-----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, GkdkhjI7b96uVJHFhg1vSo26lA0hIOgsdgpmxUUG3QWXgGcQGpiEzRYPUIXZJCD4 jWc5suabFcDsO15PYDaW3A== 0000889812-98-002037.txt : 19980821 0000889812-98-002037.hdr.sgml : 19980821 ACCESSION NUMBER: 0000889812-98-002037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 38 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980819 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LONG ISLAND LIGHTING CO CENTRAL INDEX KEY: 0000060251 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 111019782 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03571 FILM NUMBER: 98694688 BUSINESS ADDRESS: STREET 1: 333 EARLE OVINGTON BLVD STE 403 CITY: UNIONDALE STATE: NY ZIP: 11553 BUSINESS PHONE: 5165455184 MAIL ADDRESS: STREET 1: 333 EARLE OVINGTON BLVD STE 403 CITY: UNIONDALE STATE: NY ZIP: 11553 10-Q 1 QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 16 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 Commission file number 1-3571 LONG ISLAND LIGHTING COMPANY Incorporated pursuant to the Laws of New York State Internal Revenue Service - Employer Identification No. 11-1019782 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (516) 222-7700 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 --- The total number of shares of the registrant's Common Stock $1 par value, outstanding on June 30, 1998, was 100. Long Island Lighting Company Page No. -------- Part I - FINANCIAL INFORMATION Item 1 - Financial Statements Statement of Operations 2 Balance Sheet 3-4 Statement of Cash Flows 5 Notes to Financial Statements 6-12 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13-17 Part II - OTHER INFORMATION 18 Item 1 - Legal Proceedings 18 Item 2 - Changes in Securities 18 Item 3 - Defaults upon Senior Securities 18 Item 4 - Submission of Matters to a Vote of Security Holders 18 Item 5 - Other Information 18 Item 6 - Exhibits and Reports on Form 8-K 18 Signature 22 LONG ISLAND LIGHTING COMPANY 2 STATEMENT OF OPERATIONS (UNAUDITED) (THOUSANDS OF DOLLARS - EXCEPT SHARE INFORMATION)
SUCCESSOR COMPANY PREDECESSOR COMPANY ------------- --------------------------------- THREE MONTHS MAY 29, 1998 TO APRIL 1, 1998 TO ENDED JUNE 30, 1998 MAY 28, 1998 JUNE 30, 1997 ------------- --------------------------------- Revenue - Electric $ 202,739 $ 330,011 $ 560,086 EXPENSES Operations - fuel and purchased power 66,787 91,762 148,586 Operations and maintenance 34,683 68,993 98,790 Depreciation and amortization 17,719 22,986 32,228 Base financial component amortization -- 16,014 25,243 Rate moderation component amortization -- (39,574) 9,198 Regulatory liability component amortization -- (14,048) (22,143) Other regulatory amortization -- 14,694 4,082 Operating taxes 31,049 60,885 92,635 Federal income tax - current -- (79,081) 26,398 Federal income tax - deferred and other -- 1,219 8,571 ------------- ------------- ------------- Total Expenses 150,238 143,850 423,588 ------------- ------------- ------------- OPERATING INCOME 52,501 186,161 136,498 ------------- ------------- ------------- OTHER INCOME AND (DEDUCTIONS) Other income and deductions, net 5,396 89,205 4,163 Allowance for other funds used during construction -- 374 789 Federal income tax - current -- (62,303) -- Federal income tax - deferred and other -- (185,541) (630) ------------- ------------- ------------- Total Other Income and (Deductions) 5,396 (158,265) 4,322 ------------- ------------- ------------- INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST CHARGES 57,897 27,896 140,820 ------------- ------------- ------------- INTEREST CHARGES AND (CREDITS) Interest on long term debt 14,082 61,852 96,924 Interest on note payable to LIPA 20,563 -- -- Other interest 906 4,206 7,266 Allowance for borrowed funds used during construction (163) (540) (865) ------------- ------------- ------------- TOTAL INTEREST CHARGES 35,388 65,518 103,325 ------------- ------------- ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS 22,509 (37,622) 37,495 Income from discontinued operations net of taxes of zero, ($42,651), and $1,732, respectively -- 36,225 7,666 ------------- ------------- ------------- NET INCOME (LOSS) 22,509 (1,397) 45,161 Preferred stock dividend requirements -- 8,037 12,968 ------------- ------------- ------------- EARNINGS (LOSS) FOR COMMON STOCK 22,509 (9,434) 32,193 ------------- ------------- ------------- AVERAGE COMMON SHARES OUTSTANDING 100 121,822,647 121,146,042 BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 225,090 ($0.08) $ 0.26 DIVIDENDS DECLARED PER COMMON STOCK -- .445 .445
The accompanying notes are an integral part of these financial statements. LONG ISLAND LIGHTING COMPANY 3 BALANCE SHEET (Thousands of Dollars)
Successor Predecessor Company Company ------------- -------------- June 30, 1998 March 31, 1998 (unaudited) ------------- -------------- Assets Utility Plant Electric $ 1,954,664 $ 4,031,510 Gas - 1,233,281 Common - 290,221 Construction work in progress 91,634 118,808 Nuclear fuel in process and in reactor 18,084 18,119 ----------- ----------- 2,064,382 5,691,939 Less- Accumulated depreciation and amortization 7,570 1,877,858 ----------- ----------- Total Net Utility Plant 2,056,812 3,814,081 ----------- ----------- Regulatory Assets Base financial component, net of accumulated amortization of $883,496 at March 31, 1998 - 3,155,334 Rate moderation component - 434,004 Shoreham post-settlement costs - 1,005,316 Shoreham nuclear fuel - 66,455 Unamortized cost of issuing securities - 159,941 Postretirement benefits other than pensions - 340,109 Regulatory tax asset - 1,737,932 Other - 192,763 ----------- ----------- Total Regulatory Assets - 7,091,854 ----------- ----------- Current Assets Cash and cash equivalents 530,024 180,919 Special deposits - 95,790 Customer accounts receivable (less allowance for doubtful accounts of $19,222 and $23,483) 167,644 297,889 Other accounts receivable 6,403 43,744 Accrued unbilled revenues 87,487 124,464 Materials and supplies at average cost - 54,883 Fuel oil at average cost - 32,142 Gas in storage at average cost - 14,634 Prepayments and other current assets 15,521 13,807 ----------- ----------- Total Current Assets 807,079 858,272 ----------- ----------- Promissory note receivable 1,078,467 - ----------- ----------- Designated funds 302,702 - ----------- ----------- Nonutility Property and Other investments 19,025 50,816 ----------- ----------- Deferred Charges 55,862 85,702 ----------- ----------- Acquisition adjustment (net of accumulated amortization of $10,149 at June 30,1998) 4,041,790 - ----------- ----------- Total Assets $ 8,361,737 $11,900,725 ----------- -----------
The accompanying notes are an integral part of these financial statements. Long Island Lighting Company 4 Balance Sheet (Thousands of Dollars) Successor Predecessor Company Company ------------ ------------ June 30, 1998 March 31, 1998 (unaudited) ------------ ------------ Capitalization Long-term debt $ 3,331,074 $ 4,395,555 Unamortized discount on debt -- (13,606) Note Payable - LIPA 4,769,052 -- ------------ ------------ 8,100,126 4,381,949 ------------ ------------ Preferred Stock - redemption required -- 562,600 ------------ ------------ Common stock -- 608,635 Premium on capital stock -- 1,146,425 Capital stock expense -- (47,501) Retained earnings 22,509 956,092 Treasury stock, at cost -- (1,204) ------------ ------------ Total Common Shareowners' Equity 22,509 2,662,447 ------------ ------------ Total Capitalization 8,122,635 7,606,996 ------------ ------------ Regulatory Liabilities Regulatory liability component -- 99,199 1989 Settlement credits -- 59,397 Regulatory tax liability -- 78,913 Other -- 151,922 ------------ ------------ Total Regulatory Liabilities -- 389,431 ------------ ------------ Current Liabilities Current maturities of long-term debt -- 101,000 Current redemption requirements of preferred stock -- 139,374 Due to LIPA 55,009 -- Due to MarketSpan 128,125 -- Accounts payable and accrued expenses -- 228,583 LRPP payable -- 30,118 Accrued taxes 2,352 34,753 Accrued interest 19,820 146,607 Dividends payable -- 58,748 Class Settlement -- 60,000 Customer deposits 23,635 28,627 ------------ ------------ Total Current Liabilities 228,941 827,810 ------------ ------------ Deferred Credits Deferred federal income tax - net -- 2,539,364 Class Settlement -- 46,940 Other 7,541 22,529 ------------ ------------ Total Deferred Credits 7,541 2,608,833 ------------ ------------ Operating Reserves Pensions and other postretirement benefits -- 401,401 Claims and damages 2,620 66,254 ------------ ------------ Total Operating Reserves 2,620 467,655 ------------ ------------ Commitments and Contingencies ------------ ------------ Total Capitalization and Liabilities $ 8,361,737 $ 11,900,725 ------------ ------------ The accompanying notes are an integral part of these financial statements. LONG ISLAND LIGHTING COMPANY 5 STATEMENT OF CASH FLOWS (UNAUDITED) (Thousands of Dollars)
Successor Company Predecessor Company --------------- ---------------------------------- Three Months May 29, 1998 to April 1, 1998 to Ended June 30, 1998 May 28, 1998 June 30, 1997 --------------------------------------------------- Operating Activities Net Income $ 22,509 $ (1,397) $ 45,161 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 17,719 27,743 38,893 Base financial component amortization - 16,014 25,243 Rate moderation component amortization - (39,574) 9,198 Regulatory liability component amortization - (131,834) (22,143) Other regulatory amortization - 14,858 13,052 Rate moderation component carrying charges - (6,411) (5,981) Class Settlement - 2,018 4,199 Amortization of cost of issuing and redeeming securities 351 4,964 7,934 Federal income tax - deferred and other - 56,966 10,551 Allowance for other funds used during construction (163) (418) (958) Pensions and Other Post Retirement Benefits - 12,873 - Gas Cost Adjustment - 5,369 2,512 Other (1,110) 36,099 23,066 Changes in operating assets and liabilities Accounts receivable, net (2,370) 53,765 58,525 Accrued unbilled revenues (12,846) 47,465 (1,580) Materials and supplies, fuel oil and gas in storage - (31,238) (31,174) Accounts payable and accrued expenses - 21,068 33,485 Net change in due to LIPA and MarketSpan (36,372) - - Pensions and other post retirement benefits - (250,000) - Accrued taxes 2,352 15,924 (8,087) Accrued interest 19,820 (38,393) - Class Settlement - (6,918) (10,639) Special deposits - 66,492 (30,285) Other 7,452 (54,725) (27,288) Net Cash Provided by (used in) Operating Activities 17,342 (179,290) 133,684 Investing Activities Construction and nuclear fuel expenditures (8,793) (66,493) (69,219) Shoreham post settlement costs - (6,650) (11,983) Establish designated funds (302,702) - - Merger costs, net of cash transferred (62,159) - - Other - (2,009) 221 ----------- ---------- --------- Net Cash Used in Investing Activities (373,654) (75,152) (80,981) ----------- ---------- --------- Financing Activities Proceeds from sale of common stock - 4,184 4,309 Acquisition of common stock (2,497,500) - - Issuance of notes payable - 350,000 - Proceeds of note payable - parent 4,949,528 - - Repayment of note payable-parent (180,476) - - Redemption of long-term debt (1,186,000) (100,000) - Issuance of preferred stock - 75,000 - Redemption of preferred stock (221,600) (116,390) - Bond issuance costs (48,627) - - Preferred stock dividends paid - (5,711) (12,968) Common stock dividends paid - (54,147) (53,844) Other (3,989) (2,749) (729) ----------- ---------- --------- Net cash Provided by (used in) Financing Activities 811,336 150,187 (63,232) ----------- ---------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 455,024 (104,255) (10,529) Cash and cash equivalents at beginning of period 75,000 180,919 64,539 ----------- ---------- --------- Cash and cash equivalents at end of period $ 530,024 $ 76,664 $ 54,010 ----------- ---------- ---------
The accompanying notes are an integral part of these financial statements. Long Island Lighting Company 6 Notes to Financial Statements For the Three Months Ended June 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- 1. Basis of Presentation These Notes to Financial Statements reflect events subsequent to May 22, 1998, the date of the most recent Report of Independent Accountants, through the date of this Report on Form 10-Q for the three months ended June 30, 1998. These Notes to Financial Statements should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations for the three months ended June 30, 1998 and the Long Island Lighting Company (the "Company" or LILCO) Audited Financial Statements for the year ended March 31, 1998, and the transition period from January 1, 1997 to March 31, 1997. In addition, please refer to the discussion following regarding the change in control of the Company on May 28, 1998. The financial information as of June 30, 1998 and 1997 and for the periods in the three months then ended is unaudited. However, in the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial statements for the periods presented. Operating results for any of the periods presented are not necessarily indicative of results to be expected for the entire year due to the seasonal nature of the electric business. 2. Change in Control On May 28, 1998, LIPA Acquisition Corp., a wholly-owned subsidiary of Long Island Power Authority ("LIPA" or the "Authority"), was merged with and into the Company (the "Merger") pursuant to an Agreement and Plan of Merger dated as of June 26, 1997, by and among the Company, MarketSpan Corporation (formerly known as BL Holding Corp., "MarketSpan"), LIPA and LIPA Acquisition Corp., (the "Merger Agreement"). As a result of the Merger, LIPA became the holder of 100 shares of the Company's common stock, representing 100% of the outstanding voting securities of the Company. The former holders of the Company's common stock, which was widely held by the public, received a pro-rata share of (i) cash consideration of $2,497,500,000 and (ii) 3,440,625 shares of the common stock of MarketSpan, which were received by the Company in exchange for certain assets of the Company transferred to subsidiaries of MarketSpan. Pursuant to the Merger Agreement, the former holders of the Company's common stock (other than holders of dissenting shares) were deemed to have subscribed for additional shares of the common stock of MarketSpan, with an aggregate purchase price equal to the cash consideration. In order to effect the Merger, it was necessary to (i) retire all shares of the Company's preferred stock, whether by conversion, redemption or cancellation, and (ii) redeem certain of the Company's bonds, at an additional cost to LIPA of approximately $1,556,900,000. The cash consideration required for the Merger was obtained by LIPA from the proceeds of the issuance and sale of its Electric System General Revenue Bonds, Series 1998A and Electric System Subordinated Revenue Bonds, Series 1 through Series 6. The proceeds from the sale of the bonds were then passed by LIPA to the Company in exchange for a promissory note of approximately $4,949,000,000. As a result of the Merger, there was a change in control of the Company which effectively resulted in the creation of a new reporting entity (the "Successor Company"). Accordingly, the accompanying financial statements for the periods prior to and including May 28, 1998 (the "Predecessor Company") are not comparable to the financial statements presented subsequent to May 28, 1998. A black line has been drawn on the accompanying financial statements to distinguish between the Successor Company and Predecessor Company Long Island Lighting Company 7 Notes to Financial Statements For the Three Months Ended June 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- balances and activity. Pursuant to the Merger Agreement, on May 28, 1998, immediately prior to the Merger, all of the assets of the Company employed in the conduct of its gas distribution business and its non-nuclear electric generation business, and all common assets used by the Company in the operation and management of its electric transmission and distribution business and its gas distribution business and/or its non-nuclear electric generation business (the "Transferred Assets") were sold to MarketSpan and transferred to the following wholly-owned subsidiaries of MarketSpan (the "Transferee Subsidiaries") at MarketSpan's direction: MarketSpan Gas Corporation (d/b/a Brooklyn Union), MarketSpan Trading Services LLC, MarketSpan Generation LLC, MarketSpan Corporate Services LLC, MarketSpan Utility Services LLC, and MarketSpan Electric Services LLC, each a New York corporation or limited liability company, and MarketSpan Finance Corporation, a Vermont corporation (the "Transfer"). The consideration for the Transferred Assets consisted of (i) 3,440,625 shares of the common stock of MarketSpan Corporation, (ii) 553,000 shares of the Series B Preferred Stock of MarketSpan, (iii) 197,000 shares of the Series C Preferred Stock of MarketSpan, and (iv) promissory notes of $962,900,000. The interest rate and timing of principal and interest payments on the promissory notes from MarketSpan are identical to the terms of certain Predecessor Company indebtedness assumed by the Successor Company in the Merger, but issued to finance assets transferred to MarketSpan subsidiaries. MarketSpan will make principal and interest payments to the Successor Company, when due, and the Successor Company will transfer those amounts to debtholders. The value of the consideration was determined by MarketSpan and the Company to be equal to the net fair market value of the Transferred Assets. The Transfer was effected by a Bill of Sale, dated as of May 28, 1998, made and executed by the Company and acknowledged by MarketSpan. The remaining assets and liabilities of the Company acquired by LIPA consist of: (i) the Company's electric transmission and distribution system, (ii) its net investment in Nine Mile Point Nuclear Power Station, Unit 2 ("NMP2"), (iii) certain regulatory assets and liabilities associated with its electric business, (iv) allocated accounts receivable and other assets and liabilities and (v) substantially all of its long-term debt. The financial statements for the Successor Company include the push down of LIPA's basis, including costs related to the acquisition, in the assets acquired and liabilities assumed. Because of the manner in which the Successor Company's rates and charges will be established by LIPA, the original net book value of the transmission and distribution and nuclear generation assets acquired in the Merger is considered to be their fair value. Because the New York State Public Service Commission will no longer have regulatory oversight of the Successor Company, all regulatory assets and liabilities, as well as the amortization of those assets and liabilities, were eliminated from the financial statements for the periods after May 29, 1998. The excess of the acquisition costs over the fair value of the net assets acquired has been recorded as an intangible asset titled "acquisition adjustment" and is being amortized over a 35 year period, the weighted average useful life of the net plant assets acquired. Long Island Lighting Company 8 Notes to Financial Statements For the Three Months Ended June 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- LIPA was established as a corporate municipal instrumentality of the State of New York, constituting a political subdivision of the State, created by Chapter 517 of the Laws of 1986. As such, it is a component unit of the State and is included in the State's annual financial statements. As a wholly-owned subsidiary of LIPA, the Successor Company is exempt from Federal, state and local income taxes. In addition, effective May 29, 1998, the Successor Company's financial statements have been prepared in accordance with standards applicable to governmental entities. 3. Discontinued Operations The income statement of the Predecessor Company for the period April 1, 1998 to May 28, 1998 has been prepared to present the gas business (as transferred to MarketSpan subsidiaries pursuant to the Merger Agreement) as a discontinued operation, in accordance with the provisions of APB 30. The income statement for the three months ended June 30, 1997, has also been restated to present the gas business in a similar manner. The income from discontinued operations includes revenue from the gas business of approximately $79,979,000 and $104,402,000 for the period April 1, 1998 to May 28, 1998, and the three months ended June 30, 1997, respectively. 4. Commitments and Contingencies The cash consideration portion of the Merger Agreement was based upon preliminary estimated values of the LIPA acquired assets and assumed liabilities, as reflected in the financial records of the Predecessor Company at May 28, 1998. The promissory notes from MarketSpan have been adjusted at May 28, 1998 to reflect the refinement of estimated values as of that date. The promissory notes from MarketSpan will be further adjusted, pursuant to the Merger Agreement, based upon a final determination of the actual value of acquired net assets as of that date as agreed to by the Successor Company and MarketSpan. 5. Capitalization On May 29,1998, the Company received approximately $4,949,000,000 from LIPA in exchange for a promissory note. The interest rate on the note is equal to the interest rate paid by LIPA on certain bonds issued to the public ( 5.7% at June 30,1998) and the note will be repaid through revenues collected by the Successor Company from electric customers. The note is collateralized by those revenues. The proceeds of this note were used primarily to (i) repay certain debt of $1,186,000,000, (ii) redeem preferred stock of $339,100,000 (iii) establish certain restricted funds of $311,495,000 and (iv) to acquire all of the then outstanding common stock of the Company for $2,497,500,000. 6. Management Fees and Contract Costs The expenses of the Successor Company for the period May 29,1998 to June 30,1998 reflect charges by LIPA of management fees equal to the LIPA employee and overhead costs, as well as the costs of certain contracts entered into by the Successor Company with MarketSpan for the management of its Long Island Lighting Company 9 Notes to Financial Statements For the Three Months Ended June 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- assets. 7. Reclassifications Certain prior period amounts have been reclassified in the financial statements to conform with the current period presentation. 8. Rate Matters Effective May 28, 1998, LIPA adopted a new rate structure for the Successor Company which immediately reduced electric rates in its service area by an average of 20%. Under current New York law, LIPA is empowered to set rates for electric service in the Successor Company's service area without being required by law to obtain the approval of the New York State Public Service Commission (the "PSC") or any other State regulatory body. However, LIPA has agreed, in connection with the approval of the Merger by the New York State Public Authorities Control Board (the "PACB"), that it will not impose any permanent increase, nor extend or reestablish any portion of a temporary rate increase, in average customer rates over a 12 month period in excess of 2.5% without approval of the PSC, following a full evidentiary hearing. Another of the PACB conditions requires that LIPA reduce average rates within the Successor Company's service area by no less than 14% over a ten year period commencing on the date when the Successor Company began providing electric service, when measured against the Predecessor Company's base rates in effect on July 16, 1997 (excluding the impact of the Shoreham tax settlement, but adjusted to reflect emergency conditions and extraordinary unforeseeable events.) The LIPA Act requires that any bond resolution of the Authority contain a covenant that it will at all times maintain rates, fees or charges for the Successor Company sufficient to pay the costs of operation and maintenance of facilities owned or operated for the Successor Company; payments in lieu of taxes; renewals, replacements and capital additions; the principal of and interest on any obligations issued pursuant to such resolution as the same become due and payable, and to establish or maintain any reserves or other funds or accounts required or established by or pursuant to the terms of such resolution. Absent emergency conditions and unforeseeable events, LIPA expects to achieve an average rate reduction of no less than 14% over the ten year period for customers of the Successor Company, commencing on the date of the Merger and LIPA does not expect to need to increase average Successor Company customer rates in excess of 2.5% over any 12 month period during the ten-year period following the Merger. For purposes of determining compliance with the 2.5% and 14% PACB conditions described in the preceding paragraph, LIPA has interpreted the PACB conditions as allowing the exclusion of increases in the cost of electricity paid by Successor Company's customers related to the Shoreham settlement, other pass-through adjustments and any decreases related to the RICO credits. LIPA believes that it will be able to satisfy the 14% PACB condition and that it will be able to obtain any PSC approvals necessary to comply with its obligations under the LIPA Act and under the Authority's bond resolutions. If either the PSC or the PACB were to disagree with LIPA's interpretation of the PACB conditions, it may influence the timing and size of rate increases Long Island Lighting Company 10 Notes to Financial Statements For the Three Months Ended June 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- implemented by LIPA and the Successor Company and/or require (i) the modification of that portion of LIPA's plan of finance which contemplates the accelerated retirement of debt, (ii) the withdrawal of funds from the Rate Stabilization Fund to avoid or minimize rate increases, or (iii) other action necessary to meet the conditions of the PACB approval. The average system revenue requirement based on the Successor Company's initial base rates set by LIPA versus the Predecessor Company's pre-Merger average system revenue requirements, are presented in the table below. AVERAGE SYSTEM REVENUES AND REDUCTIONS (1)
- ----------------------------------------------------------------------------------------------------------- Nassau/Rockaway Suffolk County System Average Customers Customers - ----------------------------------------------------------------------------------------------------------- Cents Cents Cents per Percent per Percent per Percent kWH Reduction kWH Reduction kWH Reduction - ----------------------------------------------------------------------------------------------------------- Predecessor Company's Pre-Merger Average System Revenue Requirements 15.23 - 15.23 - 15.23 - - ----------------------------------------------------------------------------------------------------------- Less: Successor Company's Base Savings (2.53) 16.60 (2.53) 16.60 (2.53) 16.60 - ----------------------------------------------------------------------------------------------------------- Less: Shoreham Credits (.52) 3.40 (.66) 4.30 (.38) 2.50 ----- ---- ----- ---- ----- ---- - ----------------------------------------------------------------------------------------------------------- Successor Company's Average System Revenue Requirements 12.18 20.00 12.04 20.90 12.32 19.10 ----- ----- ----- ----- ----- ----- - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- 1 Reflects average revenues for all retail customers. All values exclude effects of RICO credits. - -----------------------------------------------------------------------------------------------------------
The Successor Company's initial rates are largely based on the Predecessor Company's pre-Merger rate design. In addition, the Successor Company's rates include a fuel and purchased power cost adjustment ("FPPCA"), a payment in lieu of taxes ("PILOT") payments recovery rider, the Shoreham Credits and provide for the Suffolk Surcharge. The Successor Company's rates include the FPPCA to adjust rates to reflect significant changes in the cost of fuel, purchased power and related costs. The FPPCA is designed such that customers will not pay for average annual increases above an established base fuel and purchased power cost, or receive a credit for decreases below an established base cost, of less than one percent per year. Expenses for fuel and purchased power cost in excess of or below this level will be recovered from or returned to customers beginning the following year. Should fuel and purchased power costs increase in excess of five percent cumulatively over the original base cost, the FPPCA will recover, from that year forward, all costs in excess of the original base. Long Island Lighting Company 11 Notes to Financial Statements For the Three Months Ended June 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- The LIPA Act requires the Successor Company to make PILOTs to municipalities and school districts equal to the property taxes that would have been received by each such jurisdiction from the Predecessor Company if the acquisition of the Successor Company by LIPA had not occurred, and to make PILOTs for certain New York State and local taxes which would otherwise have been imposed on the Predecessor Company. The PILOT payments recovery rider allows for LIPA rate adjustments to accommodate the State PILOTs. Pre-Merger Rate Matters In December 1997, the PSC approved the continuation of the following Predecessor Company ratemaking mechanisms for the rate year ended November 30, 1997: (a) the gas excess earnings mechanism whereby earnings in excess of a return on common equity of 11.0% was allocated equally between ratepayers and shareowners, with the ratepayers' share of excess earnings credited to the regulatory asset created as a result of costs associated with manufactured gas plant site investigation and remediation costs; and (b) the electric Rate Moderation Component ("RMC") and the Long Island Lighting Company Ratemaking and Performance Plan ("LRPP") mechanisms and performance incentive programs. Electric In April 1996, the PSC issued an order directing the Predecessor Company to file financial and other information sufficient to provide a legal basis for setting new rates for the three-year period 1997 through 1999. In compliance with the order, the Predecessor Company submitted a multi-year rate plan to be reviewed by the PSC. As an interim measure, pending the consummation of the Merger or the adjudication of its electric rate filing, the Predecessor Company submitted petitions in May 1997 and December 1997 requesting PSC approval to extend, through the rate years ending November 30, 1996 and 1997, respectively, the provisions of its 1995 electric rate order ( the "1995 Order"). These petitions were approved by the PSC in December 1997 and April 1998, respectively. The basis of the 1995 Order included minimizing future electric rate increases while continuing to provide for the recovery of the Predecessor Company's regulatory assets and retaining consistency with the rate moderation agreement objective of restoring the Predecessor Company to financial health. The 1995 Order, which became effective December 1, 1994, froze base electric rates, reduced the Predecessor Company's allowed return on common equity from 11.6% to 11.0% and modified or eliminated certain performance based incentives. For the rate year ended November 30, 1997, the Predecessor Company earned 12.7 basis points, or approximately $2.9 million, net of tax effects, as a result of its performance under all incentive programs. The deferred balances resulting from the net margin and expense reconciliations, and earned performance-based incentives are netted at the end of each rate year under the 1995 Order. The first $15 million of the total deferral was recovered from or credited to ratepayers by increasing or Long Island Lighting Company 12 Notes to Financial Statements For the Three Months Ended June 30, 1998 (Unaudited) - -------------------------------------------------------------------------------- decreasing the RMC balance. Deferrals in excess of the $15 million, upon approval of the PSC, were refunded to or recovered from the customers through the FCA mechanism over a 12-month period. For the rate year ended November 30, 1997, the amount to be returned to customers resulting from the revenue and expense reconciliations, performance-based incentive programs and associated carrying charges totaled $4.1 million. Consistent with the mechanics of the LRPP, it is anticipated that the entire balance of the deferral will be used to reduce the RMC balance upon approval by the PSC of the Predecessor Company's reconciliation filing which was submitted to the PSC in March 1998. For the rate year ended November 30, 1996, the Predecessor Company recorded a net deferred LRPP credit of approximately $14.5 million which was subsequently applied as a reduction to the RMC upon the PSC's approval of the Predecessor Company's reconciliation filing in December 1996. For the rate year ended November 30, 1995, the Predecessor Company recorded a net deferred credit of approximately $41 million. The first $15 million of the deferral was applied as a reduction to the RMC while the remaining portion of the deferral of $26 million will be returned to customers through the fuel cost adjustment when approved by the PSC. Another mechanism of the LRPP provided that earnings in excess of the allowed return on common equity, excluding the impacts of the various incentive and/or penalty programs, were used to reduce the RMC. For the rate years ended November 30, 1997, 1996 and 1995, the Predecessor Company earned $4.8 million, $9.1 million, and $6.2 million, respectively, in excess of its allowed return on common equity. These excess earnings were applied as reductions to the RMC. Gas In May 1997, the Predecessor Company submitted a petition requesting PSC approval to extend through the rate year ending November 30, 1997, the gas excess earnings sharing mechanism established in its prior three-year gas rate settlement agreement which expired on November 30, 1996. Pursuant to this request, earnings in excess of a return on common equity of 11.0% were to be allocated equally between customers and shareowners with the customers' share of excess earnings credited to the regulatory asset created as a result of costs associated with manufactured gas plant ("MGP") site investigation and remediation costs. This request was approved by the PSC in December 1997. As a result of this mechanism, the customer's allocation of excess earnings amounted to $6.3 million for the rate year ended November 30, 1997, and through the date of the Merger, was to be applied to offset costs incurred to investigate and remediate MGP sites. The prior gas rate settlement provided that earnings in excess of a 10.6% return on common equity be shared equally between the Predecessor Company's firm gas customers and its shareowners. For the rate years ended November 30, 1996 and 1995, the firm gas customers' portion of gas excess earnings totaled approximately $10 million and $1 million, respectively. In 1997, the Predecessor Company was granted permission by the PSC to apply the customers' portion of the gas excess earnings and associated carrying charges for the 1996 and 1995 rate years to the recovery of deferred costs associated with post-retirement benefits other than pensions and costs incurred for investigation and remediation of MGP sites. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Effective May 29, 1998, MarketSpan provides operations and management services for the transmission and distribution system of the Successor Company through a management services agreement. LIPA contracts for capacity from the fossil fired generating plants of MarketSpan through a power supply agreement. Energy is purchased by MarketSpan on the Successor Company's behalf through an energy management agreement. The following table combines the condensed results of operations of both the Predecessor and Successor Companies in order to facilitate comparison of the three months ended June 30,1998 and 1997.
