached hereto shall be deemed to be an integral part of this Contract. Section 12.08. Modifications. This Contract cannot be changed orally, and no executory agreement shall be effective to waive, change, modify or discharge it in whole or in part unless such executory agreement is in writing and is signed by the parties against whom enforcement of any waiver, change, modification or discharge is sought. Any such modification need not be joined in by Broker or the Title Company. -22- Section 12.09. Reporting Person. Purchaser and Seller hereby designate the Title Company as the "reporting person" pursuant to the provisions of Section 6045(e) of the Internal Revenue Code of 1986, as amended. Section 12.10. Time of Essence. Time is of the essence to both Seller and Purchaser in the performance of this Contract, and they have agreed that strict compliance by both of them is required as to any date and/or time set out herein, including, without limitation, the dates and times set forth in Article IV and Article VI of this Contract. If the final day of any period of time set out in any provision of this Contract falls upon a Saturday, Sunday or a legal holiday under the laws of the State in which the Property is located, then and in such event, the time of such period shall be extended to the next day which is not a Saturday, Sunday or legal holiday. Section 12.11. Dispute Resolution. If a dispute arises between the parties that is not settled in the ordinary course of business, then at the election of either party and upon due notice to the other, resolution of the dispute will be pursued by negotiation, each party appointing an appropriately authorized point person to negotiate with the point person of the other. If the dispute is not resolved by negotiation within fifteen (15) days after the notice therefor is given, plus such extensions of time as the parties may agree, then at the election of either party and upon due notice to the other, the parties will pursue resolution in good faith through confidential and non-binding mediation or other alternate form of dispute resolution under such rules and procedures as the parties may agree for fifteen (15) days after the notice therefor is given, plus such extensions of time as the parties may agree, before pursuing resolution through all legally available means. Neither party shall be deemed to have waived any rights or remedies at law or in equity, and both parties agree to maintain the business relationship of the parties to the greatest extent reasonably practical during the thirty (30) days, plus such additional time as the parties may agree, provided in this section for negotiation and alternate dispute resolution, but nothing herein shall be construed as preventing either party from pursuing any remedy at law or in equity as may be necessary to protect intellectual property intersets. [SEE FOLLOWING PAGE FOR SIGNATURES] -23- IN WITNESS WHEREOF, this Contract has been executed by Purchaser and Seller as of (but not necessarily on) the date and year first above written. PURCHASER: --------- PEPSICO, INC., a North Carolina corporation By: /s/ Kenneth J. O'Gara --------------------------------- Name: Kenneth J. O'Gara ------------------------------ Title: V.P. Global Real Estate Services -------------------------------- -24- SELLER: ------ CITIZENS TELECOM SERVICES COMPANY LLC a Delaware limited liability company By: /s/ John H. Casey, III ----------------------------------------- Name: John H. Casey, III --------------------------------------- Title: President and Chief Operating Officer -------------------------------------- -25- TITLE COMPANY JOINDER --------------------- The Title Company joins herein in order to evidence its agreement to perform the duties and obligations of the Title Company set forth herein and the accompanying escrow instructions and to acknowledge receipt of (a) a fully executed copy of this Contract; and (b) the Purchaser's Deposit, together with Purchaser's investment instructions with respect thereto. The Title Company acknowledges that any demand made by Purchaser for the return of the Earnest Money Deposit received on or before the last day of the Review Period need not be joined in by Seller in order to be effective. Date: February 5, 2003. REPUBLIC TITLE OF TEXAS, INC. By: /s/ Paulette Hubbard ----------------------------- Name: Paulette Hubbard --------------------------- Title: Senior Vice President -------------------------- -26- BROKER JOINDER -------------- Broker joins herein in order to (a) acknowledge receipt of a fully executed copy of this Contract; and (b) evidence Broker's consent to the terms, limitations, restrictions and covenants set forth in