Successor Predecessor Predecessor Company Company Total Company --------- --------- --------- --------- May 29,1998 to April 1, 1998 to April 1, 1998 to April 1, 1997 to June 30,1998 May 28,1998 June 30, 1998 June 30, 1997 --------- --------- --------- --------- (in millions) (in millions) (in millions) (in millions) Electric Revenues $ 202,739 $ 330,011 $ 532,750 $ 560,086 Operating Expenses 150,238 143,850 294,088 423,588 Other Income and (Deductions) 5,396 (158,265) (152,869) 4,322 Interest Charges 35,388 65,518 100,906 103,325 Income (Loss) from Continuing Operations $ 22,509 $ (37,622) (15,113) 37,495
The table highlights the effects of the Merger, which include lower electric revenues as a result of the Successor Company's rate reduction (approximately 20% for all customers effective May 29, 1998) and increased interest expense during the period May 29, 1998 to June 30, 1998 as a result of the recapitalization of the Successor Company with debt, instead of equity. As a result of the Merger, the New York Public Service Commission does not have jurisdiction over of the Successor Company with respect to the determination of rates and charges. Rates and charges for the Successor Company will be determined by LIPA. Therefore, adjustments were made on May 29, 1998 to eliminate all regulatory assets and liabilities on the balance sheet; accordingly, the results of operations for the period May 29, 1998 to June 30, 1998 exclude the amortization of such amounts. In addition, adjustments were made by the Successor Company on May 29,1998 to eliminate deferred tax assets and liabilities because of the tax exempt status of LIPA. Therefore, the results of operations for the period May 29,1998 to June 30, 1998 do not include a provision for income taxes. Three months ended June 30,1998 compared to the three months ended June 30,1997. Earnings per Common Share Net losses for the period April 1, 1998 to May 28, 1998 were $9.4 million or $0.08 per common share as compared to earnings of $32.2 million or $0.26 per common share for the three months ended June 30, 1997. The results for the period April 1, 1998 to May 28, 1998 were negatively 14 impacted by Merger-related expenses such as legal, accounting, financial and tax consultants, certain severance payments made to Predecessor Company officers, and federal income taxes resulting from the Merger. Theses items were partially offset by the positive impact on earnings caused by the change in method of amortizing the RMC discussed below. Revenues The decrease in electric revenues of approximately $27.3 million for the three months ended June 30, 1998, when compared to the same period in 1997, was principally the result of the 20% rate reduction, for all customers, effective May 29, 1998 (approximately $40.4 million). Partially offsetting the reduction in revenues, caused by the reduction in rates, were higher sales volumes resulting from warmer weather experienced in the region during the three months ended June 30, 1998. Fuel and Purchased Power Fuel and purchased power expense for the three months ended June 30,1998 and 1997, were as follows: 1998 1997 ---------------- ---------------- (in millions) (in millions) Oil $ 27 $ 18 Gas 43 52 Nuclear 2 4 Purchased 87 75 ---------------- ---------------- Total $ 159 $ 149 ---------------- ---------------- For the three months ended June 30, 1998, electric fuel costs increased from the same period in 1997, principally because of the substitution of more expensive purchased power for lower fuel cost energy generated by nuclear power. During the 1998 period, the NMP2 Nuclear Facility was undergoing a scheduled fuel outage. The increase in purchased power expense is the result of increases in the quantity purchased combined with an increase in the average unit price per Kilowatt hour. As a result of a decrease in the price of fuel oil, combined with increases in natural gas prices in 1998, generation with fuel oil became more cost effective than generation with gas. 15 Electric Energy Available The percentage of total electric energy available, by type of fuel, for electric operations for the three months ended June 30, 1998 and 1997 were as follows: 1998 1997 ---------------- ---------------- (in millions) (in millions) Oil 22% 10% Gas 33% 45% Nuclear 3% 10% Purchased 42% 35% ---------------- ---------------- Total 100% 100% ---------------- ---------------- Operations and Maintenance Expenses Operations and maintenance (O&M) expenses, excluding fuel and purchased power, amounted to $103.7 million for the three months ended June 30, 1998, compared to $98.8 million for the same period in 1997. This increase is primarily due to higher accruals for doubtful accounts and certain employee benefits. Regulatory amortization The amortization of various regulatory assets and liabilities were not recorded by the Successor Company as a result of the adjustments made on May 29,1998, to eliminate the related regulatory assets and liabilities. The RMC reflected the difference between the Predecessor Company's electric revenue requirements under conventional ratemaking and the revenues provided by its electric rate structure. In addition, the RMC was adjusted monthly for the operation of the Predecessor Company's Fuel Moderation Component ("FMC") mechanism and the difference between the Predecessor Company's share of actual operating costs at NMP2 and amounts provided for in electric rates. In the period ended June 30,1998, the Predecessor Company recorded a non-cash credit to income of approximately $39.6 million, compared to a non-cash charge of $9.2 million for the three months ended June 30, 1997. In December 1997, the Predecessor Company petitioned the Public Service Commission ("PSC") to change the monthly amortization of the RMC to a method designed to compensate for the seasonality of the electric business. Accordingly, effective December 1, 1997, the Predecessor Company began recording RMC amortization on a non-levelized basis. Previously, the Predecessor Company had amortized the RMC on a straight line basis over each 12 month period beginning December 1. As a result of the above change, for the period from April 1, 1998 to May 28, 1998, the Predecessor Company recorded non-cash credits of $46.5 million more than it would have under the previous methodology. Federal Income Tax The decrease in operating federal income tax expense of approximately $113 million for the three months ended June 30, 1998, when compared to the same period in 1997, was principally the 16 result of a decrease in operating pretax book income, various adjustments related to the Merger, and the fact that the Successor Company is not subject to Federal Income taxes. The increase in non-operating federal income tax expense of approximately $247 million for the three months ended June 30, 1998, when compared to the same period in 1997, was principally the result of an increase in non-operating pretax income, various adjustments related to the Merger, the reversal of previously recognized tax benefits because of the settlement of an IRS audit for tax years 1981 through 1989, partially offset by the fact that the Successor Company is not subject to Federal Income taxes. Other Income and Deductions Other income and deductions increased $90 million for the three months ended June 30, 1998 (exclusive of income taxes) as compared to the three months ended June 30, 1997, as a result of a $3 million increase in revenues related to the Predecessor Company's fuel incentive program whereby the Predecessor Company would recognize additional revenues (and earnings) when it produced energy more efficiently than target levels established by the PSC. In addition, in May 1998, the Predecessor Company reached a settlement with the IRS with respect to an audit covering the years 1981 to 1989, and as a result, released previously established reserves of approximately $117 million. The release of these reserves had no impact on earnings as the reversal of the reserve in May was offset by an increase in tax expense during this period. The Predecessor Company also recognized approximately $36 million of merger related expenses during the period April 1, 1998 to May 28, 1998. Liquidity and Capital Resources The Successor Company intends to refinance up to $1.8 billion of its long-term debt in the twelve months subsequent to June 30, 1998. In addition, the collection of electric revenues from customers is expected to be sufficient to meet its operating needs and debt service requirements. Impact of Year 2000 The Successor Company currently is purchasing new computer software to support its activities and believes that these systems will be Year 2000 compliant. Management also believes that, based on available information, it will be able to manage its Year 2000 transition for systems and infrastructure, without any material adverse effect on its business operations or financial prospects. However, there can be no assurance that failure to resolve any issue relating to such transition would not have a material adverse effect on the Successor Company. The Successor Company has had discussions with MarketSpan, their largest vendor, who is responsible for the management and operation of the Successor Company's transmission and distribution system, and MarketSpan has indicated that they have evaluated the extent to which modifications to its computer software and database will be necessary to accommodate the year 2000. A corporate-wide program has been established by MarketSpan to review all software, hardware and associated compliance plans. MarketSpan also indicated that contingency and business continuation plans are being prepared and will be reviewed periodically. MarketSpan expects to spend approximately $16.3 million to address the Year 2000 issue. As of June 30, 1998, $7.1 million has been expended in investigating and modifying software. Their effort is scheduled to continue into 1999 with completion expected at the end of June 30, 1999. 17 The costs of the project and the date on which MarketSpan believes it will complete the Year 2000 modifications are based on MarketSpan's management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. MarketSpan believes that, with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed on time, the Year 2000 Issue could have a material adverse impact on the operations of the Successor Company. Cautionary Statement Regarding Forward-Looking Statements This report contains statements which, to the extent they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of the Securities Litigation Reform Act of 1996. In this respect, the words "estimate," "project," "anticipate," "expect," "intend," "believe" and similar expressions are intended to identify forward-looking statements. All such forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. A number of important factors affecting the Registrant's business and financial results could cause actual results to differ materially from those stated in the forward-looking statements. Those factors include state and federal regulatory rate proceedings, competition, and certain environmental matters each as discussed herein, in the Registrant's Annual Report on Form 10-K filed May 28, 1998, for the year ended March 31, 1998, or in other reports filed by the Registrant with the Securities and Exchange Commission. 18 Part II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company has been named as a nominal defendant in a derivative suit pending in the United States District Court for the Eastern District Court of New York entitled Slyvester v. Catacosinos, et al, as well as in four class actions pending in New York State Supreme Court, Nassau County, entitled Gerson et al. v. Catacosinos, et al., Zitter, et al. v. Catacosinos, et al., Roth, et al. v. Catacosinos, et al., Lipschutz, et al. v. Catacosinos, et al. Former officers and directors of the Company also have been named as defendants in each of these actions. The complaints in these actions allege in substance that certain former officers of the Company recently received excessive compensation which totalled approximately $67 million in connection with the closing of MarketSpan Corporation's merger with the Company and with the Long Island Power Authority's acquisition of the common stock of the Company. The class action complaints seek damages of an unspecified amount and one of the complaints seeks to place approximately $67 million in a constructive trust. Because the cases are in a very early stage, at which no discovery has yet taken place, the Company cannot express an opinion as to the likelihood of any liability. The Company has notified MarketSpan Corporation of its entitlement to indemnification pursuant to an indemnification agreement dated June 26, 1997, for any losses the Company suffers as a result of these litigations. The Company expects that MarketSpan will honor the request for indemnification. Item 2. CHANGES IN SECURITIES None Item 3. DEFAULTS UPON SENIOR SECURITIES None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5. OTHER INFORMATION None Item 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 3(a) Restated Certificate of Incorporation of LILCO 3(b) Form of New By-laws of LILCO 3(c) Certificate of Assumed Name designating LIPA as the assumed name of LILCO dated June, 1998 19 10(a) Management Services Agreement dated as of June 26, 1997 between LILCO and the Authority 10(b) Power Supply Agreement dated as of June 26, 1997 between LILCO and the Authority 10(c) Energy Management Agreement dated as of June 26, 1997 between LILCO and the Authority 10(d) Generation Purchase Rights Agreement dated June 26, 1997 between LILCO and the Authority with counterpart executed by MarketSpan Generation LLC as of May 28, 1998 10(e) Guaranty Agreement dated May 28, 1998 by MarketSpan Corporation (F/K/A BL Holding Corp.); agreed to and accepted by the Authority 10(f) Liabilities Undertaking and Indemnification Agreement dated as of June 26, 1997 by LILCO and MarketSpan Electric Services LLC, MarketSpan Generation LLC, MarketSpan Trading Services LLC, MarketSpan Utility Services LLC, MarketSpan Gas Corporation (d/b/a Brooklyn Union), MarketSpan Corporate Services and MarketSpan Finance Corporation 10(g) Liabilities Undertaking and Indemnification Agreement dated as of June 26, 1997 by the Authority and LILCO 10(h) Energy Management Agreement - Assignment and Assumption Agreement dated as of May 28, 1998 by and between LILCO, MarketSpan Trading Services LLC and MarketSpan Corporation (F/K/A BL Holding Corp.); acknowledged and agreed to by the Authority and LIPA Acquisition Corp. 10(i) Management Services Agreement - Assignment and Assumption Agreement dated as of May 28, 1998 by and between LILCO, MarketSpan Electric Services LLC and MarketSpan Corporation (F/K/A BL Holding Corp.); acknowledged and agreed to by the Authority and LIPA Acquisition Corp. 10(j) Power Supply Agreement - Assignment and Assumption Agreement dated as of May 28, 1998 by and between LILCO, MarketSpan Generation LLC and MarketSpan Corporation (F/K/A BL Holding Corp.); acknowledged and agreed to by the Authority and LIPA Acquisition Corp. 10(k) Generation Purchase Rights Agreement - Assignment and Assumption Agreement dated as of May 28, 1998 by and between LILCO, MarketSpan Corporation (F/K/A BL Holding Corp.); acknowledged and agreed to by the Authority and LIPA Acquisition Corp. 10(l) Operating Agreements - Assignment and Assumption Agreement dated as of May 28, 1998 by and among the Authority, LIPA Acquisition Corp. and MarketSpan Corporation (F/K/A BL Holding Corp.) 10(m) Collections Allocation and Segregation Agreement dated as of May 28, 1998 by and among the Authority, LIPA Acquisition Corp. and MarketSpan Corporation (F/K/A BL Holding Corp.) and MarketSpan Trading Services LLC 10(n) 7.3% Promissory Note in favor of LILCO in the principal amount of $397,000,000 20 10(o) 8.20% Promissory Note in favor of LILCO in the principal amount of $270,000,000 10(p) $28,375,000 Pollution Control Revenue Bonds (LILCO Projects) Series A Promissory Note in favor of LILCO 10(q) $1,000,000 Industrial Development Revenue Bonds (LILCO Projects) Series A Promissory Note in favor of LILCO 10(r) $1,000,000 Industrial Development Revenue Bonds (LILCO Projects) Series B Promissory Note in favor of LILCO 10(s) $19,100,000 Pollution Control Revenue Bonds (LILCO Projects) Series B Promissory Note in favor of LILCO 10(t) Pollution Control Revenue Bonds (LILCO Projects) Series 1982 Promissory Note in favor of LILCO 10(u) Adjustable Rate Pollution Control Revenue Bonds (LILCO Projects) 1985 Series A Promissory Note in favor of LILCO 10(v) Adjustable Rate Pollution Control Revenue Bonds (LILCO Projects) 1985 Series B Promissory Note in favor of LILCO 10(w) Electric Facilities Revenue Bonds (LILCO Projects) 1989 Series A Promissory Note in favor of LILCO 10(x) Electric Facilities Revenue Bonds (LILCO Projects) 1989 Series B Promissory Note in favor of LILCO 10(y) Electric Facilities Revenue Bonds (LILCO Projects) 1990 Series A Promissory Note in favor of LILCO 10(z) Electric Facilities Revenue Bonds (LILCO Projects) 1991 Series A Promissory Note in favor of LILCO 10(aa) Electric Facilities Revenue Bonds (LILCO Projects) 1992 Series A Promissory Note in favor of LILCO 10(bb) Electric Facilities Revenue Bonds (LILCO Projects) 1992 Series B Promissory Note in favor of LILCO 10(cc) Electric Facilities Revenue Bonds (LILCO Projects) 1992 Series C Promissory Note in favor of LILCO 10(dd) Electric Facilities Revenue Bonds (LILCO Projects) 1992 Series D Promissory Note in favor of LILCO 21 10(ee) Electric Facilities Revenue Bonds (LILCO Projects) 1993 Series A Promissory Note in favor of LILCO 10(ff) Electric Facilities Revenue Bonds (LILCO Projects) 1993 Series B Promissory Note in favor of LILCO 10(gg) Electric Facilities Revenue Bonds (LILCO Projects) 1994 Series A Promissory Note in favor of LILCO 10(hh) Electric Facilities Revenue Bonds (LILCO Projects) 1995 Series A Promissory Note in favor of LILCO 27 Financial Data Schedule UT for the three-month period ended June 30, 1998. (B) REPORTS ON FORM 8-K In its current report on Form 8-k dated May 28, 1998, pursuant to Item 1 thereof, the registrant reported the consummation of the merger of the LIPA Acquisition Corp., a wholly owned subsidiary of Long Island Power Authority, with and into the Registrant, and, pursuant to Item 2 thereof, the registrant reported the disposition of all of the assets of the registrant employed in the conduct of its gas distribution business and its non-nuclear electric generating business, and all common assets used by the registrant in the operation and management of its electric transmission and distribution business and its gas distribution business and its non-nuclear electric generating business to MarketSpan Corporation. The registrant also provided unaudited pro forma financial information reflecting adjustments to the historical financial statements of the registrant to give effect to such transactions. In its current report on Form 8-K dated June 16, 1998, pursuant to Item 4 thereof, the registrant reported a change in its certifying accountant reflecting the dismissal of Ernst & Young LLP as the registrant's independent auditors. 22 SIGNATURE Pursuant to the requirements 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. LONG ISLAND LIGHTING COMPANY (Registrant) /s/ David Warren David Warren Chief Financial Officer Dated: August 19, 1998 EX-3.(A) 2 RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION OF LONG ISLAND LIGHTING COMPANY Under Section 807 of the Business Corporation Law Pursuant to Section 807 of the Business Corporation Law of the State of New York, the undersigned do hereby certify: 1. The name of the Corporation is Long Island Lighting Company (the "Corporation"). 2. The Certificate of incorporation of the Corporation was filed in the office of the Secretary of State on December 31, 1910. 3. Restated Certificates of Incorporation of the Corporation under Section 807 of the Business Corporation Law were filed by the Department of State on October 9, 1980 and November 22, 1993, respectively. 4. The Restated Certificate of Incorporation of the Corporation, as amended and restated is further amended to: (i) eliminate the class of Preferred Stock and each series thereof and the class of Preference Stock all of which were redeemed by the Corporation or cancelled and convened into the right to receive cash or shares of another corporation pursuant to the merger of LIPA Acquisition Corp. with and into the Corporation, with the Corporation as the surviving corporation made effective on May 28, 1998 by the filing of the Certificate of Merger of LIPA Acquisition Corp. with and into the Corporation; (ii) reduce the number of shares of Common Stock of the Corporation which the Corporation is authorized to issue from one hundred and fifty-million (150,000,000) shares to one thousand (1,000) shares and to reduce to the par value of such Common Stock from five dollars ($5.00) per share to one dollar ($1.00) per share (iii) change the number of directors of the Corporation; (iv) restrict the distribution of the net earnings and assets of the corporation; (v) restrict the distribution of any post dissolution assets of the Corporation; (vi) Amend the provisions governing the Corporation's indemnification of directors, officers and other persons, and (vii) change the post office address to which the Secretary of State shall mail a copy of any service of process against the Corporation served upon the Secretary of State. 5. The text of the Certificate of Incorporation of the Corporation, as amended and supplemented by all certificates heretofore filed pursuant to law, as now in force and effect, 1 as further amended hereby, is hereby restated in a single certificate with such further amendments to said certificate incorporated herein. 6. The entire text of the Restated Certificate of Incorporation of the Corporation, as amended and supplemented by all certificates heretofore filed pursuant to law, as further amended hereby, is hereby restated to read as follows: FIRST: The name of the Corporation is Long island Lighting Company. SECOND: The office of the Corporation is to be located in Uniondale, County of Nassau, State of New York. THlRD: The purposes of the Corporation shall be as follows: Manufacturing, using and supplying gas (herein defined, and intended throughout this Restated Certificate of Incorporation to include, gas, either manufactured, natural or mixed) and electricity, for producing light, heat or power, and in lighting streets, avenues, public parks and places, and public and private buildings, in the Counties of Suffolk, Nassau and Queens, in the State of New York. Engaging in any lawful act or activity for which corporations may be formed under the Business Corporation Law but not in any act or activity for which the consent or approval of any state department, official, board, agency or other body is required without such consent or approval first being obtained or which is not consistent with or permitted by the Long Island Power Authority Act. In furtherance of the foregoing purposes, the Corporation shall have the following powers: To manufacture, use, acquire, purchase, store, transport, sell and deal in gas and electricity. To manufacture, use, acquire, purchase, store, sell and deal in derivatives of gas or electricity; by-products of the manufacture, use and storage of gas or electricity; water, and by-products of water, produced, treated, processed, purified or desalinized in conjunction with the manufacture of gas or electricity, instruments and devices for the production, conversion or utilization of energy; energy produced or converted as a by-product or derivative of or convenient adjunct to the manufacture and storage of gas or electricity. To purchase, acquire, make, sell, finance, and lease any and all machines, instruments, substances, apparatus and equipment in furtherance of or convenient to the sale of gas or electricity. To purchase, take, receive, subscribe for, or otherwise acquire, own, hold, vote, employ, sell, lend, lease, exchange, transfer or otherwise dispose of, mortgage, pledge, use or otherwise deal in and with bonds and other obligations, shares, or other securities or interests issued by others, whether engaged in similar or differeht business, governmental, or other activities, all as more fully set forth in Section 202 of the Business Corporation Law of New York State. 2 To exercise the aforesaid powers for any and all lawful purposes, and generally to exercise all of the rights and powers conferred by the statutes of the State of New York on corporations incorporated for the purpose of supplying gas or electricity, or both, for light, heat and power, or by any other statutes which are or may hereafter become applicable to such corporations. In addition, to have and exercise all powers necessary or convenient to effect any or all of the purposes for which the corporation is formed. FOURTH: The aggregate number of shares of capital stock which the Corporation is authorized to issue is one thousand (1,000) par value of one dollar ($1.00) each, all of which shall consist of one class of common stock. FIFTH: No holder of any shares of capital stock of the Corporation of any class shall, as such holder, have any preemptive right or be entitled as a matter of right to subscribe for or to purchase any other shares of capital stock of or securities of the Corporation of any class which at any time may be sold or offered for sale by the Corpotation. SIXTH: The duration of the Corporation is to be perpetual. SEVENTH: The Secretary of State is designated as the agent of the Corporation upon whom process against it may be served and the post office address to which the Secretary of State shall mail a copy of any process against it served upon him is: Long Island Lighting Company, 333 Earle Ovington Blvd., Suite 403, Uniondale, New York 11553, Attention: Secretary. EIGHTH: The Board of Directors of the Corporation, none of whom need to be stockholders, shall be fifteen (15) or such number as the Board of Directors of the Corporation shall from time to time determine, but in no event less than three (3). NINTH: All of the net earnings and assets of the Corporation shall be distributable only to Long Island Power Authority (the "Authority") and no part of the net earnings or assets of the Corporation shall inure to the benefit of, or be distributable to, the Corporation's directors, officers, or other private persons, except that the Corporation shall be authorized and empowered to pay reasonable compensation for services and goods rendered or provided and to make payments and distributions in furtherance of the public utility related purposes set forth in Article Third hereof. TENTH: Upon dissolution of the Corporation, all of its assets remaining for distribution after payment of obligations, or provisions for the same, shall be distributed to the Authority or to such other political subdivision of the State of New York as the Board of Directors of the Corporation shall determine. ELEVENTH: The Corporation shall, to the fullest extent permitted by applicable law, as amended from time to time, indemnify each person made, or threatened to be made, a party to any action or proceeding, whether civil, criminal, administrative or investigative ("Proceeding") by reason of the fact that such person, such person's testator or intestate, is or was a director or 3 officer of the Corporation at any time after May 28, 1998, or a trustee or officer of the Authority or a director or officer of any subsidiary of the Authority at any time, or, while such trustee, director or officer, serves or served, at the request of the Corporation, the Authority or any subsidiary of the Authority, any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, penalties, amounts paid in settlement and reasonable expenses (including attorneys' fees, costs and charges) incurred in connection with such threatened or pending Proceeding, or any appeal therein; provided that no such indemnification shall be made if a judgment or other final adjudication adverse to such person establishes that (i) his or her acts or omission were committed in bad faith or involved intentional misconduct or a knowing violation of the law, (ii) he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or (iii) that his or her acts violated Section 719 of the Business Corporation Law of the State of New York, and provided further that no such indemnification shall be required with respect to any settlement or other nonadjudicated disposition of any threatened or pending Proceeding unless the Corporation has given its prior consent to such settlement or other disposition. The Corporation shall, from time to time, advance or promptly reimburse upon kquest any director, officer or trustee seeking indemnification hereunder the funds necessary for payment of expenses (including attorneys' fees, costs and charges) reasonably incurred in connection with any threatened or pending Proceeding in advance of the final disposition thereof upon receipt of a written undertaking by or on behalf of such person to repay such amount if such person is ultimately found not to be entitled to indemnification or, where indemnification is granted, to the extent the expenses so advanced or reimbursed exceed the amount to which such person is entitled. Nothing herein shall limit or affect any right of any person otherwise than hereunder to indemnification or to advancement of expenses (including attorneys' fees, costs and charges) under any statute, rule, regulation, certificate of incorporation, by-law, resolution of directors or shareholders, insurance policy, contract or otherwise. The Corporation is authorized to enter into agreements with any person, including, without limitation, any of its directors or officers, to reflect or confirm the rights and benefits contained in this Article Eleventh and to extend other additional rights to indemnification and to advancement of expenses to any such person to the fullest extent permitted by applicable law, and to set forth procedures for any such person to obtain advancement of expenses and indemnification, but the existence of any such agreement or the failure to enter into any such agreement shall not adversely affect or limit the rights of any such person pursuant to this Article Eleventh or otherwise. If a request to be indemnified or for the advancement of expenses pursuant to this Article Eleventh is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the person seeking indemnification or advancement of expenses may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the person seeking indemnification or advancement of expenses shall be entitled also to be paid the expenses of prosecuting such claim. In any such judicial proceeding, the Corporation shall have the burden of proving by the 4 preponderance of the evidence that the person seeking indemnification or advancement of expenses is not entitled to indemnification or advances hereunder. Neither the failure of the Corporation (including its board of directors, independent legal counsel or shareholders) to have made a determination that the person seeking indemnification or advancement of expenses is entitled to indemnification or advancement of expenses in the circumstances nor an actual determination by the Corporation (including its board of directors, independent legal counsel or shareholders) that the person seeking indemnification or advancement of expenses is not so entitled shall be a defense to an action or create a presumption that the person seeking indemnification or advancement of expenses is not so entitled. Nothing in this Article Eleventh shall restrict the power and the authority of the Corporation to indemnify or advance expenses to, make indemnification agreements and arrangements with, or maintain insurance on behalf of, any employee or agent of the Corporation or any person (whether or not a director, officer, trustee, employee or agent of the Corporation) who serves at the request of the Corporation in any capacity with any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. If this Article Eleventh or any part hereof shall be held unenforceable in any respect by a court of competent jurisdiction, it shall be deemed modified to the minimum extent necessary to make it enforceable, and the remainder of this Article Eleventh shall remain fully enforceable. This Article Eleventh shall be given retroactive effect and the full benefits hereof shall be available in respect of any alleged or actual occurrences, acts or failures to act prior to the date of the adoption of this Article Eleventh with respect to any trustee or officer of the Authority or any director or officer of any subsidiary of the Authority other than the Corporation. The right to indemnification or advancement of expenses under this Article Eleventh shall be a contract right. 7. The foregoing restatement of the Certificate of Incorporation of the Corporation was duly authorized by the Board of Directors of the Corporation and by the sole shareholder of the Corporation pursuant to Section 307 of the Business Corporation Law of the State of New York. 5 IN WITNESS WHEREOF, the undersigned have signed and acknowledged this certification this day 29 of May 1993 and affirm the statements contained herein as true under the penalties of perjury. LONG ISLAND LIGHTING COMPANY By: /s/ Richard M. Kessel --------------------------- Name Richard M. Kessel Title: Chairman, President and Chief Executive officer By: /s/ Stanley B. Klimberg --------------------------- Name: Stanley B. Klimberg Title: Secretary 6 EX-3.