Section 7.04 and Section 12.01, but not otherwise. Date: January 31, 2003. CUSHMAN & WAKEFIELD OF TEXAS, INC. By: /s/ Rick Hughes ------------------------------ Name: Rick Hughes ------------------------------ Title: Senior Director ---------------------------- -27- BROKER JOINDER -------------- Broker joins herein in order to (a) acknowledge receipt of a fully executed copy of this Contract; and (b) evidence Broker's consent to the terms, limitations, restrictions and covenants set forth in Section 7.04 and Section 12.01, but not otherwise. Date: January 31, 2003. THE STAUBACH COMPANY By: /s/ Larry M. Toon --------------------------- Name: Larry M. Toon ------------------------- Title: Senior Vice President ------------------------ -28- EX-12 9 exhibit12.txt EXHIBIT 12 COMP OF RATIO
Exhibit 12 ---------- Page 1 Citizens Communications Company Statements of the Ratio of Earnings to Fixed Charges (a) (Dollars in Thousands) (Unaudited) Years Ended December 31, ------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------ ------------- ------------- ------------- ---------- Pre-tax income (loss) from continuing operations before dividends on convertible preferred securities, extraordinary expense and cumulative effect of changes in accounting principle $(1,231,640) $ (72,521) $ (49,993) $ 217,709 $ 69,314 (Income) or loss from equity investees (780,251) (1,799) (1,935) (2,019) (1,163) Minority interest - - (12,222) (23,227) (14,032) ------------ ------------- ------------- ------------- ---------- Pre-tax income (loss) from continuing operations before adjustment for minority interest in consolidated subsidiaries or (income) or loss from equity investees (2,011,891) (74,320) (64,150) 192,463 54,119 Fixed charges 492,191 401,437 206,650 142,847 125,798 Amortization of capitalized interest - - - - - Distributed income of equity investees 1,400 2,350 800 600 1,100 Interest capitalized (7,390) (5,675) (4,766) (8,681) (10,444) Carrying cost of equity forward contracts - (13,650) - - - Preference security dividend requirements of consolidated subsidiaries (10,063) (10,063) (10,063) (10,063) (10,063) ------------ ------------- ------------- ------------- ---------- Total earnings (1,535,753) 300,079 128,471 317,166 160,510 ------------ ------------- ------------- ------------- ---------- Ratio of earnings to fixed charges (3.12) 0.75 0.62 2.22 1.28 ============ ============= ============= ============= ========== Note : The above calculation was performed in accordance with Regulation S-K 229.503(d) Ratio of earnings to fixed charges. (a) For the years ended December 31, 2002, 2001 and 2000, earnings were insufficient to cover fixed charges by $2.03 billion, $101.4 million and $78.2 million, respectively.
Exhibit 12 Page 2 Citizens Communications Company Statements of the Ratio of Earnings to Combined Fixed Charges and Preferred Dividends (a) (Dollars in Thousands) (Unaudited) Years Ended December 31, --------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------- ----------- ----------- ------------- ----------- Pre-tax income (loss) from continuing operations before dividends on convertible preferred securities, extraordinary expense and cumulative effect of changes in principle $(1,231,640) $ (72,521) $ (49,993) $ 217,709 $ 69,314 (Income) or loss from equity investees (780,251) (1,799) (1,935) (2,019) (1,163) Minority interest - - (12,222) (23,227) (14,032) ------------- ----------- ----------- ------------- ----------- Pre-tax income (loss) from continuing operations before adjustment for minority interest in consolidated subsidiaries or (income) or loss from equity investees (2,011,891) (74,320) (64,150) 192,463 54,119 Fixed charges 502,255 425,150 216,713 152,910 135,861 Amortization of capitalized interest - - - - - Distributed income of equity investees 1,400 2,350 800 600 1,100 Interest capitalized (7,390) (5,675) (4,766) (8,681) (10,444) Preference security dividend requirements of consolidated subsidiaries (10,063) (10,063) (10,063) (10,063) (10,063) Carrying cost of equity forward contracts - (13,650) - - - ------------- ----------- ----------- ------------- ----------- Total earnings $(1,525,689) $ 323,792 $ 138,534 $ 327,229 $ 170,573 ------------- ----------- ----------- ------------- ----------- Ratio of earnings to combined fixed charges (3.04) 0.76 0.64 2.14 1.26 ============= =========== =========== ============= =========== Note : The above calculation was performed in accordance with Regulation S-K 229.503(d) Ratio of earnings to fixed charges. (a) For the years ended December 31, 2002, 2001 and 2000, earnings were insufficient to cover combined fixed charges by $2.03 billion, $101.4 million and $78.2 million, respectively.