(B) 3 BY-LAWS BY-LAWS -of- LONG ISLAND LIGHTING COMPANY DOING BUSINESS AS LIPA ARTICLE I Shareholders Section 1.01. Annual Meeting. The annual meeting of shareholders for the election of directors and the transaction of such other business as may come before it shall be held on such date in each calendar year, not later than the 120 days after the close of the Corporation's preceding fiscal year, and at such place, as shall be fixed by the President and Chief Executive Officer of the Corporation and stated in the notice or waiver of notice of the meeting. Section 1.02. Special Meetings. Special meetings of the shareholders, for any purpose or purposes, may be called at any time by the President and Chief Executive Officer of the Corporation or by resolution of the Board of Directors. Special meetings of shareholders shall be held at such place as shall be fixed by the person or persons calling the meeting and stated in the notice or waiver of notice of the meeting. At any special meeting only such business may be transacted which is related to the purpose or purposes set forth in the notice or waiver of notice of the meeting. Section 1.03. Notice of Meetings of Shareholders. Whenever shareholders are required or permitted to take any action at a meeting, written notice shall be given stating the place, date and hour of the meeting and, unless it is the annual meeting, indicating that it is being issued by or at the direction of the person or persons calling the meeting. Notice of a special meeting shall also state the purpose or purposes for which the meeting is called. A copy of the notice of any meeting shall be given, personally or by mall, not less than ten (10) nor more than fifty (50) days before the date of the meeting, to each shareholder entitled to vote at such meeting. If mailed, such notice is given when deposited in the United States mail, with postage thereon prepaid, directed to the shareholder at his address as it appears on the record of shareholders, or, if he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. When a meeting is adjourned to another time or place, it shall not be necessary to give any notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the meeting at which the adjournment is taken, and at the adjourned meeting any business may be transacted that might have been transacted on the original date of the meeting. However, if after the adjournment, the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record on the new record date entitled to notice under the next preceding paragraph. Section 1.04. Waivers of Notice. Notice of meeting need not be given to any shareholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any shareholder at a meeting, in person or by proxy, -1- without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him. Section 1.05. Quorum. The holders of one-third of the shares entitled to vote thereat shall constitute a quorum at a meeting of shareholders for the transaction of any business. Section 1.06. Fixing Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to or dissent from any proposal without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of shareholders. Such date shall not be more than fifty (50) nor less than ten (10) days before the date of such meeting, nor more than fifty days prior to any other action. When a determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date under this section for the adjourned meeting. Section 1.07. Proxies. Every shareholder entitled to vote at a meeting of shareholders or to express consent or dissent without a meeting may authorize another person or persons to act for him by proxy. Every proxy must be signed by the shareholder or his attorney-in-fact. No proxy shall be valid after the expiration of eleven (11) months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the shareholder executing it, except as otherwise provided in this section. The authority of the holder of a proxy to act shall not be revoked by the incompetence or death of the shareholder who executed the proxy unless, before the authority is exercised, written notice of an adjudication of such incompetence or of such death is received by the corporate officer responsible for maintaining the list of shareholders. A proxy may be revoked, notwithstanding a provision making it irrevocable, by a purchaser of shares without knowledge of the existence of the provision unless the existence of the proxy and its irrevocability is noted conspicuously on the face or back of the certificate representing such shares. Section 1.08. Qualification of Voters Every shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, except as expressly provided otherwise in this section and except as otherwise expressly provided in the Certificate of Incorporation of the Corporation. Treasury shares and shares held by another domestic or foreign corporation of any type or kind, if a majority of the shares entitled to vote in the election of directors of such other corporation is held by the Corporation, shall not be shares entitled to vote or to be counted in determining the total number of outstanding shares. Section 1.09. Vote of Shareholders. Directors shall be elected by a plurality of the votes cast at a meeting of shareholders by the holders of shares entitled to vote in the election. Whenever any corporate action, other than the election of directors, is to be taken by vote of the shareholders, it shall, except as otherwise required by the Business Corporation Law or by the Certificate of Incorporation of the Corporation, be authorized by a majority of the votes cast at a -2- meeting of shareholders by the holders of shares entitled to vote thereon. The vote upon any question before any shareholders' meeting need not be by ballot. Section 1.10. Written Consent of Shareholders. Whenever shareholders are required or permitted to take any action by vote, such action may be taken without a meeting on written consent, setting forth the action so taken, signed by the holders of all outstanding shares entitled to vote thereon. This paragraph shall not be construed to alter or modify the provisions of any section of the Business Corporation Law or any provision in the Certificate of Incorporation of the Corporation not inconsistent with the Business Corporation Law under which the written consent of the holders of less than all outstanding shares is sufficient for corporate action. Written consent thus given by the holders of all outstanding shares entitled to vote shall have the same effect as a unanimous vote of shareholders. ARTICLE II Directors Section 2.01. Management of Business; Qualifications of Directors. The business of the Corporation shall be managed under the direction of its Board of Directors. Directors need not be stockholders. The Board of Directors, in addition to the powers and authority expressly conferred upon it by statute, by the Certificate of Incorporation of the Corporation, by these By-Laws and otherwise, is hereby empowered to exercise all such powers as may be exercised by the Corporation, except as expressly provided otherwise by the Constitution and statutes of the State of New York, by the Certificate of Incorporation of the Corporation and by these By-Laws. Section 2.02. Number. The number of directors which shall constitute the entire Board of Directors shall be fifteen (15), but this number may be increased and subsequently again increased or decreased by an amendment to these By-Laws, except that the number shall never be less than three (3) and that no decrease shall shorten the term of any incumbent director. Section 2.03. Election and Term. At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting, subject to the provisions of Section 2.05 hereof. Each director shall hold office until the expiration of the term for which he is elected, and until his successor has been elected and qualified. Section 2.04. Resignations. Any director of the Corporation may resign at any time by giving written notice to the Board of Directors. Such resignation shall take effect at the time specified therein, if any, or if no time is specified therein, then upon receipt of such notice by the addressee; and, unless otherwise provided therein, the acceptance of such resignation shall not be necessary to make it effective. Section 2.05. Removal of Directors. Any or all of the directors may be removed at any time (a) for cause by vote of the shareholders or by action of the Board of Directors or (b) without cause by vote of the shareholders, except as expressly provided otherwise by Section 706 of the Business Corporation Law. Section 2.06. Newly Created Directorships and Vacancies. Newly created directorships resulting from an increase in the number of directors and vacancies occurring in the Board of -3- Directors for any reason except.the removal of directors without cause may be filled by vote of the Board of Directors. If the number of directors then in office is less than a quorum, such newly created directorships and vacancies may be filled by vote of a majority of the directors then in office. The Board of Directors shall fill vacancies occurring in the Board of Directors by reason of the removal of directors without cause. A director elected to fill a vacancy shall hold office until the next meeting of shareholders at which the election of directors is in the regular order of business, and until his successor has been elected and qualified. Section 2.07. Quorum and Vote of Directors. At all meetings of the Board of Directors, a majority of the entire Board of Directors shall be necessary and sufficient to constitute a quorum for the transaction of business. The vote of a majority of the entire Board of Directors shall be the act of the Board of Directors, except as expressly provided otherwise in these By-Laws and by the statutes of the State of New York. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting of the Board of Directors to another time and place. Section 2.08. Annual Meeting. The newly elected Board of Directors shall meet immediately following the adjournment of the annual meeting of shareholders in each year at the same place and no notice of such meeting shall be necessary. Section 2.09. Regular Meetings. Regular meetings of the Board of Directors may be held at such times and places as shall from time to time be fixed by the Board of Directors and held upon notice to the directors. Section 2.10. Special Meetings. Special meetings may be called at any time by the President and Chief Executive Officer of the Corporation or by resolution of the Board of Directors. Special meetings shall be held at such places as shall be fixed by the person or persons calling the meeting and stated in the notice or waiver of notice of the meeting. Special meetings of the Board of Directors shall be held upon notice to the directors. Notice of a special meeting need not be given to any director who submits a signed waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. Unless waived, notice of each special meeting of the Board of Directors, stating the time and place of the meeting, shall be given to each director by delivered letter, by telegram or by personal communication either over the telephone or otherwise, in each such case not later than the second day prior to the meeting, or by mailed letter deposited in the United States mail with postage thereon prepaid not later than the seventh day prior to the meeting. Notices of special meetings of the Board of Directors and waivers thereof need not state the purpose or purposes of the meeting. Section 2.11. Committees. The Board of Directors, by resolution adopted by a majority of the entire Board of Directors, may designate from among its members committees, each consisting of three (3) or more directors, and each of which, to the extent provided in the resolution, shall have all the authority of the Board of Directors, except that no such committee shall have authority as to the following matters: (1) The submission to shareholders of any action that needs shareholders' approval under the Business Corporation Law. -4- (2) The filling of vacancies in the Board of Directors or in any committee. (3) The fixing of compensation of the directors for serving on the Board of Directors or on any committee. (4) The amendment or repeal of the By-Laws, or the adoption of new By-Laws. (5) The amendment or repeal of any resolution of the Board of Directors which by its terms shall not be so amendable or repealable. The Board of Directors may designate one (1) or more directors as alternate members of any such committee, who may replace any absent member or members at any meeting of such committee. Each such committee shall serve at the pleasure of the Board of Directors. Regular meetings of any such committee shall be held at such times and places as shall from time to time be fixed by such committee and held upon notice to the committee members. Special meetings may be called at any time by any officer of the Corporation or any member of such committee. Notice of each special meeting of each such committee shall be given (or waived) in the same manner as notice of a special meeting of the Board of Directors. A majority of the members of any such committee shall constitute a quorum for the transaction of business and the act of a majority of the members of such committee shall be the act of the committee. ARTICLE III Officers Section 3.01. Election or Appointment; Number. The officers of the Corporation shall be elected or appointed by the Board of Directors. The officers shall be a President and Chief Executive Officer, a Chief Financial Officer, an Executive Director, a General Counsel, a Secretary and such other officers, as the Board of Directors may from time to time determine. Any person may hold two or more offices at the same time, except the offices of President and Secretary. Any officer may, but no officer need, be chosen from among the Board of Directors. Section 3.02. Term. Subject to the provisions of Section 3.03 hereof, all officers shall be elected or appointed to hold office until the meeting of the Board of Directors following the next annual meeting of shareholders, and each officer shall hold office for the term for which he is elected or appointed and until his successor has been elected or appointed and qualified. The Board of Directors may require any officer to give security for the faithful performance of his duties. Section 3.03. Removal. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors with or without cause. The removal of an officer without cause shall be without prejudice to his contract rights, if any. The election or appointment of an officer shall not of itself create contract rights. Section 3.04. Authority. The President and Chief Executive Officer of the Corporation shall direct the policy of the Corporation on behalf of the Board of Directors. The other officers shall have the authority, perform the duties and exercise the powers in the management of the Corporation usually incident to the offices held by them, respectively, and/or such other -5- authority, duties and powers as may be assigned to them from time to time by the Board of Directors. ARTICLE IV Capital Stock Section 4.01. Stock: Certificated and Uncertificated Shares. The shares of the Corporation shall be represented by certificates or shall be uncertificated shares. Certificates shall be signed by the President and Chief Executive Officer and the Secretary of the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. Section 4.02. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by the laws of the State of New York and in these By-Laws. Transfers of stock shall be made on the books of the Corporation (a) in the case of certificated shares, only by the person named in the stock certificate or by such person's attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before the new certificate shall be issued, or (b) in the case of uncertificated shares, only by the person named on the books of the Corporation as the registered owner of the uncertificated share or by such person's attorney lawfully constituted in writing. Section 4.03. Registered Holders. The Corporation shall be entitled to treat and shall be protected in treating the persons in whose names shares or any warrants, rights or options stand on the record of shareholders, warrant holders, rights holders or option holders, as the case may be, as the owners thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, any such share, warrant, right or option on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided otherwise by the statutes of the State of New York. Section 4.04. New Certificates. The Corporation may issue a new certificate for shares in the place of any certificate theretofore issued by it, alleged to have been lost or destroyed, and the Board of Directors may, in its discretion, require the owner of the lost or destroyed certificate, or his legal representatives, to give the Corporation a bond sufficient (in the judgment of the directors) to indemnify the Corporation against any claim that may be made against it on account of the alleged loss or destruction of any such certificate or the issuance of such new certificate. A new certificate may be issued without requiring any bond when, in the judgment of the directors, it is proper so to do. ARTICLE V Miscellaneous Section 5.01. Offices. The principal office of the Corporation shall be in Uniondale, County of Nassau, and State of New York. The Corporation may also have offices at other places, within and/or without the State of New York. Section 5.02. Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its incorporation and the words "Corporate Seal New York". -6- Section 5.03. Checks. All checks or demands for money shall be signed by such person or persons as the Board of Directors may from time to time determine. Section 5.04. Fiscal Year. The fiscal year of the Corporation shall begin [the first day of January in each year, and shall end on the thirty-first day of December of such year]. Section 5.05. Books and Records. The Corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders, Board of Directors and each committee thereof, if any, and shall keep at the office of the Corporation in the State of New York or at the office of its transfer agent or registrar in the State of New York, a record containing the names and addresses of all shareholders, the number and class of shares held by each and the dates when they respectively became the owners of record thereof Any of the foregoing books, minutes or records may be in written form or in any other form capable of being converted into written form within a reasonable time. Section 5.06. Duty of Directors. A director shall perform his duties as a director, including his duties as a member of any committee of the Board of Directors upon which he may serve, in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances in accordance with the provisions of Section 717 of the Business Corporation Law and the provisions of Section 73 and Section 74 of the Public Officers Law. In the event that there shall be any conflict between the Business Corporation Law and the Public Officers Law, the provisions of the Public Officers Law shall control and govern the performance of a director's duty as a director of the Corporation. Section 5.07. Indemnification of Trustees, Directors and Officers. The Corporation shall, to the fullest extent permitted by applicable law, as amended from time to time, indemnify each person made, or threatened to be made, a party to any action or proceeding, whether civil, criminal, administrative or investigative ("Proceeding") by reason of the fact that such person, such person's testator or intestate, is or was a director or officer of the Corporation, or a trustee or officer of Long Island Power Authority (the "Authority") or a director or officer of any subsidiary of the Authority, or, while such director, officer or trustee, serves or served, at the request of the Corporation, the Authority or any subsidiary of the Authority, any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, penalties, amounts paid in settlement and reasonable expenses (including attorneys' fees, costs and charges) incurred in connection with such threatened or pending Proceeding, or any appeal therein; provided that no such indemnification shall be made if a judgment or other final adjudication adverse to such person establishes that (i) his or her acts or omission were committed in bad faith or involved intentional misconduct or a knowing violation of the law, (ii) he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or (iii) that his or her acts violated Section 719 of the Business Corporation Law of the State of New York, and provided further that no such indemnification shall be required with respect to any settlement or other nonadjudicated disposition of any threatened or pending Proceeding unless the Corpcration has given its prior consent to such settlement or other disposition. The Corporation shall, from time to time, advance or promptly reimburse upon request any director, officer or trustee seeking indemnification hereunder the funds necessary for -7- payment of expenses (including attorneys' fees, costs and charges) reasonably incurred in connection with any threatened or pending Proceeding in advance of the final disposition thereof upon receipt of a written undertaking by or on behalf of such person to repay such amount if such person is ultimately found not to be entitled to indemnification or, where indemnification is granted, to the extent the expenses so advanced or reimbursed exceed the amount to which such person is entitled. Nothing herein shall limit or affect any right of any person otherwise than hereunder to indemnification or to advancement of expenses (including attorneys, fees, costs and charges) under any statute, rule, regulation, certificate of incorporation, by-law, resolution of directors or shareholders, insurance policy, contract or otherwise. The Corporation is authorized to enter into agreements with any person, including, without limitation, any of its directors or officers, to reflect or confirm the rights and benefits contained in this Section 6.07 and to extend other additional rights to indemnification and to advancement of expenses to any such person to the fullest extent permitted by applicable law, and to set forth procedures for any such person to obtain advancement of expenses and indemnification, but the existence of any such agreement or the failure to enter into any such agreement shall not adversely affect or limit the rights of any such person pursuant to this Section 5.07 or otherwise. If a request to be indemnified or for the advancement of expenses pursuant to this Section 5.07 is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, the person seeking indemnification or advancement of expenses may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the person seeking indemnification or advancement of expenses shall be entitled also to be paid the expenses of prosecuting such claim. In any such judicial proceeding, the Corporation shall have the burden of proving by the preponderance of the evidence that the person seeking indemnification or advancement of expenses is not entitled to indemnification or advances hereunder. Neither the failure of the Corporation (including its board of directors, independent legal counsel or shareholders) to have made a determination that the person seeking indemnification or advancement of expenses is entitled to indemnification or advancement of expenses in the circumstances nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or shareholders) that the person seeking indemnification or advancement of expenses is not so entitled shall be a defense to an action or create a presumption that the person seeking indemnification or advancement of expenses is not so entitled. Nothing in this Section 5.07 shall restrict the power and the authority of the Corporation to indemnify or advance expenses to, make indemnification agreements and arrangements with, or maintain insurance on behalf of, any employee or agent of the Corporation or any person (whether or not a director, officer, trustee, employee or agent of the Corporation) who serves at the request of the Corporation in any capacity with any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. -8- If this Section 5.07 or any part hereof shall be held unenforceable in any respect by a court of competent jurisdiction, it shall be deemed modified to the minimum extent necessary to make it enforceable, and the remainder of This Section 5.07 shall remain fully enforceable. This Section 5.07 shall be given retroactive effect and the full benefits hereof shall be available in respect of any alleged or actual occurrences, acts or failures to act prior to the date of the adoption of this Section 5.07 with respect to any trustee or officer of the Authority or any director or officer of any subsidiary of the Authority other than the Corporation. The right to indemnification or advancement of expenses under this Section 5.07 shall be a contract right. Section 5.08. Entire Board of Directors. As used in these By-Laws, the term "entire Board of Directors" means the total number of directors which the Corporation would have if there were no vacancies. Section 5.09. Amendment of By-Laws. These By-Laws may be amended or repealed and new By-Laws adopted by the Board of Directors or by vote of the holders of the shares at the time entitled to vote in the election of any directors, except that any amendment by the Board changing the number of directors shall require the vote of a majority of the entire Board of Directors and except that any By-Law adopted by the Board of Directors may be amended or repealed by the shareholders entitled to vote thereon as provided in the Business Corporation Law. If any By-Law regulating an impending election of directors is adopted, amended or repealed by the Board of Directors, there shall be set forth in the notice of the next meeting of shareholders for the election of directors the By-Law so adopted, amended or repealed, together with a concise statement of the changes made. Section 5.10. Section Headings and Statutory References. The headings of the Articles and Sections of these By-Laws have been inserted for convenience of reference only and shall not be deemed to be a part of these By-Laws. -9- EX-3.(C) 4 CERTIFICATE OF ASSUMED NAME [STAMP] F980605000725 [STAMP] ICC NEW YORK DEPARTMENT OF STATE FILED JUN 05 1998 TAX $ NONE BY: JAH NASSAU Restated Certificate of Incorporation of LONG ISLAND LIGHTING COMPANY pursuant to Section 802 of the NYS Business Corporation Law Filed By: WINTHROP, STIMSON, PUTNAM & ROBERTS One Battery Park Plaza New York, NY n 10004-1490 - ---------- [STAMP] Filed June 5, 4:09PM 98 - ---------- INTERCOUNTY - 18 New York State DEPARTMENT OF STATE CORPORATE AND STATE RECORDS DIVISION - -------------------------------------------------------------------------------- CORPORATION-CERTIFICATE OF ASSURED NAME (Pursuant to Section [ILLEGIBLE] General Business Law) - -------------------------------------------------------------------------------- 1. Corporation name LONG ISLAND LIGHTING COMPANY 2. Law corporation formed under: [x] [ILLEGIBLE] [ ] Not-for-Profit [ ] Education [ ] Business [ ] Other (specify) ------------------------------------------------------- 3. Assumed name LIPA 4. Principle place 333 Earie Ovington Boulevard, Suite 403 of business in No. and Street New York State* Uniondale, New York 11553 Nassau City State Zip Code County * [ ] If [ILLEGIBLE], check [ILLEGIBLE] and insert principal out-of-state address above. 5. Counties in which business will be conducted under assumed name. [ ] All counties [ ] If not all, circle which counties below Albany [ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE] New York City [ILLEGIBLE] [ILLEGIBLE] Schuylar [ILLEGIBLE] Allegheny [ILLEGIBLE] Franklin [ILLEGIBLE] Bronx [ILLEGIBLE] [ILLEGIBLE] Seneca [ILLEGIBLE] [ILLEGIBLE] Columbus [ILLEGIBLE] [ILLEGIBLE] Kings Ontario Rockford [ILLEGIBLE] Washington [ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE] New York Orange St. Lawrence Suffolk* [ILLEGIBLE] [ILLEGIBLE] Delaware [ILLEGIBLE] [ILLEGIBLE] Queens* [ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE] [ILLEGIBLE] Duchess [ILLEGIBLE] [ILLEGIBLE] Richmond [ILLEGIBLE] Schennectady [ILLEGIBLE] Wyoming [ILLEGIBLE] Erie [ILLEGIBLE] [ILLEGIBLE]* Niagara [ILLEGIBLE] [ILLEGIBLE] Tompkins [ILLEGIBLE]
*[AN ASTERISK INDICATES CIRCLED COUNTIES IN PRINTED MATERIAL] 6. The address of each business within New York State where business is or will be conducted under assumed name - list on reverse. If a business location in New York State, check box [ ]. Corporate officer signature /s/ [ILLEGIBLE] ------------------------------------------ Type name and office Seth D. Hulkower, Executive Director Equivalent to Vice President ------------------------------------------------ ACKNOWLEDGEMENT (Must be completed) State of New York County of New York ss.: On May 28 1998 before me personally come Seth Hulkower to me known, who being by me duly sworn, did depose and say that he/she is the Executive Director of Long Island Lighting Company the corporation described in the foregoing certification, and acknowledges that he/she executed the same by order of the Board of Directors of such corporation. /s/ Lauren Solinando ---------------------------------------- Lauren Solinando Notary Public, State of New York No. [ILLEGIBLE] Qualified in Suffolk County Commission Expires March 20, 2000 ================================================================================ For Department of State use only Filer's name Intercounty Clearance Corporation Date Filed______________________ -------------------------------- Filer's address 440 Ninth Avenue New York NY 10001 No. and Street City State Zip Code ================================================================================ Intercountry - 18 510 Park Avenue 655 Mill Rose No. and Street No. and Street West Babylon, New York Bewlett, New York City State City State 11704 Suffolk 11357 Nassau Zip Code County Zip Code County ================================================================================ 2400 Sunrise Highway 175 Last Old Country Road No. and Street No. and Street Bellmore New York Hicksville, New York City State City State 11701 Suffolk 11801 Nassau Zip Code County Zip Code County ================================================================================ 1650 Islip Avenue 1800 Old Walt Whitman Road No. and Street No. and Street Brentwood, New York Mellville, New York City State City State 11717 Suffolk 11747 Suffolk Zip Code County Zip Code County ================================================================================ Montauk Highway 250 Old Country Road No. and Street No. and Street Bridgehampton, New York Mineola, New York City State City State 11932 Suffolk 11501 Nassau Zip Code County Zip Code County ================================================================================ 2045 Route 112 460 East Main Street No. and Street No. and Street Garden City, New York Patchogue, New York City State City State 11727 Suffolk 11772 Suffolk Zip Code County Zip Code County ================================================================================ 600 Stewart Avenue 600 Doctor's Path No. and Street No. and Street Garden City, New York Riverhead, New York City State City State 11530 Nassau 11901 Nassau Zip Code County Zip Code County ================================================================================ Use continuation sheet if necessary [ILLEGIBLE] STATE OF NEW YORK 26E-72 DEPARTMENT OF STATE JJW FILED AMT. OF CHECK $ 205 FILING FEE $ 25 TAX $ COUNTY FEE $150 INTERCOUNTY - 18 3 COPY $30 CERT $ SPEC HANDLE $ BY: JJW EX-10.(A) 5 MANAGEMENT SERVICES AGREEMENT ================================================================================ MANAGEMENT SERVICES AGREEMENT between LONG ISLAND POWER AUTHORITY and LONG ISLAND LIGHTING COMPANY Dated as of June 26, 1997 ================================================================================ TABLE OF CONTENTS Page ---- RECITALS ................................................................... 1 ARTICLE I DEFINITIONS; INTERPRETATION SECTION 1.1. DEFINITIONS; INTERPRETATION .................................. 2 (A) Defined Terms ........................................... 2 (B) References Hereto ....................................... 2 (C) Gender and Plurality .................................... 2 (D) Persons ................................................. 2 (E) Headings ................................................ 2 (F) Entire Agreement ........................................ 2 (G) Costs and Cost Substantiation ........................... 2 (H) References to Transmission and Distribution of Power .... 3 (I) Actions Taken Pursuant to Agreement ..................... 3 (J) Prudent Utility Practice ................................ 3 (K) Delivery of Documents in Digital Format ................. 3 (L) Counterparts ............................................ 3 (M) Applicable Law .......................................... 3 (N) Severability ............................................ 3 (0) References to Days ...................................... 3 (P) Good Faith Obligation ................................... 4 ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. REPRESENTATIONS AND WARRANTIES OF THE AUTHORITY .............. 5 (A) Existence and Power ..................................... 5 (B) Due Authorization and Binding Obligation ................ 5 (C) No Conflict ............................................. 5 (D) No Litigation ........................................... 5 (E) No Legal Prohibition .................................... 5 SECTION 2.2. REPRESENTATIONS AND WARRANTIES OF THE MANAGER ................ 5 (A) Existence and Power ..................................... 5 (B) Due Authorization and Binding Obligation ................ 5 (C) No Conflict ............................................. 6 (D) No Litigation ........................................... 6 (E) No Legal Prohibition .................................... 6 (F) Parents and Licenses .................................... 6 (G) T&D System Familiarity .................................. 6 ARTICLE III OWNERSHIP OF THE TRANSMISSION AND DISTRIBUTION SYSTEM SECTION 3.1. OWNERSHIP OF THE T&D SYSTEM .................................. 7 (A) Authority Ownership ..................................... 7 (B) Engagement of Manager ................................... 7 (C) Use ..................................................... 7 (D) Encumbrances ............................................ 7 (E) Surrender of the T&D System ............................. 7 (i) Page ---- (F) Right of Access ......................................... 7 ARTICLE IV OPERATION OF THE T&D SYSTEM SECTION 4.1. T&D SYSTEM GENERALLY ......................................... 9 (A) Reliance ................................................ 9 (B) Limitations on Manager Rights ........................... 9 (C) Curtailments and Shutdowns .............................. 9 SECTION 4.2. OPERATION AND MAINTENANCE .................................... 9 (A) General ................................................. 9 (B) Scope of Services ....................................... 9 (1) General ........................................... 9 (2) Implementation of Emergency Response and Reporting ......................................... 11 (3) Customer Service Programs ......................... 11 (4) Revenue Requirements and Rate Design .............. 12 (C) T&D System Supervisor ................................... 12 (D) Operation and Maintenance Manual ........................ 12 (E) Delivery of Manual on Termination ....................... 13 SECTION 4.3. MAINTENANCE AND REPAIR OF T&D SYSTEM ......................... 13 (A) General ................................................. 13 (B) Maintenance Expenditures ................................ 13 (C) Ownership of T&D System Assets .......................... 14 (D) Retirement of T&D System Assets ......................... 14 (E) Insurance and Other Third Party Payments ................ 14 SECTION 4.4. PERFORMANCE GUARANTEES ....................................... 14 (A) Compliance and Remedies ................................. 14 (B) Conditions to Performance Guarantee Relief .............. 14 SECTION 4.5. RIGHTS AND RESPONSIBILITIES OF THE AUTHORITY ................. 15 (A) Generally ............................................... 15 (B) T&D System Policies and Procedures ...................... 16 (C) T&D System Access Policies and Prices ................... 16 (E) No Acceptance, Waiver or Release ........................ 17 SECTION 4.6. STAFFING AND LABOR ISSUES .................................... 17 SECTION 4.7. SAFETY ....................................................... 17 SECTION 4.8. VEHICLES AND EQUIPMENT ....................................... 18 (A) Vehicle and Equipment Identification .................... 18 (B) Vehicle Specifications, Maintenance and Appearance ...... 18 SECTION 4.9. CUSTOMER SERVICES, RATES AND RULES OF SERVICE ................ 18 (A) General ................................................. 18 (B) Billing Services ........................................ 18 (C) Account Records ......................................... 18 (D) Collection of Monies .................................... 18 (E) Customer Service Office Facilities ...................... 19 (F) Customer Service Office Hours ........................... 19 (G) Availability of Representatives ......................... 19 (H) Emergency Telephone Number .............................. 19 (I) New Connections ......................................... 19 (J) Customer Retention and Expansion activities ............. 19 SECTION 4.10. SERVICE COMPLAINTS AND DEFICIENCIES .......................... 19 (A) Complaints to Manager ................................... 19 SECTION 4.11. COMPLIANCE WITH APPLICABLE LAW ............................... 20 (ii) Page ---- SECTION 4.12. LICENSES, PERMITS AND APPROVALS .............................. 20 SECTION 4.13. OPERATING PERIOD INSURANCE ................................... 20 SECTION 4.14. INFORMATION .................................................. 21 (A) Information System ...................................... 21 (B) Computer Database ....................................... 21 (C) Ownership of Information and Documentation .............. 21 SECTION 4.15. MANAGER'S REPORTING REQUIREMENTS ............................. 21 (A) Monthly Reports ......................................... 21 (B) Semi-Annual Reports ..................................... 22 (C) Other Costs Reports ..................................... 22 (D) Annual Reports .......................................... 22 (E) Operations Reports ...................................... 22 (F) Books and Records ....................................... 22 SECTION 4.16. FISCAL AFFAIRS, ACCOUNTING AND RECORD KEEPING ................ 23 (A) General ................................................. 23 (B) Bank Deposits ........................................... 23 (C) Record Keeping .......................................... 23 (D) Financial Audits ........................................ 23 (E) Authority Bank Accounts ................................. 24 (F) Maps, Plans and Specifications .......................... 24 SECTION 4.17. INVENTORY CONTROL ............................................ 24 SECTION 4.18. CAPITAL ASSET CONTROL ........................................ 24 SECTION 4.19. WARRANTIES ................................................... 24 SECTION 4.20. TECHNICAL ASSISTANCE ......................................... 24 SECTION 4.21. PURCHASE OF EQUIPMENT, MATERIALS AND SERVICES ................ 24 SECTION 4.22. OTHER SERVICES ............................................... 25 (A) Bill Payments ........................................... 25 (B) Attendance at Meetings .................................. 25 SECTION 4.23. EMPLOYEE PLANS ............................................... 25 SECTION 4.24. HAZARDOUS WASTE .............................................. 25 ARTICLE V MAJOR CAPITAL IMPROVEMENTS SECTION 5.1. MAJOR CAPITAL IMPROVEMENTS GENERALLY ......................... 26 (A) Generally ............................................... 26 (B) Insurance and Other Third Party Payments ................ 26 (C) Cost Disputes ........................................... 26 (D) Major Capital Improvement Cost Payments ................. 27 SECTION 5.2. MAJOR CAPITAL PLAN AND BUDGET ................................ 27 (A) Preparation ............................................. 27 (B) Schedule for Major Capital Plan and Budget Review ....... 28 (C) Projects in Excess of $500,000 .......................... 28 SECTION 5.3. COST DETERMINATION ........................................... 28 (A) Basis for Major Capital Improvement Cost Determination .. 28 (B) Source of Financing of Major Capital Improvements ....... 28 (C) Procurement and Contracting Procedures .................. 28 (D) Advancement of Funds for Major Capital Improvements and Additions ............................................... 29 (E) Major Capital Improvements Cost Savings Incentive ....... 29 SECTION 5.4 PUBLIC WORKS IMPROVEMENTS .................................... 29 (A) Generally ............................................... 29 (iii) Page ---- (B) Cost Disputes ........................................... 29 (C) Cost Determination ...................................... 30 (D) Public Works Improvements Cost Savings Incentives ....... 30 (E) Public Works Improvement Costs Estimate ................. 30 (F) Public Works Improvement Cost Payments .................. 30 SECTION 5.5. MAJOR CAPITAL IMPROVEMENTS FOR WHICH MANAGER IS RESPONSIBLE .. 30 ARTICLE VI COMPENSATION AND BUDGETS SECTION 6.1. SERVICE FEE .................................................. 31 (A) Formula ................................................. 31 (B) Fixed Direct Fee ........................................ 31 (C) Third Party Costs ....................................... 31 (D) Variable Payment ........................................ 31 (E) Management Fee, Cost Incentive Fee and Non-cost Performance Incentives and Disincentives ................ 32 (F) Cost Overruns ........................................... 32 (G) Limitations ............................................. 32 (H) Carrying Costs .......................................... 32 SECTION 6.2. ANNUAL T&D BUDGET AND FIVE YEAR PLANNING BUDGET PROCESS ...... 32 (A) General ................................................. 32 (1) Direct Cost Budget .................................. 32 (2) Third Party Cost Budget ............................. 33 (3) Cost Incentive Fees ................................. 33 (B) Annual T&D Budget Preparation ........................... 33 (1) Generally ........................................... 33 (2) Initial Budgets ..................................... 33 (3) Direct Cost Budget Preparation ...................... 33 (4) Third Party Costs Budget Preparation ................ 34 (5) Rate Recommendations and Budget Review .............. 34 (6) Five-Year Planning Budget ........................... 34 (7) Budget Format ....................................... 35 (8) Accelerated Budget Preparation ...................... 35 (9) Manager Availability at Forums ...................... 35 SECTION 6.3 OTHER COSTS .................................................. 35 (A) "Other Costs" Definition ................................ 35 (B) Other Costs Reserve Estimate ............................ 36 (C) Other Costs Reimbursement ............................... 36 SECTION 6.4. NON-COST PERFORMANCE INCENTIVES AND DISINCENTIVES ............ 36 (A) Generally ............................................... 36 (B) Adjustments to Threshold Levels ......................... 37 (C) Limits on Incentives and Disincentives .................. 37 SECTION 6.5. AUThORITY NON-PERFORMANCE .................................... 37 (A) Costs of Construction Work and of Operation and Maintenance ............................................. 37 (B) Major Capital Improvements to Repair Damage Caused by Authority ............................................... 37 SECTION 6.6. MANAGER NON-PERFORMANCE ...................................... 37 SECTION 6.7. BILLING OF MAJOR CAPITAL; PUBLIC WORKS ....................... 38 SECTION 6.8. ANNUAL SETTLEMENT ............................................ 38 (A) Annual Settlement Statement ............................. 38 (B) Payment of Amounts Owed ................................. 38 (C) Carrying Costs .......................................... 38 (iv) Page ---- SECTION 6.9. AUTHORITY'S PAYMENT OBLIGATIONS .............................. 38 (A) Source of Payments by Authority ......................... 38 (B) Disputes ................................................ 38 SECTION 6.10. ALLOCATION OF RISK OF CERTAIN COSTS AND LIABILITIES .......... 39 ARTICLE VII DEFAULT, TERMINATION FOR CAUSE AND DISPUTE RESOLUTION SECTION 7.1. REMEDIES FOR BREACH .......................................... 41 SECTION 7.2. EVENTS OF DEFAULT BY THE MANAGER ............................. 41 (A) Events of Manager Default Defined ....................... 41 (1) Events of Default Not Requiring Cure Opportunity for Termination ........................................ 41 (a) Change of Control of Manager .................. 41 (b) Worker Safety ................................. 41 (c) Customer Service .............................. 41 (d) Voluntary Bankruptcy .......................... 41 (e) Involuntary Bankruptcy ........................ 41 (f) Credit Enhancement ............................ 41 (g) Letter of Credit Draw ......................... 42 (2) Events of Default Requiring Cure Opportunity for Termination ........................................ 42 (a) System Reliability ............................ 42 (b) Failure to Pay or Credit ...................... 42 (c) Failure Otherwise to Comply with Agreement or Guaranty ...................................... 42 SECTION 7.3. EVENTS OF DEFAULT BY THE AUTHORITY ........................... 43 (A) Events of Authority Default Defined ..................... 43 (1) Failure to Pay ...................................... 43 (2) Failure to Comply with Agreement .................... 43 (3) Change of Control of LILCO .......................... 43 SECTION 7.4. PROCEDURE FOR TERMINATION FOR CAUSE .......................... 43 (A) Two-Year Notice ......................................... 43 (B) Termination by Authority ................................ 43 (1) Access ............................................. 43 (2) Assumption of Responsibilities ..................... 43 SECTION 7.5. CERTAIN OBLIGATIONS OF THE MANAGER UPON TERMINATION OR EXPIRATION .......................................... 44 (A) Obligations on Termination or Expiration ................ 44 (B) Additional Obligations .................................. 45 (C) Authority Payment of Certain Transition Costs ........... 46 SECTION 7.6. NO WAIVERS ................................................... 46 SECTION 7.7. FORUM FOR DISPUTE RESOLUTION ................................. 46 SECTION 7.8. NON-BINDING MEDIATION; ARBITRATION ........................... 46 (A) Dispute Resolution ...................................... 46 (B) Negotiation and Non-Binding Mediation ................... 46 (C) Arbitration ............................................. 46 (D) Provisional Relief ...................................... 47 (E) Obligation to Repair .................................... 47 (F) Awards .................................................. 47 (G) Information Exchange .................................... 47 (H) Site of Arbitration ..................................... 47 (v) Page ---- SECTION 7.9. AUTHORITY EMERGENCY POWERS ................................... 48 SECTION 7.10. WAIVER OF CERTAIN DEFENSES ................................... 48 ARTICLE VIII TERM SECTION 8.1. TERM OF AGREEMENT ............................................ 49 SECTION 8.2. MANDATORY COMPETITIVE SELECTION OF FUTURE MANAGERS ........... 49 SECTION 8.3. EXIT TEST .................................................... 49 ARTICLE IX GENERAL SECTION 9.1. MANAGER TO REMAIN AFFILIATE OF GUARANTOR; CREDIT ENHANCEMENT IN CERTAIN CIRCUMSTANCES ..................................... 50 (A) Limitations ............................................. 50 (B) Material Decline in the Guarantor's Credit Standing ..... 50 (C) Credit Enhancement ...................................... 50 SECTION 9.2. UNCONTROLLABLE CIRCUMSTANCES GENERALLY ....................... 50 (A) Performance Excused ..................................... 50 (B) Notice, Mitigation ...................................... 50 (C) Conditions to Relief on Account of Uncontrollable Circumstances ........................................... 51 (D) Acceptance of Relief Constitutes Release ................ 51 SECTION 9.3. INDEMNIFICATION .............................................. 51 (A) Indemnification by the Manager .......................... 51 (B) Indemnification by the Authority ........................ 52 SECTION 9.4. PROPERTY RIGHTS .............................................. 53 SECTION 9.5. PROPRIETARY INFORMATION ...................................... 54 (A) Manager Request .................................... 54 (B) Authority Non-Disclosure ........................... 54 (C) Permitted Disclosures .............................. 54 SECTION 9.6. RELATIONSHIP OF THE PARTIES .................................. 54 SECT1ON 9.7. ASSIGNMENT AND TRANSFER ...................................... 54 SECTION 9.8. INTEREST ON OVERDUE OBLIGATIONS .............................. 55 SECTION 9.9. NO DISCRIMINATION ............................................ 55 SECTION 9.10. APPROVAL OF SUBCONTRACTORS ................................... 55 SECTION 9.11. ACTIONS OF THE AUTHORITY IN ITS GOVERNMENTAL CAPACITY ........ 56 SECTION 9.12. BINDING EFFECT ............................................... 56 SECTION 9.13. AMENDMENTS ................................................... 56 SECTION 9.14. NOTICES ...................................................... 56 SECTION 9.15. FURTHER ASSURANCES ........................................... 56 SECTION 9.16. NO THIRD PARTY BENEFICIARIES ................................. 56 SECTION 9.17 STATE LAW REQUIREMENTS ....................................... 57 APPENDICES ---------- (1) Definitions (2) Description of T&D System and T&D System Site Related Documents (3) Notice Appendix (vi) Page ---- (4) Insurance (5) Direct Cost Budget Indices (6) Exit Test (7) Non-Cost Performance Guarantees, Obligations, Incentives and Disincentives (8) Major Capital Improvements Construction Standards and Procurement Requirements (9) Operations Information and Format (10) Budget Information and Format (11) Cost Allocation Methodology (12) Sample Service Fee Calculation (13) Certain State Law Requirements (14) System Policies and Procedures (vii) MANAGEMENT SERVICES AGREEMENT THIS MANAGEMENT SERVICES AGREEMENT is made and dated as of June 26, 1997 between the Long Island Power Authority, a corporate municipal instrumentality of the State of New York and a body corporate and politic and a political subdivision of the State of New York (the "Authority"), and Long Island Lighting Company, a corporation or other entity organized and existing under the laws of the State of New York (the "Manager"). RECITALS WHEREAS, an affiliate of the Authority is expected to become the owner of the T&D System (as defined herein) and the Authority wishes to make provision for the operation and maintenance of the T&D System and for the performance of the Construction Work (as defined herein) relating to the T&D System to be undertaken in accordance with the terms hereof in order to assure the continued delivery of electric energy to the customers of the T&D System. WHEREAS, as an essential term and condition of the Acquisition Agreement, the Authority has agreed to contract with the Manager for the purpose of providing, and the Manager has agreed to provide, the Operation and Maintenance Services (as herein defined) and the Construction Work in accordance with the terms hereof and in a manner consistent with policies established by the Authority. WHEREAS, in accordance with the terms hereof, the Authority is to establish the System Policies and Procedures for the T&D System and the Manager is responsible for the implementation of those policies. It is, therefore, agreed as follows: 1 ARTICLE I DEFINITIONS; INTERPRETATION SECTION 1.1. DEFINITIONS; INTERPRETATION. In this Agreement, unless the context otherwise requires: (A) Defined Terms. All initially capitalized terms used and not otherwise defined herein are used as defined in Appendix 1 hereto. The definitions set forth in Appendix 1 hereof shall control in the event of any conflict with the definitions used in the recitals hereto. All terms used herein and not otherwise defined herein or in Appendix 1 hereto are used as defined in the Acquisition Agreement. (B) References Hereto. The terms "hereby," "hereof," "herein," "hereunder" and any similar terms refer to this Agreement, and the term "hereafter" means after, and the term "heretofore" means before, the Contract Date. (C) Gender and Plurality. Words of the masculine gender mean and include correlative words of the feminine and neuter genders and words importing the singular number mean and include the plural number and vice versa. (D) Persons. Words importing persons include firms, companies, associations, general partnerships, limited partnerships, limited liability companies, trusts, business trusts, corporations and other legal entities, including public bodies, as well as individuals. (E) Headings. The table of contents and any headings preceding the text of the Articles, Sections and subsections of this Agreement shall be solely for convenience of reference and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. (F) Entire Aureement. This Agreement, the Acquisition Agreement, the Power Supply Agreement, the Energy Management Agreement, and the Generation Purchase Right Agreement (the "Basic Agreements") collectively contain the entire agreement between the parties hereto with respect to the transactions contemplated by the Basic Agreements and nothing in this Agreement is intended to confer on any person other than the parties hereto and their respective permitted successors and assigns hereunder any rights or remedies under or by reason of this Agreement. Without limiting the generality of the foregoing, this Agreement and the other Basic Agreements shall completely and fully supersede all other understandings and agreements among the parties with respect to such transactions, including those contained in the Agreement in Principle. (G) Costs and Cost Substantiation. Any cost proposed or incurred by the Manager which is directly or indirectly chargeable to the Authority in whole or in part hereunder shall be no greater than the fair market price, to the extent available, for the good or service provided, or, if there is no market, shall be a fair and reasonable price; provided, however, that use of Manager inventory shall be charged to the Authority at the cost Manager paid for such inventory (excluding any inter-company profit). The Manager shall maintain and, at the Authority's request, provide Cost Substantiation for all such costs invoiced to the Authority hereunder, and for all estimates and quotations furnished to the Authority hereunder for the purpose of reviewing and approving costs for Major Capital Improvements, Other Costs, additional operation services or other additional work or costs incurred for which the Authority is responsible hereunder. 2 (H) References to Transmission and Distribution of Power. The phrases "transmit", "transmitted", "transmitting", and "transmission" and any similar phrases herein, when used with respect to Power and Energy, shall mean and refer to the operation of the T&D System in accordance with this Agreement and the Performance Guarantees to transmit Power and Energy. The phrases "distribute", "distributed", "distributing" and "distribution" and any similar phrases herein, when used with respect to Power and Energy, shall mean and refer to the operation of the T&D System in accordance with this Agreement and the Performance Guarantees to distribute Power and Energy. (I) Actions Taken Pursuant to Agreement. The parties acknowledge that this Agreement sets forth procedures and intended results with respect to various circumstances which may arise during the Term hereof. Such circumstances include, without limitation, the "wheeling", "transmission" or "distribution" of Power and Energy; Changes in Law and other Uncontrollable Circumstances; the preparation of operating plans and schedules; and the assignment and transfer of this Agreement. Unless otherwise agreed to by the parties, any such correspondence, report, submittal, consent or other document or communication given pursuant hereto on account of such a circumstance shall be considered as between the parties to be an action taken pursuant to this Agreement and not an amendment hereto. (J) Prudent Utility Practice. Prudent Utility Practice shall be utilized hereunder, among other things, to implement and in no event lower or diminish, the Contract Standards. (K) Delivery of Documents in Digital Format. In this Agreement the Manager is obligated to deliver reports, records, drawings, proposals and other documentary submittals in connection with the performance of its duties hereunder. The Manager agrees that all such documents shall be submitted to the Authority both in printed form (in the number of copies indicated) and, to the extent reasonably available, in digital form. Electronic copies shall consist of computer readable data submitted in consistent standard interchange format to facilitate the administration and enforcement of this Agreement. (L) Counterparts. This Agreement may be executed in any number of original counterparts. All such counterparts shall constitute but one and the same Agreement. (M) Applicable Law. This Agreement shall be governed by and construed in accordance with the law of the State of New York without regard to any applicable principles of conflicts of law. (N) Severability. If any clause, provision, subsection, Section or Article of this Agreement shall be ruled invalid in any Legal Proceeding, then the parties shall: (1) promptly meet and negotiate in good faith a substitute for such clause, provision, section or Article which shall, to the greatest extent legally permissible, effect the intent of the parties therein; (2) if necessary or desirable to accomplish item (1) above, apply to the court or other authority, as applicable, having declared such invalidity for a judicial construction of the invalidated portion of this Agreement; and (3) negotiate in good faith such changes in, substitutions for or additions to the remaining provisions of this Agreement as may be necessary in addition to and in conjunction with items (1) and (2) above to effect the intent of the parties reflected in the invalid provision. The invalidity of such clause, provision, subsection, Section or Article shall not affect any of the remaining provisions hereof, and this Agreement shall be construed and enforced as if such invalid portion did not exist. (0) References to Days. All references to days herein are references to calendar days. 3 (P) Good Faith Obligation. In the performance of any and all of their respective obligations and responsibilities hereunder, the Authority and the Manager shall be required to do so in good faith and with due diligence. 4 ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1. REPRSENTATIONS AND WARRANTIES OF THE AUTHORITY. The Authority represents and warrants to the Manager that: (A) Existence and Power. The Authority is a corporate municipal instrumentality of the State and a body corporate and politic and a political subdivision of the State of New York validly existing under the Constitution and laws of the State, with full legal right, power and authority to enter into and perform its obligations under this Agreement. (B) Due Authorization and Binding Obligation. The Authority has duly authorized the execution and delivery of this Agreement. This Agreement has been duly executed and delivered by the Authority and constitutes a legal, valid and binding obligation of the Authority, enforceable against the Authority in accordance with its terms except insofar as such enforcement may be affected by bankruptcy, insolvency, moratorium and other laws affecting creditors' rights generally. (C) No Conflict. Neither the execution nor the delivery by the Authority of this Agreement nor the performance by the Authority of its obligations hereunder nor the consummation by the Authority of the transactions contemplated hereby (1) conflicts with, violates or results in a breach of any law or governmental regulation applicable to the Authority or (2) conflicts with, violates or results in a breach of any term or condition of any judgment, decree, agreement or instrument to which the Authority is a party or by which the Authority or any of its properties or assets are bound, or constitutes a default under any such judgment, decree, agreement or instrument. (D) No Litigation. There is no action, suit or other proceeding, at law or in equity, before or by any court or governmental authority pending or to the Authority or to the Authority's best knowledge, without having undertaken independent investigation, threatened against the Authority, which is likely to result in an unfavorable decision, ruling or finding which would materially and adversely affect the validity or enforceability of this Agreement or any other agreement or instrument to be entered into by the Authority in connection with the transactions contemplated hereby, or which would materially and adversely affect the performance by the Authority of its obligations hereunder or under any such other agreement or instrument. (E) No Legal Prohibition. There is no Applicable Law in effect on the date as of which this representation is being made which would prohibit the performance by the Authority of this Agreement and the transactions contemplated hereby. SECTION 2.2. REPRESENTATIONS AND WARRANTIES OF THE MANAGER. The Manager hereby represents and warrants to the Authority that: (A) Existence and Power. The Manager is duly organized and validly existing as a corporation or other entity under the laws of the State of New York, with full legal right, power and authority to enter into and perform its obligations under this Agreement. (B) Due Authorization and Binding Obligation. The Manager has duly authorized the execution and delivery of this Agreement. This Agreement has been duly executed and delivered by the Manager and constitutes the legal, valid and binding obligation of the Manager, enforceable against the Manager in accordance with its terms except insofar as such enforcement may be affected by bankruptcy, insolvency, moratorium and other laws affecting creditors' rights generally. 5 (C) No Conflict. Neither the execution nor the delivery by the Manager of this Agreement nor the performance by the Manager of its obligations hereunder (1) conflicts with, violates or results in a breach of any law or governmental regulation applicable to the Manager, (2) conflicts with, a violates or results in a breach of any term or condition of any judgment, decree, contract, agreement (including, without limitation, the certificate of incorporation of the Manager) or instrument to which the Manager is a party or by which the Manager or any of its properties or assets are bound, or constitutes a default under any such judgment, decree, agreement or instrument or (3) will result in the creation or imposition of any Encumbrance of any nature whatsoever upon any of the properties or assets of the Manager. (D) No Litigation. There is no action, suit or other proceeding, at law or in equity, before or by any court or governmental authority, pending or, to the Manager's best knowledge, threatened against the Manager which is likely to result in an unfavorable decision, ruling or finding which would materially and adversely affect the validity or enforceability of this Agreement or any other agreement or instrument entered into by the Manager in connection with the transactions contemplated hereby, or which would materially and adversely affect the performance by the Manager of its obligations hereunder or by the Manager under any such other agreement or instrument. (E) No Legal Prohibition. There is no Applicable Law in effect on the date as of which this representation is being made which would prohibit the execution, delivery or performance by the Manager of this Agreement and the transactions contemplated hereby. (F) Patents and Licenses. The Manager and its Affiliates own or possess all patents, rights to patents, trademarks, copyrights and licenses necessary to be owned or possessed by the Manager and its Affiliates for the performance by the Manager of this Agreement and the transactions contemplated hereby, without any known material conflict with the rights of others. (G) T&D System Familiarity. The Manager acknowledges that: (1) the Manager, as the prior owner and operator of the T&D System is thoroughly familiar with the entire T&D System and has had control over and has operated the T&D System; (2) the Manager is familiar with local conditions which may be material to the Manager's performance of its obligations under this Agreement; and (3) based on the foregoing, the T&D System is acceptable and suitable for the performance of the Manager's obligations hereunder and will permit the Manager to safely and reliably operate and maintain the T&D System in compliance with the terms and conditions of this Agreement. In making such acknowledgment, the Manager is not relying on the Authority. 6 ARTICLE III OWNERSHIP OF THE TRANSMISSION AND DISTRIBUTION SYSTEM SECTION 3.1. OWNERSHIP OF THE T&D SYSTEM. (A) Authority Ownership. The T&D System is and shall be owned by the Authority (or a subsidiary thereof) throughout the Term of this Agreement. The Manager shall not have any legal, equitable, tax, beneficial or other ownership or leasehold interest in the T&D System. (B) Engagement of Manager. The Authority hereby engages the Manager as an independent contractor to furnish the services described in this Agreement at and for the compensation provided for hereunder. The Manager hereby accepts such engagement upon the terms and conditions provided for herein. (C) Use. During the Term hereof, the Manager may enter upon, occupy and operate the T&D System to perform the Operation and Maintenance Services and/or manage Construction Work for the Authority, all in accordance herewith, and for no other purpose unless otherwise directed or approved by the Authority. (D) Encumbrances. The Manager shall not, without the Authority's prior written consent, directly or indirectly, create or permit to be created or to remain, and will promptly discharge, at its expense, any Encumbrance on the T&D System, other than (1) Encumbrances existing as of the date hereof, or (2) any Lien affecting the T&D System (i) resulting solely from any action or failure to act by the Authority or anyone claiming by, through or under the Authority (other than the Manager and persons claiming by, through or under the Manager); or (ii) created by Subcontractors that are promptly discharged or bonded against by the Manager. Nothing in this Agreement shall be deemed to create any Lien or Encumbrance in favor of the Manager on any asset of the Authority, including the T&D System, as security for the obligations of the Authority hereunder. (E) Surrender of the T&D System. At the end of the Term hereof, the Manager shall peaceably leave and surrender the T&D System to the Authority in a condition consistent with the Manager's construction, operation, maintenance, repair and replacement responsibilities hereunder. In conjunction with such surrender, the Exit Test shall be conducted in accordance with Section 8.3 hereof. (F) Right of Access. Notwithstanding any other provision of this Agreement, beginning on the Closing Date, the Authority, as the owner of the T&D System, shall have a right of unrestricted access to the T&D System for itself, its consultants and agents at such times and for such purposes as it deems necessary or desirable. In addition, the Authority shall have a right of reasonable access to the T&D System for other visitors upon reasonable notice to the Manager. The Authority and its consultants and agents also shall have a right of unrestricted access to the Allocated Common Facilities during normal business hours and, with reasonable notice, outside of normal business hours. When, as reasonably determined by the Authority to be necessary due to the nature of the task performed, access to the Common Facilities shall be allowed to the Authority and its consultants and agents on an unannounced basis for audit and oversight purposes. All Authority personnel, representatives, designees and other visitors shall comply with the Manager's on-site safety policies and procedures. The Authority and its consultants and designees shall have a dedicated on-site office space located at the current LILCO headquarters building or another suitable site mutually agreed upon and a separate work space adequate to enable the Authority to exercise its oversight rights and responsibilities under this Agreement. Such work space initially shall include a separate lockable room or rooms large enough for six people and shall provide space sufficient for computer terminals, printer, telephones, a fax machine, lockable file cabinets and desks and other office equipment and supplies. The file cabinets and desks shall be able to 7 be locked or unlocked only by the Authority. All Authority personnel, representatives and agents shall have access to a photocopying machine and other commonly used supplies and facilities located on-site. In addition, the Manager shall make available such additional or different office and work space and equipment and supplies as reasonably requested by the Authority from time to time. 8 ARTICLE IV OPERATION OF THE T&D SYSTEM SECTION 4.1. T&D SYSTEM GENERALLY. (A) Reliance. The Manager acknowledges that the Authority, in meeting the Power and Energy requirements of the Service Area, in providing an essential public service, and in complying with Applicable Law, will rely on the performance by the Manager of its obligations hereunder. (B) Limitations on Manager Rights. The Manager shall not transmit or distribute Power and Energy other than Power and Energy obtained by, on behalf of, or with the approval of the Authority, and shall not use the T&D System for any purpose other than the purposes contemplated hereby or to serve or benefit any person other than the Authority and its retail and wholesale customers in the Service Area. (C) Curtailments and Shutdowns. If deliveries of Power and Energy through the T&D System are temporarily reduced, curtailed or shut down for any reason, the Manager shall, with due consideration of its responsibility for safety and system reliability, immediately advise the Authority as to the nature, reason and probable duration thereof and the expected effect thereof on the operation of the T&D System. Such notices shall be given in accordance with Appendix 3 hereto which shall be agreed upon by the Manager and the Authority. Any announcement concerning such events made to the public or the media shall be made in accordance with the provisions of subsection 4.2(B) and Section 4.5 hereof. SECTION 4.2. OPERATION AND MAINTENANCE. (A) General. Commencing on the Closing Date, the Manager shall provide Operation and Maintenance Services and Construction Work for the T&D System on behalf of the Authority in accordance with the Contract Standards. (B) Scope of Services. Without limiting the generality of the provisions of subsection 4.2(A) hereof, the Manager shall be responsible for the safe and reliable operation and maintenance of the T&D System, management and/or performance of construction of improvements thereto and delivery of Power and Energy to the Authority's customers and shall be specifically responsible for the following tasks and services: (1) General. The Manager shall be responsible for the following activities: (a) day-to-day operation and maintenance of the T&D System, including emergency repairs and maintenance of an Open Access Same-time Information System (OASIS); (b) performance of routine facility additions and improvements, including customer connections and disconnections; (c) construction activities performed by the Manager's work force as part of its routine operation and maintenance activities as well in connection with Construction Work; (d) supervision (including engineering and related design and construction management services) of routine and major capital improvements; (e) preparation of recommended and monitoring of approved annual capital and operating expenditure budgets, load and energy forecasts and long and short range system and 9 strategic plans including integrated electric resource planning and system and policy modifications necessary to transition to a competitive environment; (f) preparation of long and short range transmission and distribution planning analyses to determine the need for capital additions to and to assure the reliability of the T&D System; (g) performance of accounting and tax and payment in lieu of tax reporting functions and preparation of monthly reports concerning the T&D System, including the maintenance of the fixed assets records; (h) procurement from third parties of other goods and services in connection with Operation and Maintenance Services, Construction Work and inventory management in accordance with pre-established guidelines developed by the Manager and approved by the Authority; (i) compliance with Applicable Law; (j) operation of the T&D System in compliance with applicable provisions of the Authority bond resolutions, copies of which shall be furnished by the Authority to the Manager, and with other requirements pertaining to qualification of the Authority's bonds for tax-exemption under the Code, which requirements shall be furnished, or otherwise specified to, the Manager; (k) repair or modification activities required due to Public Works Improvements; (l) provision of personnel and human resource-related matters and personnel training for Manager personnel and provision of emergency and other training to the Authority personnel (the extent of such Authority personnel and training to be defined and established in adopted Annual T&D Budgets approved by the Authority); (m) day to day legal and tax management responsibilities relating to the operation and maintenance of the T&D System and performance of the Construction Work and Public Works Improvements; (n) maintenance of the Operation and Maintenance Manuals for use by Manager and by the Authority and its designees in accordance with subsection 4.2(D) hereof; (0) other actions necessary to safely and reliably operate the T&D System in accordance with Prudent Utility Practice; (p) administration and management, at the direction of the Authority, of the Authority's interest in Nine Mile Point 2, including participation in meetings of the joint owners of Nine Mile Point 2; (q) billing and collection, in accordance with Authority direction, of all attachment fees, rents and other revenues due to the Authority associated with telecommunications and other equipment attached to or located on the T&D System or T&D System Site; and (r) billing and collection, in accordance with Authority direction, of all fees and charges in connection with the use or availability of the T&D System for wheeling services. 10 (2) Implementation of Emergency Response and Reporting. The Manager shall be responsible for implementation of all necessary emergency response and reporting relating to the T&D System, including but not limited to, response and reporting relating to storms and other unusual weather occurrences. Such tasks and responsibilities at a minimum shall be consistent with current NYSPSC standards applicable to the T&D System and Prudent Utility Practice, except as otherwise reasonably directed by the Authority, and shall include: (a) timely reporting to the Authority of such emergency conditions including regular updates as to the courses of action taken in response thereto or in anticipation thereof and progress made in responding to such emergency conditions; (b) storm monitoring and mobilization of Manager, Manager Affiliate or Subcontractor workforce (including workforce available under mutual assistance agreements) in connection with anticipated storms; (c) media, fire, police, and local government coordination; (d) customer communications; (e) system condition monitoring, (f) repair and replacement of damaged components of the T&D System; (g) public safety activities; and (h) restoration of the T&D System to pre-emergency conditions. (3) Customer Service Programs. The Manager shall be responsible for implementation of Authority-approved customer service programs for the T&D System which, at a minimum, shall be consistent with current NYSPSC practices and standards applicable to the T&D System and Prudent Utility Practice, except as otherwise directed by the Authority, and shall include, but not be limited to, using its best efforts: (a) complete and timely response to customer inquiries; (b) development and maintenance of all necessary information and accounting systems and controls relating to the provision and reporting of customer services; (c) marketing for retail system expansion and retail customer retention; (d) complete, timely and accurate reading of customer meters, issuance of customer bills in a format approved by the Authority, and timely collection of customer payments consistent with Section 4.9 and timely investigation of customer bill inquiries and unusual usage; (e) timely collection of reliability, meter reading, call answering, collection and customer satisfaction performance data; (f) inclusion of any communications to customers requested or approved by the Authority in customer bills related to the provision of energy services; 11 (g) other communications (all of which shall be Authority-approved) to T&D System customers; and (h) under Authority direction, assist in the development and/or implementation of energy conservation and load management programs for the T&D System and its customers, including coordination with third parties or other resources necessary or desirable to develop and implement such programs. (4) Revenue Requirements and Rate Design. The Manager shall be responsible for (i) the preparation of recommended revenue requirements for the management of the T&D System in accordance with this Agreement, (ii) the preparation of recommended rate classification and designs for the T&D System; and (iii) at the Authority's request, public presentation of recommended rate and capital expenditure adjustments at the Authority rate hearings. (C) T&D System Supervisor. The Manager shall appoint the supervisor of the T&D System (the "T&D System Supervisor") within 30 days after the Contract Date, who shall have at least ten (10) years experience with respect to the management of the T&D System, a similar system or an electric utility generally, and who shall be responsible for the day to day operation and maintenance of the T&D System. The Manager shall inform the Authority of the identity of the person serving from time to time as T&D System Supervisor, and of the telephone and beeper numbers or other means by which such person and his or her designee may be contacted at all times. The Manager and the Guarantor shall appoint officials with senior supervisory responsibility for the operation of the T&D System (the "Senior Executives") and shall inform the Authority of the telephone and beeper numbers or other means by which such persons may be contacted at all times. Recognizing the need for an amicable working relationship between the Authority and the Manager, the Authority shall approve the appointment of the T&D System Supervisor and all other Senior Executives of the Manager and any successors thereto, such approval not to be unreasonably withheld. The Senior Executives and the T&D System Supervisor shall attend monthly meetings, following Authority receipt and review of the monthly reports delivered pursuant to Section 4.15(A) hereof, with the Authority to discuss such matters as either party deems appropriate. (D) Operation and Maintenance Manual. At the request of Authority, the Manager shall provide the Authority its representatives, consultants and agents with access to the existing Operation and Maintenance Manual during the Pre-Closing Period and shall modify, as necessary, such manuals to reflect the conditions of this Agreement and any other changes in circumstances and deliver to the Authority six (6) copies of an updated Operation and Maintenance Manual no later than 60 days prior to the Closing Date. The Manager shall review and discuss in good faith with the Authority any aspect of the existing and updated Operation and Maintenance Manual. The content of the updated Operation and Maintenance Manual shall be consistent with the terms and provisions of this Agreement, shall provide for the operation and maintenance of the T&D System and the training of employees in accordance with the Contract Standards, and shall otherwise be sufficiently detailed to permit the T&D System to be operated and maintained by a third party reasonably experienced in electricity transmission and distribution operations. Neither the review of or comment upon, nor the failure of the Authority to comment upon, the Operation and Maintenance Manual shall relieve the Manager of any of its responsibilities under this Agreement, be deemed to constitute a representation by the Authority that operating the T&D System pursuant to the Operation and Maintenance Manual will cause the T&D System to be in compliance with this Agreement and the Contract Standards, or impose any liability upon the Authority except as expressly provided in subsection 4.2(E) hereof. During the Term, the Manager shall remain responsible for the Operation and Maintenance Manual and shall keep it current by making necessary updates, supplements or revisions thereto to reflect the Contract Standards. Manager shall promptly supply the Authority with six (6) copies of any such updates, supplements or revisions thereto. 