EX-21 10 sublist.txt SUBSIDIARY LIST Exhibit 21 ---------- Citizens Communications Company Subsidiary List Citizens Business Services Company Citizens Cable Company Subsidiary of Citizens Cable Company: NCC Systems, Inc. Citizens Capital Ventures Corp. Citizens Consumers Services, Inc. Citizens Directory Services Company, Inc. Citizens Directory Services Company L.L.C. Citizens Energy Personnel Company LLC Citizens International Management Services Company Citizens Louisiana Accounting Company Citizens Mohave Cellular Company Citizens NEWCOM Company Citizens NEWTEL Company Citizens Pennsylvania Company LLC Citizens Public Works Service Company of Arizona Citizens Resources Company Citizens SERP Administration Company Citizens Solutions Company Citizens Southwestern Capital Corporation Citizens Telecommunications Company Citizens Telecommunications Company of California, Inc. Citizens Telecommunications Company of Colorado Citizens Telecommunications Company of Idaho Citizens Telecommunications Company of Illinois Citizens Telecommunications Company of Iowa Citizens Telecommunications Company of Minnesota, Inc. Citizens Telecommunications Company of Montana Citizens Telecommunications Company of Nebraska Citizens Telecommunications Company of Nebraska LLC Citizens Telecommunications Company of Nevada Citizens Telecommunications Company of New York, Inc. Citizens Telecommunications Company of North Dakota Citizens Telecommunications Company of Oregon Citizens Telecommunications Company of Tennessee L.L.C. Citizens Telecommunications Company of the Golden State Citizens Telecommunications Company of the Volunteer State LLC Citizens Telecommunications Company of the White Mountains, Inc. Citizens Telecommunications Company of Tuolumne Citizens Telecommunications Company of Utah Citizens Telecommunications Company of Virginia Citizens Telecommunications Company of West Virginia Citizens Telecommunications Company of Wyoming Citizens Telecommunications Company of Wyoming LLC Citizens Telecom Services Company LLC Citizens Utilities Company of California Citizens Utilities Rural Company, Inc. Citizens Utilities Water Company of Pennsylvania Citizens Water Resources Company Citizens Water Resources Company of Arizona Citizens Water Services Company of Arizona Conference-Call USA, Inc. CTC of Colorado LLC CTC Green Company, Inc. CU Capital LLC Subsidiary of CU Capital LLC: Electric Lightwave, LLC CU Wireless Management L.L.C. Flowing Wells, Inc. Frontier Cellular of Alabama, Inc. (1) Frontier Communications of AuSable Valley, Inc. Frontier Communications of New York, Inc. Frontier Communications of Rochester, Inc. Frontier Communications of Seneca-Gorham, Inc. Frontier Communications of Sylvan Lake, Inc. Frontier Subsidiary Telco LLC Subsidiaries of Frontier Subsidiary Telco LLC: Frontier Cable of Mississippi, Inc. Frontier Communications - Midland, Inc Frontier Communications - Prairie, Inc. Frontier Communications - Schuyler, Inc. Subsidiary of Frontier Communications - Schuyler, Inc.: Schuyler Cellular, Inc. Frontier Communications - St. Croix, Inc. Subsidiary of Frontier Communications - St. Croix, Inc.: Frontier Cable of Wisconsin, Inc. Frontier Communications of Alabama, Inc. Frontier Communications of America, Inc. Frontier Communications of Breezewood, Inc. Frontier Communications of Canton, Inc. Frontier Communications of DePue, Inc. Subsidiary of Frontier Communications of DePue, Inc.: DePue Communications, Inc. Frontier Communications of Fairmount, Inc. Subsidiary of Frontier Communications of Fairmount, Inc.: Fairmount Cellular, Inc. (1)Owned by: Frontier Communications of the South, Inc.; Frontier Communications of Alabama, Inc.; and Frontier Communications of Lamar County, Inc. Frontier Communications of Georgia, Inc. Frontier Communications of Illinois, Inc. Frontier Communications of Indiana, Inc. Frontier Communications of Iowa, Inc. Frontier Communications of Lakeside, Inc. Frontier Communications of Lakewood, Inc. Frontier Communications of Lamar County, Inc. Frontier Communications of Michigan, Inc. Frontier Communications of Minnesota, Inc. Frontier Communications of Mississippi, Inc. Frontier Communications of Mondovi, Inc. Frontier Communications of Mt. Pulaski, Inc. Frontier Communications of Orion, Inc. Subsidiary of Frontier Communications of Orion, Inc.: O.T. Cellular Telephone Company. Frontier Communications of Oswayo River, Inc. Frontier Communications of Pennsylvania, Inc. Frontier Communications of the South, Inc. Frontier Communications of Thorntown, Inc. Subsidiary of Frontier Communications of Thorntown, Inc.: Frontier Cable of Indiana, Inc. Frontier Communications of Viroqua, Inc. Frontier Communications of Wisconsin, Inc. Frontier InfoServices, Inc. Frontier TechServ, Inc. Frontier Telephone of Rochester, Inc. Havasu