12 The Authority shall have the right to review and comment on any such updates, supplements or revisions prior to their inclusion in the Operation and Maintenance Manual. Upon the commencement of procurements for future contract bids for the management of the T&D System, the Operation and Maintenance Manual, with the exception of that information that the parties mutually agree in writing is proprietary, shall be available to any qualified prospective bidder. The Authority shall require such qualified prospective bidders to treat the Operation and Maintenance Manual confidentially. (E) Delivery of Manual on Termination. Upon the expiration or termination of this Agreement for any reason whatsoever, the Manager shall deliver to the Authority the Operation and Maintenance Manual for use in connection with the operation and maintenance of the T&D System. Any final payments due at the time of the termination of the Agreement shall be conditional upon delivery of such Operation and Maintenance Manual. Such manual will be available for use by any subsequent manager, provided any such manager is required by the Authority to also maintain the confidentiality of information contained therein and is prohibited from using any such information other than in connection with the management of the T&D System. The Authority will hold Manager harmless from any Loss and Expense solely resulting from any claims or Legal Proceedings commenced by third parties based upon use by subsequent managers of such manuals. SECTION 4.3. MAINTENANCE AND REPAIR OF T&D SYSTEM. (A) General. The Manager shall maintain the T&D System, the T&D System Site and the Common Facilities in good working order and repair and in a neat and orderly condition (including the cleanup of litter and debris as required), and shall conduct periodic, corrective, and preventive maintenance and repair of the T&D System consistent with the Contract Standards for the purpose of, among other things, mitigating and preventing abnormal wear, tear and usage. The Manager shall also maintain a spare parts inventory as required under the Contract Standards. The Manager shall maintain the aesthetic quality of the T&D System and the T&D System Site; provided, however, that such maintenance responsibility shall not materially adversely affect the reliability of the T&D System. As used herein, "maintenance" means those routine and/or repetitive activities required or reasonably recommended by the equipment or facility manufacturer, by the Authority or by Manager, or customary in the industry to provide for the normal useful life of property, plant, equipment or other capital items. As used herein, "repair" means those non-routine/non-repetitive activities required for operational continuity, safety and performance generally due to failure or to avert a failure of the T&D System or any of its components. If the Manager chooses to defer any scheduled maintenance or repair provided for in any maintenance or repair program or in the Annual T&D Budget that is in excess of a per item or category dollar amount or a dollar amount on a cumulative basis, such dollar amount to be agreed upon by the parties prior to the adoption of the initial Annual T&D Budget or for more than a number of months to be agreed upon by the parties prior to the adoption of the initial Annual T&D Budget, the Manager shall so advise the Authority and provide satisfactory justification therefor, provided that the Manager may not defer any maintenance or repairs if such deferral could reasonably be expected to materially and adversely affect the reliability or safety of the T&D System. (B) Maintenance Expenditures. The Manager shall be authorized to make expenditures for routine repair, maintenance, or replacement as set forth in the Annual T&D Budget. The Authority may require that the Annual T&D Budget set forth on a project or category basis, anticipated repairs, maintenance, or replacement in excess of a dollar amount to be agreed upon by the parties prior to the adoption of the initial Annual T&D Budget. The Manager shall provide proposals to, and obtain prior written authorization from, the Authority for routine repair, maintenance, or replacement projects or categories not set forth in the Annual T&D Budget if the projected cost therefor is reasonably estimated to exceed a dollar limit for such projects or categories to be agreed upon by the parties prior to the adoption of the initial Annual T&D Budget; provided, however, the Manager shall 13 respond immediately to any emergency situations and shall notify the Authority immediately upon initiating such emergency response. (C) Ownership of T&D System Assets. All additions to the T&D System purchased in conjunction or for the use with any part of the T&D System during the Term shall be the property of the Authority, except those which are leased or constitute part of the Common Facilities. Manager shall maintain, and provide to the Authority, perpetual records of all capital items purchased, installed or constructed (including, without limitation, vehicles, fixtures and equipment) with the Authority's funds. (D) Retirement of T&D System Assets. In the event the Manager intends to retire from service T&D System assets constituting a "unit of property" as set forth in the Authority's capital asset policies with an original cost at least equal to a dollar amount that will be agreed upon by the parties prior to the adoption of the initial Annual T&D Budget, the Manager shall notify the Authority either in the proposed Annual T&D Budget, or, if the Annual T&D Budget has been adopted for the applicable Contract Year, at least 90 days prior to the scheduled retirement date. The Manager may not retire such T&D System assets without the prior written approval of the Authority. Any salvage or residual value of any T&D System assets shall be for the account of the Authority. All retirements shall be conducted in accordance with the Bond Resolution. (E) Insurance and Other Third Party Payments. To the extent that any repair or replacement costs that are incurred pursuant to this Article can be recovered by the Manager from any insurer providing the Required Construction Work Insurance or the Required Operating Period Insurance, or from another third party, the Manager shall exercise with due diligence such rights as it may have to effect such recovery. The Manager shall give prompt written notice to the Authority of the receipt of any such recovery which shall be applied as appropriate to the restoration or reconstruction of the T&D System in accordance with the Bond Resolution. The Manager shall provide the Authority with copies of all documentation, and shall afford the Authority a reasonable opportunity to participate in and, if the Authority so determines, to direct all conferences, negotiations and litigation, regarding insurance claims which materially affect the Authority's interest under this Agreement. All applicable insurance recoveries shall be applied to reducing the cost of restoration or reconstruction. SECTION 4.4. PERFORMANCE GUARANTEES. (A) Compliance and Remedies. Commencing on the Closing Date, the Manager shall at all times comply with the Performance Guarantees, except to the extent excused by Uncontrollable Circumstances or Authority Fault. If the Manager fails to comply with any Performance Guarantee, the Manager shall, without relief under any other Performance Guarantee under this Agreement, (1) promptly notify the Authority of any such noncompliance, (2) promptly provide the Authority with copies of any notices sent to or received from any Governmental Body having regulatory jurisdiction with respect to any violations of Applicable Law, (3) promptly make any applicable payments provided for herein, and to the extent required under Section 6.10 hereof, any other resulting damages, fines, levies, assessments, impositions, penalties or other charges resulting therefrom, and (4) at its own cost and expense to the extent required under Section 6.10 hereof, promptly take any action (including without limitation making all repairs, replacements and operating changes) necessary in order to comply with such Performance Guarantee, continue or resume performance hereunder and eliminate the cause of, and avoid or prevent recurrence of noncompliance with such Performance Guarantee. (B) Conditions to Performance Guarantee Relief. The Manager shall be relieved of its obligation to comply with a Performance Guarantee to the extent and for any period during which the operation of the T&D System is affected by the occurrence of an Uncontrollable Circumstance or Authority Fault. Should any such circumstances occur, the Manager shall nonetheless (1) in accordance with the Contract Standards, use its best efforts to mitigate any noncompliance with such Performance 14 Guarantee and restore T&D System performance to comply with this Agreement as rapidly as practicable, and (2) promptly advise the Authority of the circumstances and the Manager's planned course of action. SECTION 4.5. RIGHTS AND RESPONSIBILITIES OF THE AUTHORITY. (A) Generally. As the owner of the T&D System, the Authority retains the ultimate authority and control over the assets and operations of the T&D System and the right to direct the Manager, consistent with the provisions of the Agreement in connection with the performance of the Manager's obligations under this Agreement. Without limiting the generality of the foregoing, the Authority's specific rights and responsibilities with respect to the T&D System shall include: (a) the right to determine all T&D System rates and charges, line extension policies and service rules and regulations applicable to the T&D System and System Power Supply; (b) the right to determine and to change from time to time, in its sole discretion, all policies and procedures for the T&D System consistent with Applicable Law and Prudent Utility Practice; (c) the right to review, amend as appropriate and approve annual capital and operating expenditure budgets pursuant to the procedures outlined in subsection 6.2(B) hereof and approve or in its discretion, develop, all long-range strategic plans for the T&D System and System Power Supply; (d) to the extent the Manager acts as the representative of the Authority in connection with the North American Electric Reliability Council, Northeast Power Coordinating Council, the New York Power Pool, the ISO and any other similar institutions or organizations, the right to direct the Manager's actions with respect thereto; (e) the right to determine customer service programs for the T&D System; (f) the right to determine customer and public communications policy; including the right to determine all billing formats, bill inserts, flyers and other advertisements distributed by Manager (other than communications required to address emergencies); (g) the right to review and approve the power resource model/plan developed for the T&D System and the load forecast developed by the Manager; (h) the right to determine all energy efficiency and conservation and load management policies and plans for the T&D System; (i) the responsibility for management of the Authority's financial resources including, but not limited to, determination of the source of financing for major projects; (j) responsibility for compliance with Bond Resolution provisions regarding third party expert review of the annual operating and capital budgets and compliance with rate covenants; (k) overall legal responsibilities; (1) responsibility for governmental relations and reporting, except to the extent the Authority has expressly authorized and directed the Manager to assist in such activities; (m) the right to oversee and audit Manager operations and performance under this Agreement; 15 (n) the right and responsibility for establishing future management service contract procurement procedures and selecting a new manager or managers for the T&D System and other Manager functions hereunder; (o) the right to approve all contracts entered into by the Manager to the extent required to meet the requirements of the state law applicable to the Authority and as otherwise determined by the Authority; (p) the responsibility to respond in a timely manner to all requests of Manager for action or decision by the Authority with respect to all matters requiring the approval, review or consent of the Authority hereunder and as to such other matters relating to the obligations of the Manager hereunder as to which the Manager shall reasonably request the response of the Authority in accordance with the provisions of this Agreement;. (q) the right of review and approval of recommended power supply agreements and the right to own and construct new generation capacity; (r) the right to establish policies for the T&D System generally, including, without limitation, policies governing wholesale or retail access; (s) the responsibility, on an annual and five year basis, to provide the Manager with estimates for Authority's costs required to be funded with T&D System revenues; (t) the responsibility to directly make all appropriate payments in lieu of taxes or taxes imposed on the Authority; (u) the responsibility to undertake the obligations imposed on the Authority as an owner of an interest in Nine Mile Point 2 under the provisions of the Nine Mile Point Nuclear Station Unit 2 Operating Agreement and to directly make all appropriate payments relating to the Authority's ownership interest in Nine Mile Point 2. In the event that any obligation of Manager hereunder conflicts with Applicable Law, Applicable Law shall govern with respect to the Manager's performance required hereunder. (B) T&D System Policies and Procedures. Not later than thirty days prior to the date on which the Manager is required to submit the proposed initial Annual T&D Budget, the Authority will establish initial policies and procedures for the operation and maintenance of the T&D System, which will take into consideration, but not be bound by, policies and procedures in effect prior to the Closing Date. Authority shall promptly notify the Manager of any subsequent changes to the System Policies and Procedures. Appendix 14 provides a preliminary outline of the topics for which the Authority will adopt such policies and procedures. (C) T&D System Access Policies and Prices. The Authority intends to establish nondiscriminatory prices and policies for access to, and use of, its transmission facilities for its customers, Manager or its Affiliates, and other parties providing similar services, in a manner which is designed to enable the Authority to recover its costs and will not inequitably shift costs among customers or classes of customers. (D) Authority Representative. Not later than 30 days after the Contract Date, the Authority shall select a representative (the "Authority Representative"). The Authority Representative will act for and on behalf of the Authority on all matters concerning this Agreement for which the 16 Authority has authorized such representative to act. The Authority shall advise the Manager as to the scope of such authorization. In all such matters, the Authority shall be bound, to the extent permitted by Applicable Law, by the written communications, directions, requests and decisions made by the Authority Representative. The Authority shall promptly notify the Manager in writing of the selection of the Authority Representative and any subsequent replacement(s). (E) No Acceptance, Waiver or Release. No exercise of rights or failure to exercise rights by the Authority hereunder shall be construed as the Authority's acceptance of any Operation and Maintenance Service which is defective, incomplete, or otherwise not in compliance with this Agreement, as the Authority's release of the Manager from any obligation under this Agreement, as an estoppel against the Authority, or as the Authority's acceptance of any claim by the Manager. Notwithstanding any review or approval of the Authority hereunder, in no event shall the Manager be excused from the performance of its responsibilities hereunder, except to the extent due to Authority Fault, subject to Section 6.5, or Uncontrollable Circumstances, subject to Section 9.2. SECTION 4.6. STAFFING AND LABOR ISSUES. The Manager shall staff the T&D System during the Term of this Agreement with the appropriate number of hourly and salaried employees and utilize Subcontractors consistent with the Contract Standards. The Manager shall provide proper training for the Manager's employees in the performance of their work under this Agreement. The Manager shall give due consideration to any comments of the Authority with respect to the performance of specific employees. At all times, the Manager shall comply with Prudent Utility Practice and Applicable Law with respect to the Manager's employees and with respect to the Manager's obligations under this Agreement, including, but not limited to, ERISA, wage withholding, social security, equal employment opportunity, age and disability discrimination, unemployment insurance, hours of labor, wages, working conditions, OSHA, immigration control and other employer-employee related subjects. The Manager shall provide to the Authority copies of the Manager's salary administration plan and the job descriptions for each of the Manager's employees on the Closing Date and shall thereafter provide copies of all subsequent amendments and changes thereto. The Manager recognizes that a substantial portion of the work force at the T&D System is currently unionized and agrees to honor existing labor contracts and will not rely upon mandatory lay-offs to achieve any operational efficiencies. The Manager shall require that Subcontractors agree to pay prevailing wage rates and employee benefits in connection with the performance of the Operation and Maintenance Services and Construction Work that is performed by a Subcontractor (other than pursuant to existing Subcontractor arrangements and renewals and replacements thereof) which would otherwise have been performed by union employees of the Manager. SECTION 4.7. SAFETY. The Manager shall maintain a safe T&D System at a level at least consistent with the Contract Standards. Without limiting the foregoing, the Manager shall:(1) take all reasonable precautions for the safety of, and provide all reasonable protection to prevent damage, injury or loss by reason of or related to the operation of the T&D System to, (a) all employees working at the T&D System and all other persons who may be involved with the operation or maintenance of the T&D System, (b) all materials and equipment under the care, custody or control of the Manager on the T&D System Site, and (c)other property on the T&D System Site, including trees, shrubs, lawns, walks, pavements, roadways, structures and utilities; (2)establish and enforce all reasonable safeguards for safety and protection, including posting danger signs and other warnings against hazards and promulgating safety regulations; (3) give all notices and comply with all applicable Laws relating to the safety of persons or property or their protection from damage, injury or loss; and (4) designate a qualified and responsible employee at the T&D System whose duty shall be the supervision of plant safety, the prevention of fires and accidents and the coordination of such activities as shall be necessary with federal, State and local officials. 17 SECTION 4.8. VEHICLES AND EQUIPMENT. (A) Vehicle and Equipment Identification. The Manager's name, and vehicle or equipment number shall be visibly displayed on both sides of its vehicles or other equipment used by the Manager in the operation and maintenance of the T&D System. All such vehicles and equipment owned by the Authority and used by the Manager shall also display the name of the Authority as owner and identify the Manager as the operator. The size and placement of such identifying information shall be approved by the Authority. No other signs or markings shall be placed in the vehicles or other equipment used by the Manager without the prior approval of the Authority, except signs or markings relative to use of such equipment including traffic safety signs or other safety markings. (B) Vehicle Specifications. Maintenance and Appearance. All vehicles used by the Manager in providing the Operation and Maintenance Services or in conducting any Construction Work shall be registered with the appropriate state Department of Motor Vehicles, shall be kept clean and in good repair and shall be uniformly painted. No advertisement or other display shall be carried on any vehicle without the written approval of the Authority. SECTION 4.9. CUSTOMER SERVICES. RATES AND RULES OF SERVICE. K.11 (A) General. The Manager shall perform normal and customary customer services in a manner designed to achieve the highest level of customer service, including, but not limited to: customer account service and maintenance; service restorations account inquiry work; customer assistance, credit and collection services; cashiering; account connection and disconnection; and conservation advice. (B) Billing Services. The Manager shall, unless otherwise directed by the Authority, read the meters of electric commercial, industrial, residential heating and residential multiple rate period customers on a monthly basis and all other electric customer meters on a bi-monthly basis. Manager shall, according to the schedule of rates, tariffs and policies (the "Schedule of Rates") then in effect, render bills to all T&D System customers in the name of the Authority for electric service delivered on behalf of the Authority and in the format determined by the Authority. To the extent directed by the Authority, such bills shall also reflect electric services provided to T&D System customers by other parties. The Authority may implement changes to such rates, rules of service, regulations and procedures by giving written notice to the Manager not later than sixty (60) days prior to the effective date of such change to the extent practicable given the nature of the change. (C) Account Records. The Manager shall maintain customer bills and records as the Authority reasonably requests setting forth in accurate and reasonable detail the actual and estimated meter readings, billing determinants, charges made to the Authority's customers in accordance with the Schedule of Rates, and payments received from each of the Authority's customers. At a minimum, the Manager shall maintain the records in a manner such that data by various customer classifications can readily be reported on a monthly basis, for the fiscal year to date and for the most recent twelve-month period. The Manager shall retain any records that it is required to maintain pursuant to this subparagraph for the term of this Agreement and shall deliver them to the Authority upon the Authority's request. (D) Collection of Monies. The Manager shall use best efforts to collect on a timely basis (1) all amounts due the Authority for service provided to customers, and for other services, in accordance with the Schedule of Rates for the periods in which services were provided, and (2) other monies owed to the Authority pursuant to the operation of the T&D System. At the Authority's direction, the Manager shall investigate and implement checking account debit payment procedures for payment of customer bills. The Manager's responsibilities shall also include, consistent with the System Policies and Procedures, the institution of legal proceedings in the Authority's name to collect utility billings and other monies owed the Authority related to the T&D System. The Manager shall provide current billing information concerning customers of the T&D System to the Authority monthly in such 18 form as reasonably requested by the Authority and historical billing information as otherwise reasonably requested by the Authority. All monies collected by the Manager or its Subcontractors shall be the property of the Authority and shall be deposited by the Manager daily in the account of the Authority specified pursuant to Section 4.16. In collecting such monies, the Manager and any Subcontractor shall act solely as an agent for the Authority and shall have no right or claim to such moneys and, without limiting the generality of the foregoing, shall have no right to assert a claim of set-off, recoupment, abatement, counterclaim or deduction for any amounts which may be owed to the Manager hereunder or with respect to any other matter in dispute hereunder. The Manager is unconditionally and absolutely obligated to pay or deposit all such monies as directed by the Authority. It is expected that in accordance with current practice, gas customers of Manager's Affiliate and the T&D System electric customers will be billed in a single statement. In the event any electric customer who is also a gas customer shall pay less than all of the amount due at any time under a single statement, the amounts collected shall be applied pro rata between the amounts owed by such customer with respect to electric service and gas service. To the extent moneys are collected for any power supply services provided by any unrelated party, amounts collected shall be allocated in accordance with the directions of the Authority. Manager may elect to bill gas customers separately provided that Manager shall bear all incremental costs arising by reason of any such election. (E) Customer Service Office Facilities. The Manager shall maintain at all times during the Term hereof customer service and/or payment offices within Nassau and Suffolk Counties and in Far Rockaway with specific minimum requirements to be agreed upon by the parties. The Manager shall establish a local toll free customer service number that shall be identified on all publications, bills and correspondence. (F) Customer Service Office Hours. Except as otherwise approved by the Authority, the Manager's customer service office hours shall be, at a minimum, from 8:30 am. to 5 p.m. daily, except Saturdays, Sundays and holidays. (G) Availability of Representatives. Representatives of the Manager shall be available during normal business hours for communication with the Authority or the public. (H) Emergency Telephone Number. The Manager shall maintain a toll-free emergency telephone number(s)) for use during other than normal business hours. The Manager shall have a representative, or an answering service to contact such representative, available at the emergency telephone number during all hours other than normal office hours. (I) New Connections. Manager shall provide new customer connection services, which may include electric facility design, estimation of construction costs, new service hook-up, credit check and job scheduling. (J) Customer Retention and Expansion Activities. The Manager shall undertake, subject to Authority approval, marketing and public information activities to retain and expand the customer base served by the T&D System in accordance with the System Policies and Procedures. In its sole discretion, the Authority may undertake its own marketing and public information activities or retain other parties to do so. In such event, the Annual T&D Budget will be appropriately modified. Afl SECTION 4.10. SERVICE COMPLAINTS AND DEFICIENCIES. (A) Complaints to Manager. The Manager shall maintain during office hours a complaint service and a telephone answering system having an answering capacity consistent with the System Policies and Procedures. All service complaints and billing complaints will be directed to the Manager. Copies of all complaints shall be 19 given to the Authority upon request. The Manager shall record all complaints, including date and time, complainant name and address, and nature and date and time of resolution of complaint, in a log. This log shall be available for inspection by the Authority during the Manager's regular office hours. Copies thereof shall be furnished to the Authority upon request. The Manager shall also provide the Authority with a monthly report summarizing the status of any complaints in such month. In particular, such summary shall specify any complaints for which dollar damages in excess of a dollar amount to be agreed upon by the parties prior to the adoption of the initial Annual T&D Budget have been asserted. The Manager shall take such reasonable actions as may be warranted in response to customer complaints to retain customers and provide service in accordance with Prudent Utility Practice, the System Policies and Procedures and Applicable Law. SECTION 4.11. COMPLIANCE WITH APPLICABLE LAW. The Manager shall operate and maintain the T&D System and otherwise perform all of its obligations hereunder in accordance with Applicable Law. In the event that the Manager fails at any time to comply with Applicable Law, then the Manager shall immediately remedy such failure and, to the extent required by Section 6.10 hereof, do so at its cost and expense and bear all Loss-and-Expense of either party resulting therefrom subject, however, to the provisions hereof regarding Uncontrollable Circumstances or Authority Fault and Section 6.10 hereof. Any such damage, fine, assessment or other charge paid by the Manager due to a violation of Applicable Law caused by Uncontrollable Circumstances or Authority Fault or with respect to which Manager is not responsible under Section 6.10 hereof shall be reimbursed to the Manager. Notwithstanding whether a regulatory enforcement action has been undertaken by a Governmental Body, the Authority shall have an independent right to require Manager to comply with all applicable Legal Entitlements and Applicable Law. SECTION 4.12. LICENSES, PERMITS AND APPROVALS. The Manager shall identify for the Authority, prepare, and with Authority approval, make and prosecute all filings, applications and reports necessary to obtain and maintain all permits, licenses and approvals required to be made, obtained or maintained by each under Applicable Law in order to operate the T&D System. Draft and record copies of all such documents shall be timely given to the Authority. The Manager shall supply all data and information in a timely manner, which may be required and which is in the Manager's knowledge or control, and shall take all other action necessary or desirable in order to assist the Authority in obtaining, maintaining, renewing, extending and complying with the terms of all permits, licenses and approvals necessary subsequent to the Closing Date in order to perform the Operation and Maintenance Services and any Construction Work. The data and information supplied by the Manager to the Authority and all regulatory agencies in connection therewith shall be correct and complete in all material respects, and to the extent required under Section 6.10 hereof the Manager shall be responsible for any schedule and cost consequences which may result from the submission of materially incorrect or incomplete information. Except as directed by the Authority, the Manager shall not submit any data or information directly to the regulatory agencies unless required to do so under Applicable Law or by the terms of an existing license, permit or approval. The Manager shall report immediately to the Authority all violations of the terms and conditions of any permit, license, approval or Applicable Law pertaining to the T&D System. 3.4 SECTION 4.13. OPERATING PERIOD INSURANCE. Commencing with the Closing Date and continuing throughout the remainder of the Term of this Agreement, the Manager shall obtain and maintain, the Required Operating Period Insurance as specified in Appendix 4 hereto and shall comply with all applicable Insurance Requirements. The Manager shall name the Authority, its trustees, officers and employees as additional insureds or named insureds, as appropriate, on its insurance policies, which policies shall require 30 days prior written notice to the Authority prior to any change in or cancellation of such policies. Insurance coverage required pursuant to this Section shall be maintained with generally recognized financially responsible i.nsifrers reasonably acceptable to the Authority and 20 qualified and authorized to insure risks in the State. The cost of the Required Operating Period Insurance shall be paid by the Manager, subject to reimbursement by the Authority pursuant to Section 6.1 hereof as a Third Party Cost. The Manager shall demonstrate to the Authority, by a bidding process or other acceptable methods, that the premiums payable for the Required Operating Period Insurance constitute a fair and reasonable price for the coverage provided. The Authority shall have the right, upon 90 days' notice to the Manager, at any time at its expense to cancel or replace and obtain independently all or any portion of the Required Operating Period Insurance as set forth in Appendix 4 hereto. SECTION 4.14. INFORMATION. (A) Information System. The Manager shall, on and after the Closing Date establish and maintain an information system to provide storage and, to the extent practicable, real time retrieval for Authority review and copying of T&D System operating data, including all information necessary to verify calculations made pursuant to this Agreement. (B) Computer Database. The Manager shall maintain for the Authority a computer database which specifies each customer served by the T&D System, the service classification applicable to each such customer, and any special services provided to each such customer. The Authority shall be entitled to access such database at any time. (C) Ownership of Information and Documentation. The Authority will have sole ownership of information related to customers served by the T&D System (except to the extent such information is also owned by an Affiliate of the Manager in its role as owner of the gas utility) and the operation of the T&D System ("Authority Customer & Operations Data"). The Manager may not use any Authority Customer & Operations Data for non-Authority related purposes without the Authority's prior written permission. Such permission, if granted, will be granted on a nondiscriminatory basis. Neither the Manager nor any Affiliate will (1) use customer information systems to extract, sort or otherwise use Authority Customer and Operations Data (including, without limitation, name, address, telephone number, and energy usage) or (2) use mechanisms for customer access (including, without limitation, meter reading, customers representatives and service call center), available solely as a result of Manager's role as the Manager of the T&D System, to market any services to customers served by the T&D System other than the services provided under this Agreement. To the extent Authority Customer and Operations Data is available from other sources, neither the Manager nor its Affiliates shall be precluded from using in its business such data obtained from other sources. SECTION 4.15. MANAGER'S REPORTING REQUIREMENTS. (A) Monthly Reports The Manager shall provide the Authority and the Consulting Engineer with monthly reports no later than 15 Business Days after the end of each month, including the following data: (1) on a monthly and year-to-date basis, the actual T&D System costs versus the Annual T&D Budget and the prior year's costs at such time, (2) a description and explanation of significant variations (at least $1,000,000 and 3%) from the Annual T&D Budget (or any line item therein) or the prior year's results including a description of any related changes in the tasks performed or to be performed, (3) a description of partial or total shutdowns for maintenance and repairs during the prior month and anticipated during the current month, (4) any known or anticipated adverse conditions which may be expected to arise during the next 30 day period that may affect the ability of the Manager to transmit and distribute Power and Energy in accordance with the Performance Guarantees and the annual operating plan established for the T&D System, (5) the results of any regulatory or insurance inspections or tests conducted during the prior month, (6) all Major Capital Improvements Costs and Other Costs paid by the Manager during such Billing Period, including a description and explanation of significant variations (at least $1,000,000 and 2%) from budgeted costs for such period, (7) identification of those costs which are classified as capital versus operating in sufficient detail in order to allow the Authority to determine which costs qualify for bonding under the Bond Resolution and which are to be recovered through T&D System rates, (8) the results of any environmental or other tests or monitoring procedure& conducted by or at the direction of any federal, 21 State or local environmental or other regulatory agency during the prior monthly period, and copies of any reports or other submittals made to or received from any such agency, and (9) any other information or statement which is requested by the Authority and which may be reasonably produced from records a maintained by the Manager in the normal course of business. The Manager shall also provide a quarterly forecast of projected expenditures by line item through year-end. These reports shall present the data in form and detail reasonably acceptable to the Authority and the Consulting Engineer and shall be certified as to accuracy and completeness by the Manager. (B) Semi-Annual Reports. The Manager will, on a semi-annual basis within 60 days after the end of each half of the Contract Year, provide the Authority and the Consulting Engineer with a report of actual Direct Costs and Third Party Costs together with: (i) identification of any material Direct Costs projects or Third Party Costs projects which were included in the Direct Cost Budget or the Third Party Costs Budget from the previous Contract Year which were deferred to the current Contract Year or proposed to be deferred to a subsequent Contract Year, or such costs in the current Contract Year which the Manager proposes deferring beyond the current Contract Year; and (ii) such other information as may be reasonably requested by the Authority. (C) Other Costs Reports. The Manager shall promptly notify the Authority when an event occurs, or is anticipated to occur, that the Manager believes qualifies for treatment as an Other Cost. If practicable, the Manager shall provide the Authority with an explanation and estimate of the incremental costs caused by the event at the time of notification. If such explanation and estimate is not provided at the time of notification, it shall be provided as soon as practicable thereafter. The Manager shall submit an invoice certified as to accuracy and completeness by the Manager, together with appropriate supporting documentation, for reimbursement of the related incremental costs of such event as soon as practicable and, if appropriate, on a progress basis. The Authority shall have an opportunity to review such billing prior to payment and shall have access to the Manager's books and records in order to confirm such costs prior to reimbursing the Manager consistent with provisions of Section 6.3(C). (D) Annual Reports. The Manager shall furnish the Authority and the Consulting Engineer, with the Annual Settlement Statement, an annual summary of the statistical data provided in the monthly reports, certified by the Manager and the Manager's independent public accountants, as well as all other data required to be furnished to the Authority pursuant to Appendix 9 hereto. (E) Operations Reports. As reasonably requested by the Authority, the Manager shall prepare appropriate reports concerning matters reasonably related to the operation of or planning for the T&D System, including, but not limited to: source of Power and Energy supply; revenues and unit sales of Power and Energy supplied to customers in the aggregate and by customer class, including an explanation of any significant variations from planned sales; environmental requirements and compliance; compliance with Applicable Law; safety requirements and compliance; and reports relating to any incentive and penalty provisions set forth herein. (F) Books and Records. The Manager shall prepare and maintain proper, accurate and complete books, records and accounts regarding the operations and financial or other transactions related to the T&D System to the extent necessary (8 enable the Authority to prepare financial statements, regarding the operations of the T&D System, certified in accordance with generally accepted accounting principles, (2) to verify data with respect to any operations or transactions in which the Authority has a financial or other material interest hereunder, and (3) to prepare periodic performance reports and statements of the T&D System, which shall be submitted by the Manager to the Authority. 22 The Manager shall, upon reasonable notice and demand from the Authority, produce for examination and copying at the Manager's office, by representatives of the Authority, all books of account, bills, vouchers, invoices, personnel rate sheets, cost estimates and bid computations and analyses, Subcontracts, purchase orders, time books, daily job diaries and reports, correspondence, and any other documents showing all acts and transactions in connection with or relating to or arising by reason of this Agreement. Manager shall at reasonable times produce such books and records for examination and copying in order to allow the Authority to determine the costs payable by the Authority under Article VI hereof or any other costs for which the Authority may be responsible hereunder. All such books and records and all supporting documents shall be available at mutually agreeable locations in the Service Area. The Manager shall keep the relevant portions of the books, records and accounts maintained with respect to each Contract Year until at least the seventh anniversary of the last day of each such Contract Year and provide access to or copies thereof to the Authority at its reasonable request to the extent necessary to allow the Authority to determine to its reasonable satisfaction the propriety of any request for payment or charge hereunder. The provisions of this subsection 4.15(F) shall survive the termination of this Agreement. SECTION 4.16. FISCAL AFFAIRS, ACCOUNTING AND RECORD KEEPING. (A). The Manager shall maintain possession of operating equipment, buildings, materials and supplies, maps, plans, specifications, and customer billing records during the Term in accordance with Manager's customary practices or in such manner as the Authority may reasonably require and shall duly account to the Authority therefor. (B) Bank Deposits. All cash held by the Manager for the account of the Authority and all cash collected by the Manager for the account of the Authority after the Closing Date shall be deposited on each business day in bank accounts in such bank as the Authority may direct and upon such terms and conditions as may be specified by the Authority. (C) Record Keeping. In addition to the requirements of Section 4.15(F), the Manager shall maintain Authority's fixed asset books and records for those activities performed by the Manager in general conformity with municipal electric utility accounting standards or such other standards as reasonably requested by the Authority. When requested by the Authority, the Manager shall make reasonable changes in its standard accounting practices and procedures applied to the books and records of the T&D System. (D) Financial Audits. Financial information prepared as of the end of each Contract Year, shall be certified by an officer of the Manager and an independent public accountant who is experienced in electric utility system accounting (which accountant shall be a member of a nationally recognized accounting firm) and shall be delivered to the Authority within ninety (90) days after the end of such Contract Year. In addition, the books and records upon which the reports and statements required by this Article IV were prepared shall be made available by the Manager to the Authority for audit by the Authority or the Authority's designated independent auditor for a period not to exceed twenty-four (24) months. Upon completion of the Authority's audit or upon expiration of said twenty-four-month period, the statements, invoices and records shall be deemed to be correct, provided no written protest by the Authority has been provided to the Manager. If the Authority's audit establishes that the total of all payments by the Authority to the Manager exceeds the amount actually due hereunder, then Manager shall immediately refund the overpayment to the Authority with interest at the Base Interest Rate from the time such overpayment was made by the Authority to the Manager until repaid to the Authority. If the Authority's audit establishes that the Authority has underpaid the Manager, then the Authority shall immediately pay the Manager the underpayment, with interest at the Base Interest Rate from the time such underpayment was due until paid~ by the Authority. 23 (E) Authority Bank Accounts. The Authority may establish and maintain such special bank accounts as may be necessary or desirable, including, but not limited to, petty cash funds and local accounts funds, and shall establish the rules and procedures for access to any such accounts by the Manager and certain of its designated employees. (F) Maps, Plans and Specifications. At the expiration of this Agreement or at such time that the Authority (or a successor manager of the T&D System) assumes the functions requiring the same, the Manager shall transfer to or at the direction of the Authority all maps, plans and specifications, and records pertaining to the TAD System in its possession at that time. Notwithstanding the Manager's possession of such maps, plans and specifications, and records, the Manager acknowledges that the same remain and are the property of the Authority provided that, to the extent they relate to facilities in addition to the T&D System, the Manager shall retain a joint-ownership interest therein. SECTION 4.17. INVENTORY CONTROL. The Manager shall, in consultation with, and with approval of, the Authority, maintain an inventory of equipment, ware parts, materials and supplies consistent with the Contract Standards and shall maintain and document an inventory control program. The Manager shall comply with the inventory policy agreed to by the Authority and the Manager and shall purchase and store inventory in a manner consistent with the Annual T&D Budget. Inventory shall be billed to the Authority on a cost basis as used. The Manager shall complete, on an agreed-upon cycle count basis, a physical inventory of the equipment, spare parts, materials and supplies and reconcile the same with the inventory assets carried on the balance sheet and provide the information to the Authority. SECTION 4.18. CAPITAL ASSET CONTROL. Within 90 days after the Closing Date, Authority and the Manager shall complete an inventory of all T&D System assets constituting "Capital Assets as such term shall be defined in accordance with directions of the Authority. Annually, no later than 60 days after the end of each Contract Year, the Manager shall provide to the Authority a list of all additions and retirements of Capital Assets from the perpetual records set forth in subsection 4.17 hereof, with such detail as requested by the Authority for maintenance of these records. Within 90 days after the sixth anniversary of the Closing Date, the Manager shall assist the Authority in completing a physical inventory of all Capital Assets. The Manager shall not dispose of, scrap, trade or sell any individual Capital Asset having an original cost of $100,000 or more without the Authority's prior written approval. To the extent directed by the Authority, all vehicles and equipment shall be purchased in the name of the Authority and title shall be so issued. As vehicles or other equipment are acquired by the Manager for the Authority, the Manager shall forward all titles to the Authority within 30 days after such acquisitions. SECTION 4.19. WARRANTIES. The Manager shall maintain and enforce any warranties or guarantees on any facilities, vehicles, equipment or other items owned or leased by the Authority or purchased or leased on behalf of the Authority and used by the Manager in carrying out this Agreement, and shall not, by act or omission, negligently or knowingly invalidate in whole or part such warranties or guarantees without the prior approval of the Authority. SECTION 4.20. TECHNICAL ASSISTANCE. The Manager may contract for the services of outside consultants, suppliers, manufacturers, or experts pursuant to the limits of expenditure described in this Agreement or as provided in the Annual T&D Budget, provided that the Manager shall remain responsible for the performance or omissions of the same. SECTION 4.21. PURCHASE OF EQUIPMENT, MATERIALS AND SERVICES. Consistent with each Annual T&D Budget, the Manager shall arrange for the purchase or rental for the account of the Authority of equipment, materials, and supplies and services which are not purchased directly by the Authority or other items necessary to properly operate and maintain the T&D System and 24 to maintain the records of the Authority, and to make such additions and extensions to the T&D System, all as may be required from time to time by the Authority. In this connection, any contracts let by the Manager shall be in conformity with competitive bidding laws or regulations applicable to the Manager, and, without the prior authorization of such specific contract by the Authority, no such contract shall be for an amount greater than $250,000 or extend for a term greater than one year. Subcontractors shall be subject to approval by the Authority in accordance with Section 9.10. SECTION 4.22. OTHER SERVICES. (A) Bill Payments. The Manager shall timely pay all bills related to the T&D System which are proper, appropriate and not otherwise disputed and which it has authority to pay and shall assure that, to the extent within the Manager's control, no mechanic's or similar liens are filed against any portion of the T&D System. In the event that the Manager fails to pay any such bill timely, the Authority shall have the right, but not the obligation, to pay such bill and deduct the amount of such payment (including, but not limited to, any penalties which may be payable in respect of such bill), plus interest at the Base Interest Rate from the time such payment was made by the Authority until repaid the Manager and an administrative fee in an amount of $50. (B) Attendance at Meetings. The Manager shall attend meetings of the Authority, with customers of the Authority, suppliers of the Authority and others as reasonably requested by the Authority. SECTION 4.23. EMPLOYEE PLANS. During the term of this Agreement, the Manager `shall fully comply with all of the terms of its Plans and all Applicable Law relating thereto. Any liability arising by reason of the Manager's failure to do so shall be borne by the Manager. The Manager shall promptly give notice to the Authority of any default under any Plans, or any event which with the passage of time or giving of notice would be a default under any Plan and shall not permit or suffer an event by the Manager which with the passage of time or giving of notice would be a default under any Plan. SECTION 4.24. HAZARDOUS WASTE. With respect to the performance of its obligations hereunder and to the extent required by the provisions of the System Policies and Procedures relating to unusual events in connection with the handling, transporting or disposing of Hazardous Waste, the Manager shall give notice to the Authority, and to any other Governmental Body as required by Applicable Law, of its intention to handle, transport or dispose of such Hazardous Waste. The Manager shall cause such Hazardous Waste to be handled, transported and disposed of at a Disposal Facility in accordance with the Contract Standards. The costs associated with such handling, transport and disposal shall be borne by the Authority, unless the Manager is responsible therefor under Section 6.10 hereof. 25 ARTICLE V MAJOR CAPITAL IMPROVEMENT SECTION 5.1. MAJOR CAPITAL IMPROVEMENTS GENERALLY. (A) Generally. The parties acknowledge that the Major Capital Plan and Budget provided for herein is intended to provide for the implementation of major repairs and replacements not constituting routine maintenance of the T&D System. In addition, the Major Capital Plan and Budget is intended to recognize that it will be necessary or desirable from time to time during the Term hereof to modify, alter or improve the T&D System from its then-current condition. Such modifications may be appropriate, by way of example, in order to increase the efficiency or improve the performance of the T&D System, to anticipate or address the obsolescence of any portion of the T&D System, to respond to a Change in Law or to reduce Power and Energy supply costs. All such projects which constitute Major Capital Improvements shall be made in accordance with this Article and all Major Capital Improvements shall be owned by the Authority. Under no circumstances shall any such Major Capital Improvement be considered to constitute routine repair, maintenance or replacement of the T&D System, all of which remain the responsibility of the Manager to be performed pursuant to Section 4.3 hereof. The Manager shall make all Major Capital Improvements described in the approved Major Capital Plan and Budget in accordance with the provisions thereof. The Manager shall not make a Major Capital Improvement without notifying the Authority and receiving written consent from the Authority unless such Major Capital Improvement is included in the then current annual Major Capital Plan and Budget. The Authority shall have the right, when the Manager has materially exceeded the Major Capital Plan and Budget as of an interim date to require the Manager to defer specific Major Capital Improvements planned for the remainder of the year. In no event shall the approval or denial of a Manager-requested Major Capital Improvement relieve the Manager of any of its performance obligations hereunder or entitle the Manager to a cost adjustment unless the Manager is entitled to recover such costs as an Other Cost under Section 6.3 hereof or the Authority shall have agreed to such adjustments, and except to the extent provided in Section 7.8. The requirements of Applicable Law relating to Authority procurement of construction services shall govern whether, to what extent and in what manner the Authority may exercise its rights to contract with the Manager with respect to any Major Capital Improvement pursuant to this Article. (B) Insurance and Other Third Parry Payments. To the extent that any Major Capital Improvement Costs that are incurred pursuant to this Article can be recovered by the Manager from any insurer providing the Required Construction Work Insurance or the Required Operating Period Insurance, or from another third party, the Manager shall exercise with due diligence such rights as it may have to effect such recovery. The Manger shall give prompt written notice to the Authority of the receipt of any such recovery which shall be applied in accordance with the Bond Resolution. The Manager shall provide the Authority with copies of all documentation, and shall afford the Authority a reasonable opportunity to participate in and, if the Authority so determines, to direct all conferences, negotiations and litigation, regarding such insurance claims which materially affect the Authority's interest under this Agreement. All applicable insurance recoveries shall be applied to reducing the cost of restoration or reconstruction. (C) Cost Disputes. The Manager agrees to use its best efforts to limit the costs incurred in making each Major Capital Improvement consistent with Prudent Utility Practice. The Authority may, without limiting the Authority's obligation to make timely payments of any Major Capital Improvement Costs consistent with the mutually agreeable payment procedures established in accordance with 5.1(D) hereof, object to any Major Capital Improvement Cost or to the payment of any Major Capital Improvement Cost on the grounds that such Major Capital Improvement Cost or the amount being 26 charged to the Authority was improperly computed, that the Major Capital Improvement Costs incurred by the Manager were unreasonable for the work performed, or that the work performed by the Manager in making the Major Capital Improvement was materially delayed or not completed due to a circumstance for which the Manager would be responsible for the costs of under Section 6.10 hereof. (D) Major Capital Improvement Cost Payments. Payment for Major Capital Improvement Costs will be made in accordance with mutually agreeable payment procedures which shall reflect customary construction drawdown, milestone and retainage provisions for similar projects. SECTION 5.2. MAJOR CAPITAL PLAN AND BUDGET. (A) Preparation. Contemporaneously with the preparation of the Annual T&D Budget, the Manager shall prepare a proposed annual and five year Major Capital Plan and Budget concerning planned Major Capital Improvement projects (the "Major Capital Plan and Budget). Such Major Capital Plan and Budget shall identify, among other things: (i) proposed Major Capital improvements by function (e.g. transmission, substation, distribution, communication, common plant, and public works) and project location; (ii) detailed project descriptions in the case of projects the costs of which exceed a dollar limit to be agreed upon by the parties prior to the adoption of the initial Annual T&D Budget, and general descriptions in all other cases; (iii) the planned initiation date of each project and the expected duration of such project; (iv) an estimate of the amount of the Major Capital Improvement Cost for each project, including the dollar amount of capital expenditures per year if the project requires more than a year to complete; (v) a proposed drawdown schedule for each project; (vi) an explanation of the relationship to other planned or subsequently required capital additions or improvements of which each individual Major Capital Improvement is a component; (vii) the anticipated useful life of each improvement or addition; (viii) the economic and engineering justifications for each capital improvement or addition, including, where applicable, quantification of system performance changes as a result of such improvement or addition, and the expected effect, if any, of the capital improvement or addition on the ability of the Manager to meet the Performance Guarantees; (ix) an indication of whether the improvement or addition is planned for performance by Manager work force or by third party contractor; and (x) such other information as may be reasonably requested by the Authority. Such Major Capital Plan and Budget shall include explanation and justification of costs in a form acceptable to the Authority. Whether particular costs are capital or operation and maintenance costs payable from the Annual T&D Budget shall be determined by the Authority in accordance with the Bond Resolution. 27 (B) Schedule for Major Capital Plan and Budget Review. The Manager shall file a proposed Major Capital Plan and Budget with the Authority at the same time the Annual T&D Budget proposal is filed pursuant to Section 6.2(B). The Authority shall provide preliminary comments on the Major Capital Plan and Budget within 60 days after receipt, provided additional time for review, if required, may be agreed to by the parties. The Manager shall make all changes to the Major Capital Plan and Budget reasonably requested by the Authority. Any proposed Major Capital Plan and Budget submitted to the Authority by the Manager may be made available to the public by the Authority at such time as it shall deem appropriate for public review and comment. The annual Major Capital Plan am! Budget will be approved by the Authority before or contemporaneously with the adoption of the Annual T&D Budget, and prior to or contemporaneously with the adoption of any rate adjustment by the Authority; provided that in the event the Major Capital Plan and Budget has not been adopted by the Authority as of the beginning of a Contract Year, the Manager may undertake such Major Capital Improvements as reasonably approved by the Authority on a project-by-project basis. (C) Projects in Excess of $500.000. Other than for emergency repairs or replacements, at the Authority's request, the Manager shall prepare a repair-or-replace analysis for the Authority for repairs or replacements of the T&D System costing more than $500,000 if the same have not been approved in the Annual T&D Budget. The Authority shall decide whether to have such repair or replacement implemented. SECTION 5.3. COST DETERMINATION. (A) Basis for Major Capital Improvement Cost Determination. Major Capital Improvements, except those awarded to the Manager as a result of the competitive procurement procedures outlined in subsection 5.3(C) hereof shall be performed, whether by the Manager's own workforce or by a Subcontractor, at the cost of the service without any multiplier fee or mark-up. Construction Work management and administration costs will either be specifically budgeted on a project-specific outsourced basis, or such costs will be captured within the then current Direct Cost Budget. (B) Source of Financing of Major Capital Improvements. (1) Major Capital Improvements other than those for which the Manager is responsible under Section 6.10 hereof will be financed by the Authority in accordance with the construction drawdown payment procedures established pursuant to Section 5.1(D) hereof, provided that the Authority and the Manager may agree to have the Manager fund, subject to reimbursement, capital additions in the event of emergency costing in the aggregate not more than a dollar amount to be agreed upon by the parties prior to the adoption of the initial Annual T&D Budget. (2) The Authority may in its sole discretion determine whether to fund particular Major Capital Improvements from current revenue or from bond proceeds. The Manager shall reflect the principal and interest repayment for Major Capital Improvement Cost financing in its projections for System Revenue Requirements in the Major Capital Plan and Budget. (C) Procurement and Contracting Procedures. (1) Along with its proposed annual Major Capital Plan and Budget, the Manager shall provide the Authority with an explanation of its proposed process for procuring equipment, construction, and other services related to implementing the Major Capital Improvements so as to achieve favorable cost completion of the Major Capital Improvements Such procurement process shall be performed in accordance with Applicable Law and Appendix 8. Decisions as to outsourcing construction management shall be made in accordance with the procedures and criteria to be determined in accordance with Appendix 8 hereto. (2) Wherever a Major Capital Improvement is to be performed under this Agreement, the provisions and procedures set forth in Appendix 8 hereto shall apply. In order to implement such 28 provisions with respect to any Major Capital Improvement costing in excess of a dollar amount to be agreed upon by the parties prior to the adoption of the initial Annual T&D Budget, the costs for which the Authority is responsible, the Manager shall submit, at the Authority's discretion, a lump sum or an individual element price proposal for such Major Capital Improvement, which shall be broken out by the categories of work to be done and corresponding costs. Any such proposal shall be deemed the Manager's offer to the Authority, binding for 60 days, to perform the Major Capital Improvement at the price quoted. The parties shall promptly proceed to negotiate in good faith to reach agreement on the price to be paid to the Manager for the Major Capital Improvement and on the effect of such Major Capital Improvement on any costs or obligations of the Manager under this Agreement. If the Authority does not accept the Manager's proposal, the Authority may conduct a procurement to contract with a third-party to undertake such Major Capital Improvement or, alternatively, the Authority may require the Manager to solicit at least three competitive bids for such Major Capital Improvements on a lump-sum or individual element basis, as requested by the Authority. The Manager shall cooperate with and assist the Authority in connection with any procurement undertaken by the Authority. To the extent that the Manager or any Affiliate participates as a bidder in any competitive solicitation process, the Manager shall establish internal controls and other procedures satisfactory to the Authority for the purpose of assuring the integrity of the competitive solicitation. Except as the Authority may otherwise direct, competitive solicitations of bids shall be conducted in accordance with the process and procedures to be established by the Authority. The Manager shall promptly notify the Authority of any reasonable objection to the Authority's inclusion of a party on a list of bidders. (D) Advancement of Funds for Major Capital Improvements and Additions. Once an annual Major Capital Plan and Budget is approved, the Authority shall advance funds in accordance with an agreed upon drawdown schedule established to the mutual satisfaction of the Authority and the Manager for payment of Major Capital Improvement Costs. Such drawdown schedule shall conform to Applicable Law, including the provisions set forth in Appendix 13 hereto. (E) Major Capital Improvements Cost Savings Incentive. Manager shall be entitled to incentive payments for cost savings and disincentive payments for cost overruns and delays in scheduled completion of approved Major Capital Improvements equal to 50% of all variances from the approved Major Capital Plan and Budget; provided, however, that no such incentive or disincentive shall be payable for cost variances in excess of 15% of the approved Major Capital Plan and Budget. Such incentive and disincentive payments will relate to Major Capital Improvements which are not subject to competitive bidding and those projects in which Manager serves as construction manager over third party contracts and not with respect to Major Capital Improvements in which the Manager serves as the general contractor, except as otherwise agreed by the Authority or as set forth in the terms and conditions of the contract. Incentives and disincentives will be trued-up upon the closing and acceptance by the Authority of approved capital projects. SECTION 5.4 PUBLIC WORKS IMPROVEMENTS. (A) Generally. The Manager shall not undertake a Public Works Improvement without previously notifying the Authority and receiving the written consent of the Authority which shall not be unreasonably delayed. In such notification, the Manager shall provide a proposed project budget for such Public Works Improvement containing information that is consistent with that required under Section 5.2 hereof. The budget for each Public Works Improvement shall be subject to Authority approval and the Manager shall not undertake any Public Works Improvement until the budget therefor has been adopted. The parties may agree to adjust any Public Works Improvement budget in the event the governmentally requested scope of work for such project substantially changes from the originally budgeted scope of work. (B) Cost Disputes. The Manager shall use its best efforts to limit the costs incurred in undertaking each Public Works Improvement consistent with Prudent Utility Practice. The Authority 29 may, without limiting the Authority's obligations to make timely payments of any Public Works Improvement Costs under subsection 5.4(C) consistent with the mutually agreeable payment procedures established in accordance with Section 5.4(E) hereof, object to any Public Works Improvement Costs or to the payment of any Public Works Improvement Costs on the grounds that such Public Works Improvement Cost or the amount being charged to the Authority was improperly computed, that the Public Works Improvement Costs incurred by the Manager were unreasonable for the work performed or that the work performed by the Manager in undertaking the Public Works Improvement was materially delayed or not completed due to a circumstance for which the Manager would be responsible for the costs of under Section 6.10 hereof. (C) Cost Determination. Public Works Improvements shall be performed, whether by the Manager's own workforce or by a Subcontractor, at the cost of the service without any multiplier fee or mark-up; provided, however, that such costs shall be reduced by all reimbursements or payments received from the applicable Governmental Body for the planning, engineering, procurement and completion of the Public Works Improvement. Construction management and administration costs will either be specifically budgeted on a project-specific outsourced basis or such costs will be captured within the then current Direct Cost Budget. Decisions as to outsourcing construction management of Public Works Improvements shall be made in accordance with the procedures and criteria set forth in Appendix 8 hereto. (D) Public Works Improvements Cost Savings Incentives. The Manager shall be entitled to incentive payments for cost savings and disincentives for cost overruns and delays in scheduled completion that result in incremental costs for approved Public Works Improvement as follows: (a) no incentive or disincentives shall be payable for all variances from the approved Public Works Improvement project budget between 0% and plus or minus 2%, and (b) 50% of all variances (whether positive or negative) from the approved Public Works Improvement budget of 2.01% or more. Incentives and disincentives will be payable 60 days after the project completion and acceptance by the Authority of approved Public Works Improvements. (E) Public Works Improvement Costs Estimate. The Manager shall recommend, and the Authority shall adopt, an annual reserve level for Public Works Improvements. Such reserve level shall be identified in each Major Capital Plan and Budget and 5-year planning budget, although not included therein, in order to enable estimation of total cash flows for the T&D System. Such estimates will also be used by the Authority for determination of financial reserve requirements for the T&D System. (F) Public Works Improvement Cost Payments. Payment for Public Works Improvement Costs will be made in accordance with mutually agreeable payment procedures which shall reflect customary construction drawdown, milestone and retainage provisions for similar projects. SECTION 5.5. MAJOR CAPITAL IMPROVEMENTS FOR WHICH MANAGER IS RESPONSIBLE. If the T&D System is damaged or destroyed by reason of circumstances for which the Manager is responsible under Section 6.10 hereof, the Manager shall promptly proceed to make or cause to be made all Major Capital Improvements reasonably necessary to permit the Manager to perform its obligations under this Agreement. The Manager shall give the Authority and the Consulting Engineer written notice of, and reasonable opportunity to review and comment upon, any such proposed Major Capital Improvement. All such Major Capital Improvement for which Manager is responsible under Section 6.10 shall be made at the Manager's sole cost and expense, and the Manager shall not be entitled to any compensation from the Authority as a result thereof. 30 ARTICLE VI COMPENSATION AND BUDGETS SECTION 6.1. SERVICE FEE. (A) Formula. Commencing with the first Billing Period and for each Billing Period during the Term of this Agreement, the Authority shall pay the Manager a Service Fee for the services provided by the Manager under the terms of this Agreement in accordance with the following formula: SF =FDF + TPC + VP + CIF (+ or -) NCPI Where SF = Service Fee FDF = Fixed Direct Fee TPC = Third Party Costs VP = Variable Payment CIF - Cost Incentive Fee NCPI = Non-cost Performance Incentives and Disincentives Each component of the Service Fee shall be computed in accordance with this Article and may be adjusted from time to time as provided in this Agreement. For illustrative purposes, examples of the calculation of the Service Fee payable hereunder are attached as Appendix 12 hereto. In addition to the Service Fee, Manager shall be entitled to payment for cost overruns as set forth in Section 6.1(F). (B) Fixed Direct Fee. The Authority will make a monthly payment to the Manager equal to ninety (90%) of the approved annual Direct Cost Budget (the "Fixed Direct Fee"). The monthly allocation of such payment will be determined by the parties prior to the adoption of each Annual T&D Budget based on historical monthly trends to minimize working capital costs. (C) Third Party Costs. The Authority will make a monthly payment to the Manager for the monthly allocation of the approved annual Third Party Cost Budget. Monthly allocation of such payments will be determined by the parties prior to the adoption of each Annual T&D Budget based on historical monthly trends to minimize working capital costs. (D) Variable Payment. The Manager will be entitled to a Variable Payment equal to the lesser of (a) the difference between actual Total Costs (the sum of the actual Direct Costs and the actual Third Party Costs), less the sum of the Fixed Direct Fee and the lesser of actual or budgeted Third Party Costs or (b) the difference between the approved Total Cost Budget (the sum of the Direct Cost Budget and the Third Party Cost Budget) less the sum of the Fixed Direct Fee and the lesser of the actual or budgeted Third Party Costs. Monthly allocation of such payment shall be determined by the parties based on historical monthly trends to minimize working capital costs. For administrative ease, the calculation of the monthly Variable Payment shall be based on the difference between the Total Cost budget and the sum of the amounts paid for the Fixed Direct Fee and Third Party Costs. 