Water Company, Inc. Navajo Communications Company, Inc. Ogden Telephone Company Subsidiaries of Ogden Telephone Company: NewOp Communications Corporation Phone Trends, Inc. Rhinelander Telecommunications, Inc. Subsidiaries of Rhinelander Telecommunications, Inc.: New North Telecommunications, Inc. Rhinelander Telephone Company Subsidiaries of Rhinelander Telephone Company: Rib Lake Cellular for Wisconsin RSA #3, Inc. Rib Lake Telecom, Inc. Sun City Sewer Company Sun City Water Company Sun City West Utilities Company Tubac Valley Water Company, Inc. LLC Members are: Citizens Communications Company Citizens Telecommunications Company Sole LLC Member of Citizens Energy Personnel Company LLC Sole LLC Member of Citizens Pennsylvania Company LLC Sole LLC Member of Citizens Telecommunications Company of Nebraska LLC Sole LLC Member of Citizens Telecommunications Company of Wyoming LLC Sole LLC Member of CTC of Colorado LLC Sole LLC Member of CU Capital LLC Sole LLC Member of Frontier Subsidiary Telco LLC Citizens Communications Company Sole LLC Member of Citizens Telecom Services Company L.L.C. Citizens NEWTEL Company Sole LLC Member of Electric Lightwave, LLC CU Capital LLC Citizens Communications Company is a Partner in the following partnerships: Citizens Utilities Capital L.P. (EPPICS) Mohave Cellular Limited Partnership EX-23 11 kpmgconsent.txt KPMG CONSENT Exhibit 23 ---------- Independent Auditors' Consent ----------------------------- To the Board of Directors and Shareholders Citizens Communications Company: We consent to the incorporation by reference in the Registration Statement (No. 33-52873) on Form S-3, in the Registration Statement (No. 33-63615) on Form S-3, in the Registration Statement (No. 333-58044) on Form S-3, in the Registration Statement (No. 333-91054) on Form S-8, in the Registration Statement (No. 333-61432) on Form S-8, in the Registration Statement (No. 333-71821) on Form S-8, in the Registration Statement (No. 333-71597) on Form S-8, in the Registration Statement (No. 333-71029) on Form S-8, in the Registration Statement (No. 33-42972) on Form S-8, in the Registration Statement (No. 33-48683) on Form S-8, in the Registration Statement (No. 333-69740) on Form S-4 of Citizens Communications Company and subsidiaries of our reports dated March 4, 2003, with respect to the consolidated balance sheets of Citizens Communications Company and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity, comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 2002, and the related financial statement schedule, which reports appears in the December 31, 2002, annual report on Form 10-K of Citizens Communications Company and subsidiaries. Our report refers to the adoption of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" as of January 1, 2002. KPMG LLP New York, New York March 21, 2003 EX-99 12 certification906.txt CERTIFICATION 906 Exhibit 99 ---------- March 19, 2003 Jonathan G. Katz, Secretary Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Re: Citizens Communications Company, SEC File No. 001-11001 Dear Sir: Attached please find statements of the principal executive officer and the principal financial officer of Citizens Communications Company accompanying the filing today of the Annual Report on Form 10-K of the Company for the year ended December 31, 2002, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Please call me at (203) 614-5047 or, in my absence, Robert Larson at (203) 614-5104, if you have any questions. Sincerely, /s/ L. Russell Mitten ----------------------- L. Russell Mitten CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350. AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Citizens Communications Company (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Leonard Tow, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Leonard Tow - ------------------------- Leonard Tow Chief Executive Officer March 24, 2003 This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. A signed original of this written statement requird by Section 906 has been provided to Citizens Communications Company and will be retained by Citizens Communications Company and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350. AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Citizens Communications Company (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jerry Elliott, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jerry Elliott - ---------------------- Jerry Elliott Chief Financial Officer March 24, 2003 This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. A signed original of this written statement requird by Section 906 has been provided to Citizens Communications Company and will be retained by Citizens Communications Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----