31 (E) Management Fee. Cost Incentive Fee and Non-cost Performance Incentives and Disincentives. To the extent actual Total Costs are less than the approved Total Cost Budget for the year, the Manager shall be paid the portion of its Management Fee, described within the definition of Direct Costs in subsection 6.2(A) (relating to cost savings), in an amount equal to such cost savings up to a maximum of $5 million. Beyond such $5 million level, the Manager will be paid a Cost Incentive Fee equal to 50% of such additional savings, provided that no incentive will be paid for savings in excess of 15% of the Total Cost Budget. All savings above this cap shall be for the benefit of the Authority. The amounts described in this subsection shall not be payable monthly, but shall instead be paid as part of the Annual Settlement Statement process in accordance with Section 6.8 hereof. The Manager shall also be entitled to share in any amounts recovered in accordance with Section 4 of Appendix 7 hereto. (F) Cost Overruns. To the extent actual Total Costs, excluding the Management Fee, are greater than the Total Cost Budget, excluding the net Management Fee, for the applicable Contract Year, the Manager shall absorb the first dollars of such overruns, up to a maximum total of $15 million in each Contract Year. For cost overruns in excess of this amount, the Manager shall be entitled to a payment through the Annual Settlement Statement equal to the amount of such excess overruns (the "Overrun Payment"). (G) Limitations. To the extent required by the terms of the letter ruling obtained from the Internal Revenue Service in connection with the Agreement, the ratio of (1) the sum of the Variable Payment plus the Cost Incentive Fee plus the sum of the Non-cost Performance Incentives and Disincentives (described in Section 6.4) plus the Overrun Payment divided by (2) the sum of (a) the amounts described in (1) above and (b) the Fixed Direct Fee shall not be greater than twenty percent (20%) in any Contract Year. (H) Carrying Costs. Interest rates and charges due from one party to the other for carrying costs for the timing of reimbursements for balances due for differences between the lesser of actual Total Costs or the approved budgeted Total Costs and the monthly payments for such costs shall be determined as set forth in Section 6.8 hereof in connection with the Annual Settlement Statement. SECTION 6.2. ANNUAL T&D BUDGET AND FIVE YEAR PLANNING BUDGET PROCESS. (A) General. The Annual T&D Budget and the Five-Year Planning Budget will be established in accordance with subsection 6.2(B) and will provide for the determination and payment of the Manager's costs of operating and maintaining the T&D System and performing its obligations hereunder, inclusive of fees paid to the Manager. The Annual T&D Budget and the Five-Year Planning Budget shall be comprised of two broad categories: Direct Costs (the "Direct Costs Budget") and Third Party Costs (the "Third Party Costs Budget"). These categories of costs shall exclude Incremental Internal Costs and additional Third Party Costs relating to Major Capital Improvements, Public Works Improvements, and Other Costs. (1) Direct Cost Budget. In establishing the Direct Cost Budget for the initial Annual T&D Budget hereunder, the Direct Cost Budget shall include (1) amounts to compensate the Manager for Operation and Maintenance Services costs anticipated to be reasonably predictable and incurred by the Manager through the utilization of either its work force, or its owned assets, in carrying out its responsibilities under the Agreement (the "Direct Costs") and (2) the Manager's fee ("Management Fee"). Costs related to the Manager's work force shall include compensation paid to employees of the Manager as well as an appropriate allocation of such costs of employees of the Manager's parent or affiliates to the extent such employees provide service to the Authority pursuant to the Agreement. Costs related to the Manager's owned assets shall include an appropriate allocation of depreciation and return on the undepreciated balance and shall include an appropriate allocation for projects in progress at the Closing Date. The determination of depreciation and return to be allocated shall be based upon historical costs 32 and an agreed upon capital structure. The Management Fee shall be an annual fixed amount of $15 million. Of this amount, however, $5 million must result from cost savings. As a result, the Direct Cost Budget will include a net Management Fee of $10 million. (2) Third Party Cost Budget. The Third Party Cost Budget shall include amounts for reimbursement of, on a dollar for dollar basis, all recurring capital or operating costs incurred by the Manager in carrying out its responsibilities under the Agreement and paid to parties other than Manager, its parent or affiliates, and any of their employees (the "Third Party Costs"). Such costs shall include, for example, costs incurred in respect of professional fees, postage, materials and supplies, third party contract labor, rents, property taxes on the Common Facilities, telecommunications, insurance, dues and fees, advertising, and mutual assistance agreements with non-Affiliates of the Manager. (3) Cost Incentive Fees. The Manager shall be entitled to receive Cost Incentive Fees, as provided in subsection 6.1(E) hereof, for costs savings from the amounts included for Direct Costs and Third Party Costs in the approved Annual T&D Budget. (B) Annual T&D Budget Preparation. (1) Generally. On the date determined in accordance with Schedule C to the Acquisition Agreement to be the date six months preceding the projected Closing Date and thereafter no later than six months prior to the end of each Contract Year, the Manager will prepare a recommended annual budget for the operation and maintenance, including routine capital projects not constituting Major Capital Improvements or Public Works Improvements, of the T&D System and a recommended annual budget for total revenue requirements, inclusive of the Authority's own costs, with the costs that will be paid by the Authority to Manager under this Agreement specifically and separately identified (together, the "Annual T&D Budget"). The recommended Annual T&D Budget shall be accompanied by a five year T&D planning budget (the Five-Year Planning Budget"). The Authority will hold at least one hearing to solicit public input on the initial budgets. The Annual T&D Budget and Five-Year Planning Budget shall be divided into a Direct Cost Budget and a Third Party Cost Budget in accordance with the budget categories set forth in Appendix 10 hereto, consistent with the general definition of such costs in subsection 6.2(A) hereof. The initial Direct Cost Budget, once established and approved by the Authority, will be indexed for each subsequent year during the Term of this Agreement as described in Appendix 5. The Third Party Cost Budget, as contained in the Annual T&D Budget and the Five Year Planning Budget, will be determined and approved annually. Each Annual T&D Budget and Five-Year Planning Budget will be composed of the indexed Direct Cost Budget and the annually determined and approved Third Party Cost Budget. Direct Costs and Third Party Costs in the adopted Annual T&D Budget shall be calculated and included in such budget at cost without mark-up. (2) Initial Budgets. The Manager shall propose and the Authority shall review, amend as appropriate and approve the Annual T&D Budget and the Five-Year Planning Budget for the first Contract Year prior to the Closing Date. Such initial Annual T&D Budget and Five-Year Planning Budget shall reflect an agreed-upon estimate of adjustments in T&D System costs attributable to productivity improvements to be undertaken by the Manager and in accordance with the Acquisition Agreement, estimated synergy savings from the combination of Long island Lighting Company and The Brooklyn Union Gas Company pursuant to the BUGLILCO Agreement. (3) Direct Cost Budget Preparation. The amounts included for Direct Costs in the initial Annual T&D Budget shall be based upon the agreed upon disaggregated T&D System costs portion of the proposed 1997 rate year budget in the LILCO 1996 rate case filing with the NYSPSC, adjusted to 1999 (the anticipated first full calendar year of operation under the Agreement). Adjustments to the 1997 base budget shall include, but not be limited to adjustment of union labor costs in accordance with the existing union labor contract, non-union labor costs in accordance with the Direct Cost Budget 33 Indices, other indices as used in the 1996 rate case filing to adjust from the 1997 rate year to the 1999 revenue requirements estimate, addition of the net Management Fee of $10 million and known changes in facts and circumstances. Such Direct Cost Budget shall also consider actual historical results from 1996 through the date of adoption of the initial Annual T&D Budget prepared on a comparable disaggregated basis. Payment of any bonus or incentive pay to officers of the Parent shall not be part of the Direct Cost Budget unless mutually agreed to in writing by the parties. Subsequent annual Direct Cost Budgets shall be calculated based upon the initial Direct Cost Budget, subject to adjustments for the Direct Cost Budget Indices described in Appendix 5 hereto and as follows: (i) The union labor portion of the Direct Costs will be adjusted in accordance with existing union contracts through February 13, 2001. Thereafter, the cost of union labor and benefits will be adjusted based on Direct Cost Budget Indices. At the Authority's option, Manager will consult with the Authority on all future renegotiations of union labor contracts prior to final agreement and will keep the Authority apprised of labor negotiations as they progress; (ii) All other portions of the Direct Cost budget, including non-union labor, will be adjusted for the appropriate Direct Cost Budget Indices set forth in Appendix 5. (4) Third Party Costs Budget Preparation. If in any proposed Annual T&D Budget or Five-Year Planning Budget the Manager proposes changes in components of Third Party Costs (e.g. rates for professional services, unit costs for materials and supplies, postage rates, insurance premiums, etc.) from the prior budgets due to claims by the Manager of changes in costs significantly different from previously applicable rates used in the previously adopted Third Party Costs Budget, the Manager must provide documentation of the basis of such changes. The Authority may require that the Manager demonstrate justification for increases in components of Third Party Costs through competitively bidding for contracts or services, or through other means. If the Annual T&D Budget has not been adopted by the Authority prior to the beginning of a Contract Year, the Manager, to the extent necessary to maintain T&D System reliability and safety, shall be authorized to expend, amounts up to the actual Third Party Costs for the first three months of the prior Contract Year. (5) Rate Recommendations and Budget Review. The Annual T&D Budget and Five-Year Planning Budget prepared by the Manager and submitted to the Authority for review and approval shall be accompanied by any Manager-recommended rate adjustments for the upcoming year and shall be submitted at least six months before the anticipated Closing Date and six months before the beginning of each subsequent Contract Year. The Authority shall have 60 days to review the proposed Annual T&D Budget and Five-Year Planning Budget and any rate adjustments and to propose modifications as it deems appropriate. The parties' objective is to have the Annual T&D Budget and the Five-Year Planning Budget adopted at least two months before the beginning of the next Contract Year. If there is a rate adjustment, the Manager, at the Authority's request, shall expedite its preparation and discussions with the Authority so as to enable the public review process for a rate adjustment to begin sufficiently early to allow approximately four (4) months of public review, comment, and adoption by the Authority before the new rate year begins. All rate proposals will be subject to public hearings prior to approval by the Authority. (6) Five-Year Planning Budget. The Five-Year Planning Budget shall include a projection of the Direct Cost Budget based on the load forecast most recently approved by the Authority and a projection of the applicable indices. The Manager acknowledges that the Authority's acceptance of the year 2 through 5 planning budgets as contained in the Five-Year Planning Budget shall not be deemed to constitute approval of such budgets, although these later year planning budgets will be used 34 as guidance for the reasonableness of any adjustments to subsequent annual budgets to be adopted by the Authority. (7) Budget Format. The Annual T&D Budget and Five-Year Planning Budget shall be in a form acceptable to the Authority, with the initial Annual T&D Budget and Five-Year Planning Budget to be prepared with the same categories and levels of detail for historical costs and documented in a manner which enables comparison to actual expenditures. The Annual T&D Budget and Five-Year Planning Budget shall include the type and format of information shown in Appendix 10 hereto. (8) Accelerated Budget Preparation. If, in the Authority's sole opinion, trends in the cost of service, customer loads or other factors indicate a need to consider changes in rates, cost allocation, or rate design, the Authority may request a revised budget and rate recommendation from the Manager or preparation of the budget on an accelerated schedule, with reasonable notice. The Authority and the Manager shall agree on any reasonable incremental costs which may be subject to reimbursement for such accelerated budget preparation. (9) Manager Availability at Forums. At the Authority's request upon reasonable notice, the Manager shall provide, in any public or private forums, explanation and support for the Manager's T&D System management activities, including, without limitation, activities relating to the Annual T&D Budget and Five-Year Planning Budget, the Major Capital Plan and Budget, rates and rate design. SECTION 6.3 OTHER COSTS. (A) "Other Costs" Definition. (1) Other Costs are those costs which cast reasonably be anticipated and shall include those costs the Manager and the Authority agree are not included in the Direct Cost Budget, Third Party Cost Budget or Major Capital Plan and Budget ("Other Costs"). Other Costs include the Incremental Internal Costs and additional Third Party Costs incurred by the Manager as a result of events (including but not limited to major storms and extreme weather) that Manager and the Authority agree have caused costs to be incurred by the Manager to respond to significant (i) damage to or adverse affects on the T&D System, (ii) changes in the level of required maintenance or operation of the T&D System, or (iii) tasks which are necessary for safety reasons. In addition, Manager will be reimbursed for Other Costs resulting from or as a consequence of: (i) changes in work scope and projects agreed to by the Manager and the Authority; (ii) a Change in Law; (iii) determinations made by the Authority pursuant to Section 4.5 resulting in changes in System Policies and Procedures; or (iv) the Authority's assumption "of the day-to-day direction" of the Manager pursuant to Section 7.4(B)(2). None of the following shall constitute an event which can cause Other Costs to arise: (i) general economic conditions, interest or inflation rates, or currency fluctuations or exchange rates, (ii) the financial condition of the Authority, the Manager, the Guarantor, any of their Affiliates or any Subcontractor, 35 (iii) the consequences of a failure by the Manager, the Guarantor, any Subcontractor, any of their Affiliates or any other person to adhere to the Contract Standards in the performance of any work hereunder; (iv) the failure of the Manager to secure patents or licenses to be owned or possessed by the Manager and its Affiliates in connection with the technology necessary to perform their obligations hereunder; (v) union work rules, requirements or demands which have the effect of increasing the number of employees employed at the T&D System, reducing the operating flexibility of the Manager or otherwise increase the cost to the Manager of operating and maintaining the T&D System, or (vi) the failure of any Subcontractor or supplier to furnish labor, materials, services or equipment for any reason. (2) "Incremental Internal Costs" shall include those incremental internal costs incurred by the Manager and approved by the Authority to provide for Major Capital Improvements, Public Works Improvements, and Other Costs pursuant to the Agreement to the extent such costs are not otherwise included as a Direct Cost or a Third Party Cost. Such costs shall include, for example, unbudgeted overtime wages for employees of the Manager or its Affiliates whose salaries are included, directly or indirectly, in the Direct Cost Budget, and wages and benefits for any additional employees hired to perform the task or a task contemplated in the Direct Cost Budget not able to be performed by the Manager's employees due to their deployment as a result of such event, and any incremental allocation of costs related to employees of the Manager's parent or affiliates. (3) The Authority and the Manager shall agree upon the occurrence of an event that qualifies as one that has or is anticipated to lead to Other Costs. The Authority's approval of the reimbursement of Other Costs shall not be unreasonably withheld. Other Costs will not be taken into consideration in any determination of incentives or disincentives as contemplated in this Agreement. (B) Other Costs Reserve Estimate. Although Other Costs will not be budgeted, the Manager shall recommend, and the Authority shall adopt, an annual reserve level for Other Costs for each Annual T&D Budget and Five-Year Planning Budget to enable estimation of total System Revenue Requirements. Such estimate will also be used by the Authority for determination of financial reserve requirements for the T&D System. (C) Other Costs Reimbursement. The Manager will be reimbursed for reasonably incurred Other Costs. Payment for such costs will be made as needed from reserves retained by the Authority. Approved costs in excess of available reserves will be reimbursed in a manner which minimizes working capital costs to the Authority. Other Costs shall be billed as incurred, but not more frequently than on a monthly basis. The Authority shall pay such invoice within 30 days of receipt, subject to a 10% retention by the Authority pending completion of review of such invoice. The Authority shall have 60 days to review such invoice and supporting documentation after which time it shall pay the Manager the full amount thereof, unless the Authority disputes any aspect of such invoice. Any amounts determined to be owing by one party to the other through such dispute resolution shall be paid, along with interest at the Base Interest Rate from the date the Authority made its payment under this subsection until the date of payment of the disputed or retained amounts. SECTION 6.4. NON-COST PERFORMANCE INCENTIVES AND DISINCENTIVES. (A) Generally. In addition to the cost saving incentives provided for in 36 Section 6.2, the Manager will be eligible for incentives for performance above certain threshold target levels of performance standards ("Non-cost Performance Incentives") and subject to disincentives for performance below certain other threshold minimum performance standard levels ("Non-cost Performance Disincentives"), with an intermediate band of performance in which neither incentives nor disincentives shall apply, for reliability, worker safety, and customer service, all as described in Appendix 7 hereto. (B) Adjustments to Threshold Levels. The threshold levels to which Manager's performance is measured for purposes of determining the Non-cost Performance Incentives and Non-Cost Performance Disincentives as described in Appendix 7, may be increased or decreased by the mutual agreement of the Parties to reflect material effects, if any, of (1) increases in Authority-approved Annual T&D Budgets; (2) determinations by the Authority not to approve maintenance or capital improvement projects as originally recommended by Manager and not otherwise reflected in the annual T&D Budgets; (3) changes in System Policies and Procedures; or (4) changes in the scope of Manager's services from that which is contemplated in this Agreement. (C) Limits on Incentives and Disincentives. In any Contract Year in no event shall the total of the Non-cost Performance Incentives, net of any applicable Non-cost Performance Disincentives, together with the System Power Supply Incentive/Disincentive payable under Section 5.3.2 of the Energy Management Agreement, be greater than $7.5 million, nor will the total Non-cost Performance Disincentives, net of any applicable Non-cost Performance Incentives together with the System Power Supply Incentive/Disincentive payable under Section 5.3.2 of the Energy Management Agreement be greater than $7.5 million. SECTION 6.5. AUTHORITY NON-PERFORMANCE. (A) Costs of Construction Work and of Operation and Maintenance. If subsequent to the Closing Date, caused by an event the costs of which the Authority is responsible for under Section 6.10 hereof, there shall be an increase in the Manager's cost of Construction Work or Operation and Maintenance Services, the amount of any such incremental cost increase shall be borne by the Authority to the extent it is responsible therefor under Section 6.10 hereof and shall not be considered for purposes of calculating any incentive or disincentive hereunder. The Manager shall give the Authority and the Consulting Engineer prompt written notice of the occurrence of any such event, including in such notice as and to the extent known (1) a description in reasonable detail of the reasons why such increase is due to such an event, (2) the projected amount of any increase in the Manager's cost of Construction Work or Operation and Maintenance Services, including Cost Substantiation therefor and any impact on the scheduled completion date, and (3) the resulting adjustment in the compensation due hereunder. The Authority may object to any adjustment to the compensation due hereunder due to any such increase in the Manager's cost of operation and maintenance for any reason under this Agreement, including the grounds that such adjustment was improperly computed, that such costs are unreasonable for the work performed, that such costs or the manner in which the work was carried out was not a reasonable response to the event, or that the event is something for which the Manager is responsible under Section 6.10 hereof has occurred. Notification and resolution of any such dispute shall be made in accordance with the provisions of Section 7.8 hereof. (B) Major Capital Improvements to Repair Damage Caused by Authority. If at any time the T&D System is damaged or destroyed due to an event for which the Authority is responsible under Section 6.10 hereof, the Authority shall pay, in addition to and not in substitution for the payments required under subsection (A) hereof, all Major Capital Improvement Costs and adjustments as are required to be made by the Authority pursuant to Article V hereof. SECTION 6.6. MANAGER NON-PERFORMANCE. If subsequent to the Closing Date, due to an event for which the Manager is responsible under Section 6.10 hereof, there shall be an increase in the Manager's cost of Construction Work or Operation and Maintenance Services, or in the 37 Authority's costs associated with performing obligations hereunder, the amount of any such incremental cost increase shall be borne by the Manager to the extent it is responsible therefor under Section 6.10 hereof. If at any time the T&D System is damaged or destroyed due to an event for which the Manager is responsible under Section 6.10 hereof, the Manager shall pay, in addition to and not in substitution for the payments required above, all Major Capital Improvement Costs and adjustments resulting therefrom. SECTION 6.7. BILLING OF MAJOR CAPITAL: PUBLIC WORKS. Major Capital Improvements shall be billed and paid as provided in Article V hereof. SECTION 6.8. ANNUAL SETTLEMENT. (A) Annual Settlement Statement. Within 60 days after the end of each Contract Year, the Manager shall deliver to the Authority an annual settlement statement (the "Annual Settlement Statement") in a mutually agreed upon form, certified as to accuracy and completeness by the Manager, setting forth the actual aggregate Service Fee payable with respect to such Contract Year and a reconciliation of such amount with the amounts actually paid by the Authority pursuant to the Billing Statements with respect to such Contract Year, including, without limitation, all adjustments to the Service Fee made pursuant to Article V hereof and this Article VI, all adjustments made pursuant to subsection 6.8(B) hereof. If any amount is then in dispute, the Annual Settlement Statement shall set forth the Manager's estimate of such amount and a final reconciliation of such amount shall be made in the Billing Statement for the Billing Period immediately following the resolution of such dispute. The Annual Settlement Statement shall also include an accounting of any incentives or disincentives accrued during the applicable Contract Year along with appropriate supporting documentation. The Authority shall have an opportunity to review such accounting prior to payment and shall have access to the Manager's books and records in order to confirm such accounting prior to payment. Such review will be performed within 90 days of receipt of the Annual Settlement Statement. (B) Payment of Amounts Owed. During the first quarter of the following Contract Year, the monthly payments made to the Manager by the Authority shall be (i) reduced by any overpayment by the Authority resulting from the sum of actual Direct Costs and actual Third Party Costs being less than the payments made by the Authority to the Manager for such costs during the previous year or (ii) increased to reflect any Non-Cost Performance Incentive earned by the Manager during the previous year and/or any Overrun Payment Due. In the final Contract Year, such adjustments shall be made in the last month of such year for the first nine months of the year, and a final adjustment will be made within 90 days after the end of the year. (C) Carrying Costs. Any amounts determined in the Annual Settlement Statement to be owing by one party to the other, other than Non-Cost Performance Incentives or Non-Cost Performance Disincentives shall be paid with interest at the Base Interest Rate calculated from July 1 of the preceding Contract Year until the date of the Annual Settlement Statement. SECTION 6.9. AUTHORITY'S PAYMENT OBLIGATIONS. (A) Source of Payments by Authority. Amounts payable to Manager hereunder are to be paid from T&D System revenues and other funds of the Authority available for such purposes in accordance with the terms of the Bond Resolution. (B) Disputes. If the Authority disputes any amount billed by the Manager in any Billing Statement, the Authority shall pay that portion or the billed amount which is not in dispute and shall provide the Manager with written objection within 45 days of the receipt of such Billing Statement indicating the portion of the billed amount that is being disputed and providing all reasons then known to the Authority for its objection to or disagreement with such amount. If the Authority and the Manager are not able to resolve such dispute within 30 days after the Authority's objection, either party may refer such dispute for resolution in accordance with Section 7.8 hereof. If any such amount is adjusted in the 38 Manager's favor pursuant to agreement, mediation or otherwise, the Authority shall pay the amount of such adjustment to the Manager, with interest thereon at the Base Interest Rate from the date such disputed amount was due the Manager to the date of payment in full of such amount. Nothing contained in this subsection shall limit the authority of any authorized officer of the Authority or any other governmental agency pursuant to Applicable Law to raise a further objection to any amount billed by the Manager pursuant to an audit conducted by the Authority or such governmental agency. No payment of amounts by the Authority hereunder shall be construed as or shall constitute a waiver by the Authority of its rights to dispute such amounts, to conduct a final audit or reconciliation, or otherwise review the appropriateness of such amounts. SECTION 6.10. ALLOCATION OF RISK OF CERTAIN COSTS AND LIABILITIES. Except to the extent due to Authority Fault (as determined by either a final non-appealable order or judgment of a court of competent jurisdiction (including administrative tribunals) or a final non-appealable binding arbitration decision), the Manager shall be responsible and liable to the Authority for, and shall not be entitled to reimbursement from the Authority for any Loss-and-Expense incurred by the Manager or the Authority, (a) due to any gross negligence or willful misconduct by the Manager during the period commencing six months prior to the Closing Date to the extent LILCO knew or should have known of such gross negligence or willful misconduct and during the Term in carrying out its obligations hereunder, (b) due to any violation of or failure of compliance with Applicable Law by the Manager (except as provided below) during the period commencing six months prior to the Closing Date to the extent LILCO knew or should have known of such violation or failure of compliance and during the Term which materially and adversely affects (i) the condition or operations of the T&D System, (ii) the financial condition of the Authority, (iii) the performance or ability of the Manager to perform its obligations under this Agreement, or (iv) the cost of providing electric service to the customers of the T&D System, provided, however, that Manager shall not be responsible and liable to the Authority under this clause (b) with respect to any violation of, failure of compliance with, or liability under, Environmental Laws (as defined in the Acquisition Agreement) for which the Authority or the Manager may be strictly liable provided that Manager (or for actions prior to the Closing Date, LILCO) acted in a manner consistent with Prudent Utility Practice. Notwithstanding the foregoing, Manager shall in all events be liable for any fine or penalty arising by reason of any violation of or failure of compliance with Applicable Law for acts or omissions of the Manager not consistent with Prudent Utility Practice, (c) due to any criminal violation of Applicable Law by the Manager (or for actions prior to the Closing Date, LILCO), or (d) due to an event which gives rise to a cost not included in the Direct Cost Budget or Third Party Cost Budget or a cost incurred with respect to Major Capital Improvements or 39 Public Works Improvements, that is incurred by reason of actions or omissions of the Manager not consistent with Prudent Utility Practice. Any action or omission identified in (a), (b), (c) or (d) shall be determined by either a final non-appealable order or judgment of a court of competent jurisdiction (including administrative tribunals) or a final non-appealable binding arbitration decision and shall be attributable to the Manager for purposes of the preceding sentence whether it is attributable to the Manager or to any officer, member, agent, employee or representative of the Manager or any Affiliate and any contractor, Subcontractor of any tier, or independent contractor selected to perform any work hereunder not previously objected to by the Manager to the extent permitted by Section 5.3 and related dispute resolution provisions. 40 ARTICLE VII DEFAULT, TERMINATION FOR CAUSE AND DISPUTE RESOLUTION SECTION 7.1. REMEDIES FOR BREACH. Subject to the provisions of Section 7.8 hereof, the parties agree that, in the event that either party breaches any other obligation under this Agreement or any representation made by either party hereunder is untrue in any material respect, the other party shall have the right to take any action at law or in equity it may have to enforce the payment of any damages or the performance of such other obligation hereunder and such right to recover damages or to be reimbursed as provided herein will ordinarily constitute an adequate remedy for any breach of such other obligation or any material untruth in any such representation. Either party may enforce by an action for specific performance the other party's obligations hereunder in the event a material breach thereof has occurred and is continuing. Neither party shall have the right to terminate this Agreement for cause except after an Event of Default determined in accordance with the provisions of this Article VII shall have occurred. SECTION 7.2. EVENTS OF DEFAULT BY THE MANAGER. (A) Events of Manager Default Defined. (I) Events of Default Not Requiring Cure Opportunity for Termination. Each of the following shall constitute an Event of Default on the part of the Manager for which the Authority may terminate this Agreement without any requirement of cure opportunity: (a) Change of Control of Manager. Change of Control of the Manager, the Parent or the Guarantor has occurred; provided, however, that the combination effectuated under the BUGLILCO Agreement or the Acquisition Agreement shall not constitute a Change of Control of the Manager for purposes of this provision. (b) Worker Safety. Failure for any two out of three consecutive years, for reasons other than major storms or extreme weather, to achieve the Minimum Worker Safety Standard; (c) Customer Service. Failure for two out of three consecutive years to achieve the Minimum Customer Service Standard. (d) Voluntary Bankruptcy. The written admission by the Manager or the Guarantor that it is bankrupt, or the filing by the Manager or the Guarantor of a voluntary petition under the Federal Bankruptcy Code, or the consent by the Manager, the Parent or the Guarantor to the appointment by a court of a receiver or trustee for all or a substantial portion of its property or business, or the making by the Manager, the Parent or the Guarantor of any arrangement with or for the benefit of its creditors involving an assignment to a trustee, receiver or similar fiduciary, regardless of how designated, of all or a substantial portion of the Manager's or the Guarantor's property or business. (e) Involuntary Bankruptcy. The final adjudication of the Manager, the Parent or the Guarantor as a bankrupt after the filing of an involuntary petition under the Federal Bankruptcy Code, but no such adjudication shall be regarded as final unless and until the same is no longer being contested by the Manager, the Parent or the Guarantor nor until the order of the adjudication shall be regarded as final unless and until the same is no longer being contested by the Manager or the Guarantor nor until the order of the adjudication is no longer appealable. (f) Credit Enhancement. Failure of the Manager to supply, maintain, renew, extend or replace the credit enhancement required under subsection 9.1(C) hereof within the time 41 specified therein in the event there is a Material Decline in the Guarantor's Credit Standing, as defined in Section 9.1 hereof. (g) Letter of Credit Draw. Failure of the Manager to supplement, replace or cause to be reinstated the letter of credit as described in Section 9.1 hereof within 30 days following draws equal to, in the aggregate, 50% of the face value thereof. (2) Events of Default Requiring Cure Opportunity for Termination. Each of the following shall constitute an Event of Default on the part of the Manager for which the Authority may terminate this Agreement upon compliance with the notice and cure provisions set forth below: (a) System Reliability. Failure to achieve, for two out of three consecutive years, the Minimum Reliability Standard for both SAIFI and CAIDI as defined in Appendix 7 hereto for any of the same individual system geographic operating divisions; provided that if the Authority and the Manager shall agree that such failure is not capable of being cured within the three year period, then such failure shall not be deemed an Event of Default hereunder if and so long as the Manager shall provide assurances satisfactory to the Authority that appropriate steps have been and are being taken to effect a cure and that such failure will be cured within an agreed upon appropriate period; (b) Failure to Pay or Credit. The failure of the Manager to pay or credit undisputed amounts owed to the Authority under this Agreement within 90 days following the due date for such payment or credit (including the payment or crediting of any payments due to the Authority in connection with the Performance Guarantees); and (c) Failure Otherwise to Comply with Agreement or Guaranty. The failure or refusal by the Manager to perform any material obligation under this Agreement (other than those obligations contained in subsection 7.2(A)(1) above), or the failure of the Guarantor to comply with any of its material obligations under the Guaranty unless such failure or refusal is excused by an Uncontrollable Circumstance or Authority Fault; except that no such failure or refusal specified in clause (b) or (c) of this Section 7.2(A)(2) shall constitute an Event of Default giving the Authority the right to terminate this Agreement for cause under this subsection unless: (i) The Authority has given prior written notice to the Manager or the Guarantor, as applicable, stating that a specified failure or refusal to perform exists which will, unless corrected, constitute a material breach of this Agreement on the part of the Manager or the Guaranty on the part of the Guarantor and which will, in its opinion, give the Authority a right to terminate this Agreement for cause under this Section unless such default is corrected within a reasonable period of time, and (ii) The Manager or the Guarantor, as applicable, has neither challenged in an appropriate forum the Authority's conclusion that such failure or refusal to perform has occurred or constitutes a material breach of this Agreement nor corrected or diligently taken steps to correct such default within a reasonable period of time, but not more than 60 days, from receipt of the notice given pursuant to clause (i) of this subsection (but if the Manager or the Guarantor shall have diligently taken steps to correct such default within a reasonable period of time, the same shall not constitute an Event of Default for as long as the Manager or the Guarantor is continuing to take such steps to correct such default). 42 SECTION 7.3. EVENTS OF DEFAULT BY THE AUTHORITY. (A) Events of Authority Default Defined. Each of the following shall constitute an Event of Default on the part of the Authority for which the Manager may terminate this Agreement upon compliance with the notice and cure provisions set forth below: (1) Failure to Pay. The failure of the Authority to pay undisputed amounts owed to the Manager under this Agreement within 90 days following the due date for such payment. (2) Failure to Comply with Agreement. The failure or refusal by the Authority to perform any material obligation under this Agreement unless such failure or refusal is excused by an Uncontrollable Circumstance or Manager Fault; except that no such failure or refusal to pay or perform shall constitute an Event of Default giving the Manager the right to terminate this Agreement for cause under this Section unless: (a) The Manager has given prior written notice to the Authority swing that a specified failure or refusal to perform exists which will, unless corrected, constitute a material breach of this Agreement on the part of the Authority and which will, in its opinion, give the Manager a right to terminate this Agreement for cause under this Section unless such default is corrected within; reasonable period of time, and (b) The Authority has neither challenged in an appropriate forum the Manager's conclusion that such failure or refusal to perform has occurred or constitutes a material breach of this Agreement nor corrected or diligently taken steps to correct such default within a reasonable period of time but not more than 60 days from the date of the notice given pursuant to clause (a) of this subsection (but if the Authority shall have diligently taken steps to correct such default within a reasonable period of time, the same shall not constitute an Event of Default for as long as the Authority is continuing to take such steps to correct such default). (3) Change of Control of LILCO. A change of control of LILCO (after acquisition by the Authority) which results in ownership control of LILCO by other than a state public benefit corporation, authority, political subdivision or other instrumentality of the State or any political subdivision thereof. SECTION 7.4. PROCEDURE FOR TERMINATION FOR CAUSE. (A) Two-Year Notice. If any party shall have a right of termination for cause in accordance with this Article VII the same may be exercised by notice of termination given to the party in default at least two years prior to (or, in the case of a bankruptcy or insolvency default or a Change of Control, simultaneously with, or, in the case of an Event of Default specified in clause (0 or (g) of subsection 7.2(A)( 1) hereof, six months) the date of termination specified in such notice (the "Termination Date"). (B) Termination by Authority. (I) Access. In the event an Event of Default of the Manager occurs and the Authority issues a termination notice described in subsection (A) hereof, from the date of such issuance until the Termination Date, the Authority shall have unrestricted access to all areas of, and all information, data and records concerning, the T&D System and to Manager's personnel necessary to monitor the performance of the Manager and to ensure that the Manager complies with the provisions of this Agreement during such time period (the "Termination Notice Period"). (2) Assumption of Responsibilities. At the Authority's sole option, the Authority may elect at any time during the Termination Notice Period to direct the Manager and its employees in the day-to-day performance of the Manager's obligations under this Agreement. If the Authority so elects, 43 the Authority shall reimburse the Manager for its resulting Cost Substantiated incremental costs incurred, and the Manager shall no longer be eligible to receive any performance incentives otherwise payable hereunder nor be responsible for the payment of any performance disincentives otherwise payable under this Agreement; provided that the Manager shall be entitled to receive any performance incentives otherwise payable hereunder and shall be responsible for any performance disincentives otherwise payable hereunder for the period preceding such assumption of day-to-day operations. SECTION 7.5. CERTAIN OBLIGATIONS OF THE MANAGER UPON TERMINATION OR EXPIRATION. (A) Obligations on Termination or Expiration. Upon a termination of the Manager's right to perform this Agreement under Section 7.2 hereof or the expiration of this Agreement in accordance with the terms hereof, the Manager shall cooperate in the smooth transition to the new manager and, without limiting the generality of the foregoing, in addition to those rights and obligations under Schedule F to the Acquisition Agreement shall: (1) transfer all records, customer lists and account information, the Operation and Maintenance Manuals and personnel information to the new manager; (2) sell all existing materials and supplies utilized by the Manager in the operation and maintenance of the T&D System to the new manager at cost; (3) stop the Operation and Maintenance Services and any Construction Work on the date or dates and to the extent specified by the Authority, provided that in so doing the Manager shall cooperate and coordinate with the Authority and any successor manager so as to assure continued operation of the T&D System; (4) promptly take all action as necessary to protect and preserve all materials, equipment, tools, facilities and other property; (5) promptly remove from the T&D System Site all equipment, implements, machinery, tools, temporary facilities of any kind and other property owned or leased by the Manager which are not to be transferred to any successor manager or the Authority, and repair any damage caused by such removal; (6) leave the T&D System in a neat and orderly condition; (7) promptly remove all employees of the Manager and any Subcontractors and vacate the T&D System Site, subject to subsection (B) of this Section and further subject to the requirement that all employees of the Manager shall be permitted by the Manager to take employment with the Authority or a replacement manager of the T&D System; (8) promptly deliver to the Consulting Engineer or the successor manager, as the Authority shall direct, copies of all Subcontracts, together with a statement of: (a) the items ordered and not yet delivered pursuant to each agreement; (b) the expected delivery date of all such items; (c) the total cost of each agreement and the terms of payment; and (d) the estimated cost of cancelling and/or assigning each agreement; 44 (9) deliver to the Consulting Engineer or the successor manager, as the Authority shall direct, promptly a list of: (a) all special order items previously delivered or fabricated by the Manager or any Subcontractor but not, a incorporated in the Construction Work or the Operation and Maintenance Services; and (b) all other supplies, materials, machinery, equipment and other property previously delivered or fabricated by the Manager or any Subcontractor but not yet incorporated in the Construction Work or the Operation and Maintenance Services; (10) advise the Authority promptly of any special circumstances which might limit or prohibit cancellation of any Subcontract; (11) as the Authority directs, terminate or assign to the new manager all Subcontracts and make no additional agreements with Subcontractors without the prior written approval of the Authority; (12) as directed by the Authority, transfer to the Authority by appropriate instruments of title, and deliver to such place as the Authority may specify, all special order items; (13) furnish to the Authority all information used in the preparation of reports and other data necessary for the Authority (or any successor manager) to operate the T&D System, and use its best efforts to obtain the consent of any third party required to fulfill such obligation; (14) notify the Authority promptly in writing of any Legal Proceedings against the Manager by any Subcontractor relating to the termination of the Construction Work or the Operation and Maintenance Services (or any Subcontracts); (15) give written notice of termination, effective as of date of termination of this Agreement, promptly under each policy of Required Construction Work Insurance and Required Operation Period Insurance (with a copy of each such notice to the Authority), but permit the Authority to continue and/or assign such policies thereafter at its own expense, if possible; and (16) take such other actions, and execute such other documents, as may be necessary to effectuate and confirm the foregoing matters, or as may be otherwise necessary or desirable to minimize the Authority's costs, and take no action which will increase any amount payable to the Authority under this Agreement. (B) Additional Obligations. The Manager shall also provide, and shall use its best reasonable efforts to cause its Subcontractors to provide, technical advice and support to the Authority (or any replacement manager designated by the Authority). Such advice and support shall be for a period of six months and shall include providing any plans, drawings, renderings, blueprints, operating and training manuals for all facilities, personal information, specifications or other information useful or necessary for the Authority or any replacement manager designated by the Authority to complete and carry out the Construction Work and to perform the Operation and Maintenance Services. In addition, to the extent requested by the Authority, the Manager shall use reasonable efforts to retain any or all key operating and management employees and make them available following termination or expiration of this Agreement to provide on-site, real-time consulting advice to a replacement manager for the T&D System. 45 (C) Authority Payment of Certain Transition Costs. The Authority shall reimburse the Manager within 60 days of the date of the Manager's invoice all mutually agreeable costs incurred by the Manager in satisfying the requirement of subsections (A) and (B) hereof, subject to Cost Substantiation. SECTION 7.6. NO WAIVERS. No action of the Authority or Manager pursuant to this Agreement (including, but not limited to, any investigation or payment), and no failure to act, shall constitute a waiver by either party of the other party's compliance with any term or provision of this Agreement. No course of dealing or delay by the Authority or Manager in exercising any right, power or remedy under this Agreement shall operate as a waiver thereof or otherwise prejudice such party's rights, powers and remedies. No single or partial exercise of (or failure to exercise) any right, power or remedy of the Authority or Manager under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. SECTION 7.7. FORUM FOR DISPUTE RESOLUTION. Subject to the provisions of Section 7.8, it is the express intention of the parties that all legal actions and proceedings related to this Agreement or to the T&D System or to any rights or any relationship between the parties arising therefrom shall be solely and exclusively initiated and maintained in courts of the State of New York having appropriate jurisdiction; provided, however, that except in the case of a termination due to a change in control or bankruptcy or insolvency, either party may refer a challenge to the termination of this Agreement to an independent arbitrator, following the use of expedited limited mediation provided for in Section 7.8 hereof. During such arbitration process, the two-year notice period provided for in Section 7.4 hereof shall continue to run and this Agreement shall terminate at the end of such period, unless a final, binding ruling that the termination of this Agreement was improper has been issued by such arbitrator. SECTION 7.8. NON-BINDING MEDIATION: ARBITRATION. (A) Dispute Resolution. Any dispute arising out of or relating to this Agreement shall be resolved in accordance with the procedures specified in this Section, which shall constitute the sole and exclusive procedures for the resolution of such disputes. (B) Negotiation and Non-Binding Mediation. The parties agree to use their best efforts to settle promptly any disputes or claims arising out of or relating to this Agreement through negotiation conducted in good faith between executives having authority to reach such a settlement. Either party hereto may, by written notice to the other party, refer any such dispute or claim for advice or resolution by mediation by an Independent Engineer, financial advisor or other suitable mediator. The parties shall mutually agree on the selection of such mediator. If the parties are unable to agree, the parties shall each designate a qualified mediator who, together, shall choose the mediator for the particular dispute or claim. If the mediator is unable, within 30 days of such referral, to reach a determination as to the dispute that is acceptable to the parties hereto, the matter shall be referred to applicable Legal Proceedings. All negotiations - A mediation discussions Pursuant to this paragraph shall be confidential subject to Applicable Law and shall be treated as compromise and settlement negotiations for purposes of Federal Rule of Evidence 408 and applicable state rules of evidence. (C) Arbitration. Any dispute arising out of or relating to this Agreement or the breach, termination, or validity thereof, except for a termination due to a Change in Control or due to a bankruptcy or insolvency or a failure to provide, renew, reinstate or replace the credit enhancement required pursuant to Section 9.1 which dispute has not' been resolved by a negotiation or mediation as 46 provided in subsection 7.8(B) hereof within 30 days from the date that either negotiations or mediation shall have been first requested, shall be settled by arbitration before three independent and impartial arbitrators (the "Arbitrators") in accordance with the then current rules of the American Arbitration Association, except to the extent such rules are inconsistent with any provision of this Agreement, in which case the provisions of this Agreement shall be followed, and except that the arbitrations under this Agreement shall not be administered by the American Arbitration Association. The Arbitrators shall be (a) independent of the parties and disinterested in the outcome of the dispute, provided that residents of Long Island shall not be deemed to be interested merely by virtue of their residence on Long Island, (b) attorneys, accountants, investment bankers, commercial bankers or engineers familiar with contracts governing the operation of electric utility assets, and (c) qualified in the subject area of the issue in dispute. The Arbitrators shall be chosen by the parties, with each party choosing one arbitrator and those arbitrators choosing the third Arbitrator. Judgment on the award rendered by the Arbitrators may be entered in any court in the State of New York having jurisdiction thereof. If either party refused to participate in good faith in the negotiations or mediation proceedings described in subsection 7.8(B) hereof, the other may initiate arbitration at any time after such refusal without waiting for the expiration of the applicable time period. Except as provided in subsection 7.8(D) hereof relating to provisional remedies, the Arbitrators shall decide all aspects of any dispute brought to them including attorney disqualification and the timeliness of the making of any claim. (D) Provisional Relief. Either party may, without prejudice to any negotiation, mediation, or arbitration procedures, proceed in any court to obtain provisional judicial relief if, in the such party's sole discretion, such action is necessary to avoid imminent irreparable harm, to provide uninterrupted electrical and other services, or to preserve the status quo pending the conclusion of the dispute procedures specified in this Section. (E) Obligation to Repair. It is the intention of the parties that the Manager's operation and maintenance obligations hereunder shall be implemented by the Manager in accordance with this Agreement, notwithstanding the existence of any dispute hereunder, including without limitation, responsibility for the costs therefor. Such actions by the Manager shall in no case prejudice its rights thereafter to dispute its responsibility for the costs therefor. (F) Awards. The Arbitrators shall have no authority to award punitive damages or any other damages aside from the prevailing party's actual and consequential damages plus interest at the Base Interest Rate from the date such damages were incurred. The Arbitrators shall not have the authority to make any ruling, finding, or award that does not conform to the terms and conditions of this Agreement. The Arbitrators may award reasonable attorneys' fees and costs of the arbitration. The Arbitrator's award shall be in writing and shall set forth the factual and legal bases for the award. (G) Information Exchange. The Arbitrators shall have the discretion to order a prehearing exchange of information by the parties, including, without limitation, production of requested documents, the exchange of summaries of testimony of proposed witnesses, and the examination by disposition of parties. The parties hereby agree to produce all such information as ordered by the Arbitrators and shall certify that they have provided all applicable information and that such information is true, accurate and complete. (H) Site of Arbitration. The site of any Arbitration brought pursuant to this Agreement shall be either Mineola, New York or Hauppauge, New York. 47 SECTION 7.9. AUTHORITY EMERGENCY POWERS. Should the Manager, due to Uncontrollable Circumstances or any other reason whatsoever, fail, refuse or be unable to provide any or all Operation and Maintenance Services and Construction Work contemplated hereby and the Authority or any Governmental Body finds that such failure endangers or menaces the public health, safety or welfare, then, in any of those events and to the extent of such failure, the Authority shall have the right, upon notice to the Manager, during the period of such emergency, to take possession of and use any or all of the Operating assets necessary to transmit and distribute Power and Energy which the Manager would otherwise be obligated to transmit and distribute. The Manager agrees that in such event it will fully cooperate with the Authority to effect such a temporary transfer of possession of the Operating Assets for Authority's use of the same. The Manager agrees that, in such event, the Authority may take possession of and use any or all of the Operating Assets for the above-mentioned purposes without paying the Manager or any other person any additional charges or compensation whatsoever for such possession and use; provided, however, that if such emergency is due to Uncontrollable Circumstances, the Authority shall reimburse the Manager for its Cost-Substantiated costs incurred due to such a transfer of the Operating Assets. The parties acknowledge that if the Authority takes emergency possession of the Operating Assets, any applicable cure period provided for in this Agreement for the Manager's benefit shall be tolled until such tune as the Manager resumes possession of the Operating Assets. The Authority may operate the Operating Assets with Authority employees, or cause the Operating Assets to be operated by subcontractors to the Authority or through the use of the Manager's employees, and the Manager shall make its employees available for such purposes. It is further agreed that the Authority may at any time, at its discretion, relinquish possession of any or all of the Operating Assets to the Manager and thereupon demand that the Manager resume the operations as provided in the Agreement. It is specifically understood and agreed that the Authority's exercise of its rights under this Section: (1) does not constitute a taking of private property for which payment must be made other than as specifically provided for in this Section; (2) shall not create any liability on the part of the Authority to the Manager; and (3) that the indemnity provisions of the Agreement of Section 9.3 hereof covering the Authority and the Manager are meant to include circumstances arising under this Section. The Authority's right to retain temporary emergency possession of the Operating Assets, and to operate the T&D System shall terminate at the earlier of: (1) the time when such services can, in the judgment of the Authority, be resumed by the Manager, or (if earlier) (2) the time when the Authority no longer reasonably requires such Operating Assets, as determined by the Authority. SECTION 7.10. WAIVER OF CERTAIN DEFENSES. The Manager acknowledges that it is responsible for the day-to-day operation and maintenance of the T&D System and the design, construction, startup and testing of the Major Capital Improvements and Public Works Improvements and agrees that, unless otherwise permitted pursuant to the provisions of this Agreement with respect to the occurrence of Uncontrollable Circumstances, and without limiting such provisions, it shall not assert (i) impossibility or impracticability of performance, (ii) lack of fitness for use or operation of the T&D System, (iii) the existence, non-existence, occurrence or non-occurrence of any foreseen or unforeseen fact, event or contingency that may be a basic assumption of the Manager, (iv) commercial frustration of purposes or (v) contract of adhesion, as a defense against any claim by the Authority against the Manager. 48 ARTICLE VIII TERM SECTION 8.1. TERM OF AGREEMENT. This Agreement shall become effective on the Contract Date, and shall continue in effect until the eighth (8th) anniversary of the Closing Date (the "Term"), unless earlier terminated in accordance with its terms, in which event the Term shall be deemed to have expired as of the date of such termination. All rights, obligations and liabilities of the parties hereto shall commence on the Closing Date, subject to the terms and conditions hereof. The Authority shall have no obligation to make Service Fee payments hereunder until the Closing Date. The rights and obligations of the parties hereto pursuant to Sections 3.1(E), 4.2(D), 4.2(E), 4.3(E), 4.14(C), 4.15(F), 4.16(D), 4.16(F), 4.24, 6.3, 6.10, 7.1, 7.4(BX2), 7.5, 7.7, 7.8, 7.10, 8.3, 9.1(C), 9.2, 9.3, 9.4 and 9.5 hereof shall survive the termination or expiration of this Agreement, and no such termination or expiration of this Agreement shall limit or otherwise affect the respective rights and obligations of the parties hereto accrued prior to the date of such termination or expiration. At the end of the Term of this Agreement, all other obligations of the parties hereunder shall terminate unless extended. SECTION 8.2. MANDATORY COMPETITIVE SELECTION OF FUTURE MANAGERS. The Manager hereby acknowledges that the Authority will commence and conduct a competitive procurement for T&D System management services following the fifth anniversary of the Closing Date. The Manager shall have the right or be ineligible, as the case may be, to submit a bid in such procurement on the same basis as other bidders; provided that if this Agreement is terminated due to an Event of Default of the Manager, the Manager shall not have the right to submit a bid in such procurement. The Manager shall cooperate with the Authority during such procurement process, including, by way of example, providing information and documents requested by the Authority for dissemination to bidders and providing access to the T&D System for such bidders. SECTION 8.3. EXIT TEST. An exit test (the "Exit Test") will be commenced six months prior to the expiration or termination of this Agreement to confirm (1) that the Manager has performed the maintenance and Major Capital Improvement and Public Work Improvements activities which were budgeted for the final year of the Agreement or as otherwise previously approved by the Authority, in such final year and (2) that the Manager has completed any remedial activities to cure maintenance deficiencies or Major Capital Improvements and Public Works Improvements which were previously determined to be incomplete as noted by the Authority pursuant to the most recently conducted review of the condition of the T&D System which review shall be conducted annually. The Exit Test shall be carried out in accordance with the provisions of Appendix 6 hereto. If, as a result of such Exit Test, an independent engineer selected by the Authority and agreed to by the Manager, finds that maintenance, Major Capital Improvement and Public Works Improvements, replacement, or remedial activities described in (1) and (2) above have not been performed in accordance with this Agreement and that the Authority has provided the funds for such activities as part of the payments made during such final year or in the case of items noted as deficiencies or incomplete items pursuant to (2) above were funded by the Authority in a previous year, then the Manager shall, in its discretion, either perform such incomplete maintenance, Major Capital Improvement, Public Works Improvements, replacement, or remedial activities without further compensation from the Authority, or within 90 days after termination of the Agreement, the Manager shall reimburse the Authority for the cost to complete such work. 49 ARTICLE IX GENERAL SECTION 9.1. MANAGER TO REMAIN AFFILIATE OF GUARANTOR: CREDIT ENHANCEMENT IN CERTAIN CIRCUMSTANCES. (A) Limitations. The Manager agrees that it will remain an Affiliate of the Guarantor. (B) Material Decline in the Guarantor's Credit Standing. For purposes of this Section, a "Material Decline in the Guarantor's Credit Standing" shall be deemed to have occurred if (1) in the event that the Guarantor has long-term senior debt outstanding which has a credit rating by a Rating Service, such rating by a Rating Service is established or is reduced below investment grade level or (2) in the event the Guarantor does not have long-term senior debt outstanding which has a credit rating by a Rating Service and the Guarantor has a credit rating by a Rating Service, such credit rating is established or reduced below investment grade level, or (3) in the event the Guarantor does not have long-term senior debt outstanding which has a credit rating by a Rating Service and the Guarantor does not have a credit rating by a Rating Service, in which event the Guarantor shall seek a credit rating for the Guaranty from a Rating Service, such rating is established or is reduced below investment grade level or if no rating is established. The Manager immediately shall notify the Authority of any Material Decline in the Guarantor's Credit Standing. (C) Credit Enhancement. If, at any time during the Term hereof, a Material Decline in the Guarantor's Credit Standing occurs, the Manager shall immediately notify the Authority thereof and, within 30 days after such occurrence, shall provide credit enhancement of its obligations hereunder, GENCO's obligations under the Power Supply Agreement and the Energy Manager's obligations under the Energy Management Agreement at its sole cost and expense in the form either of (1) an unconditional guarantee of all of the Manager's obligations hereunder, GENCO's obligations under the Power Supply Agreement and the Energy Manager's obligations under the Energy Management Agreement provided by a corporation or financial institution whose long-term senior debt is or would be rated investment grade by a Rating Service or (2) an irrevocable letter of credit in form and substance satisfactory to the Authority securing the Manager's obligations hereunder, GENCO's obligations under the Power Supply Agreement and the Energy Manager's obligations under the Energy Management Agreement in a face amount of $60,000,000 provided by a financial institution whose long-term senior debt is rated investment grade by a Rating Service; provided that if any such letter of credit is drawn upon in the aggregate in an amount equal to 50% of the face value of such letter of credit, the Manager shall, within 30 days thereafter, supplement or replace such letter of credit with an additional letter of credit such that the total amount of such letter of credit then available equals $60 million. The amount of such letter of credit shall be reduced by $30 million if the Energy Management Agreement has theretofore been or is thereafter terminated and by $4 million if the Power Supply Agreement has theretofore been or is thereafter terminated, such obligation to continue until the expiration or termination of this Agreement, the Power Supply Agreement and the Energy Management Agreement. SECTION 9.2. UNCONTROLLABLE CIRCUMSTANCES GENERALLY. (A) Performance Excused. Except as otherwise specifically provided in this Agreement, neither the Authority nor the Manager shall be liable to the other for any failure or delay in performance of any obligation under this Agreement (other than any payment at the time due and owing) to the extent due to the occurrence of an Uncontrollable Circumstance. (B) Notice, Mitigation. The party experiencing an Uncontrollable Circumstance shall notify the other party by hardcopy telecommunication or telephone and in writing, on or promptly after the date the party experiencing such Uncontrollable Circumstance first knew of the commencement 50 thereof, followed within 15 days by a written description of (1) the Uncontrollable Circumstance and the cause thereof (to the extent known), (2) the date the Uncontrollable Circumstance began and the cause thereof, its estimated duration, the estimated time during which the performance of such party's obligations hereunder will be delayed, and the impact, if any, on any scheduled completion dates for Major Capital Improvements Public Works Improvements, (3) to .he extent appropriate in accordance with Section 6.3, the estimated amount, if any, by which Other Costs may arise as a result of such Uncontrollable Circumstance, (4) its estimated impact on the other obligations of such party under this Agreement and (5) potential mitigating actions which might be taken by the Manager or Authority and any areas where costs might be reduced and the approximate amount of such cost reductions. Each party shall provide prompt written notice of the cessation of such Uncontrollable Circumstance. Whenever such act, event or condition shall occur, the party claiming to be adversely affected thereby shall, as promptly as reasonably possible, use its best reasonable efforts to eliminate the cause therefor, reduce costs and resume performance under this Agreement. While the delay continues, the Manager or Authority shall give notice to the other party with a copy to the Consulting Engineer, before the first day of each succeeding month, updating the information previously submitted. The Manager shall furnish promptly (if and to the extent available to the Manager) any additional documents or other information relating to the Uncontrollable Circumstance reasonably requested by the Consulting Engineer or the Authority. (C) Conditions to Relief on Account of Uncontrollable Circumstances. If and to the extent that Uncontrollable Circumstances interfere with, delay or increase the cost of the Manager's performing any Construction Work or the Operation and Maintenance Services in accordance herewith, and the Manager has given timely notice as required by subsection 9.2(B) hereof, the Manager shall be entitled to an increase or extension in the Service Fee or the schedule for performance equal to the amount of the increased cost or the time lost as a result thereof. In the event that the Manager believes it is entitled to with respect to compensation or any other relief hereunder on account of any Uncontrollable Circumstance, it shall furnish the Authority written notice of the specific relief requested and detailing the event giving rise to the claim within 45 days after the giving of notice delivered pursuant to subsection 9.2(B) hereof. Within 45 days after receipt of such a timely submission from the Manager, the Authority shall issue a written determination as to the extent, if any, it concurs with the Manager's claim for relief, and the reasons therefor. (D) Acceptance of Relief Constitutes Release. The Manager's acceptance of compensation or schedule relief under this Section shall be construed as a release of the Authority by the Manager (and all persons claiming by, through, or under the Manager) for any and all Loss-and-Expense resulting from, or otherwise attributable to, the event giving rise to the relief claimed. SECTION 9.3. INDEMNIFICATION. (A) Indemnification by the Manager. The Manager agrees that to the extent permitted by law it will protect, indemnify and hold harmless the Authority and its respective representatives, trustees, officers, employees and subcontractors (as applicable in the circumstances), (the "Authority Indemnified Parties") from and against (and pay the full amount of) any Loss-and-Expense and will defend the Authority Indemnified Parties in any suit, including appeals, for personal injury to, or death of, any person, or loss or damage to property arising out of any matter for which the Manager is responsible under Section 6.10 hereof. The Manager shall not, however, be required to reimburse or indemnify any Authority Indemnified Party for any Loss-and-Expense to the extent any such Loss-and-Expense is due to (a) any matter for which the Authority is responsible under Section 6.10 hereof, (b) the negligence or other wrongful conduct of any Authority Indemnified Party, (c) any Uncontrollable Circumstance, (d) any act or omission of any Authority Indemnified Party judicially determined to be responsible for or contributing to the Loss-and-Expense, or (e) any matter for which the risk has been specifically allocated to the Authority hereunder. An Authority Indemnified Party shall promptly notify the Manager of the assertion of any claim against it for which it is entitled to be indemnified hereunder, shall give the Manager the opportunity to defend such claim, and shall not settle 51 the claim without the approval of the Manager. The Manager shall be entitled to control the handling of any such claim and to defend or settle any such claim, in its sole discretion, with counsel of its own choosing that is reasonably acceptable to the Authority Indemnified Parties; provided, however, that, in the case of any such settlement, the Manager shall obtain written release of all liability of the Authority Indemnified Parties, in form and substance reasonably acceptable to the Authority Indemnified Parties. Notwithstanding the foregoing, each Authority Indemnified Party shall have the right to employ its own separate counsel in connection with, and to participate in (but, except as provided below, not control) the defense of, such claim, but the fees and expenses of such counsel incurred after notice to the Manager of its assumption of the defense thereof shall be at the expense of such Authority Indemnified Party unless: (i) the employment of counsel by such Authority Indemnified Party has been authorized by the Manager; (ii) counsel to such Authority Indemnified Party shall have reasonably concluded that there may be a conflict on any significant issue between the Manager and such Authority Indemnified Party in the conduct of the defense of such claim; or (iii) the Manager shall not in fact have employed counsel reasonably acceptable to the Authority Indemnified Party to assume the defense of such claim within twenty (20) days following the receipt by the Manager of the notice from the Authority Indemnified Party regarding the assertion of the applicable claim, in each of which cases the fees and expenses of counsel for such Authority Indemnified Party shall be at the expense of the Manager; provided, however, that, with respect to clauses (ii) and (iii) of this sentence, the Manager shall not be obligated to pay the fees and expenses of more than one law firm, plus local counsel if necessary in each relevant jurisdiction, for all such Authority Indemnified Parties with respect to any claims arising out of the same events or facts or the same series of events or facts. The Manager shall not be entitled, without the consent of such Authority Indemnified Party, to assume or control the defense of any claim as to which counsel to such Authority Indemnified Party shall have reasonably made the conclusion that there may be a conflict on any significant issue between the Manager and such Authority Indemnified Party in the conduct of the defense of such claim as set forth in clause (ii) above, provided that the foregoing limitation shall apply only with respect to those issues for which there may be such a conflict. These indemnification provisions are for the protection of the Authority Indemnified Parties only and shall not establish, of themselves, any liability to third parties. The provisions of this subsection 9.3(A) shall survive termination of this Agreement. (B) Indemnification by the Authority. The Authority agrees that to the extent permitted by law, it will protect, indemnify and hold harmless the Manager and its Affiliates and their respective officers, directors, Subcontractors (as applicable in the circumstances) and employees (the "Manager Indemnified Parties") from and against (and pay the full amount of) any Loss-and-Expense, and will defend the Manager Indemnified Parties in any suit, including appeals, for personal injury to, or death of, any person, or loss or damage to property arising out of any matter for which the Authority is responsible under Section 6.10 hereof. The Authority shall not, however, be required to reimburse or indemnify any Manager Indemnified Party for any Loss-and-Expense to the extent any such Loss-and-Expense is due to (a) any matter for which the Manager is responsible under Section 6.10 hereof, (b) the negligence or other wrongful conduct of any Manager Indemnified Party, (c) any Uncontrollable Circumstance, (d) any act or omission of any Manager Indemnified Party judicially determined to be responsible for or contributing to the Loss-and-Expense, (e) any matter for which the risk has been specifically allocated to the Manager hereunder. A Manager Indemnified Party shall promptly notify the 52 Authority of the assertion of any claim against it for which it is entitled to be indemnified hereunder, shall give the Authority the opportunity to defend such claim, and shall not settle the claim without the approval of the Authority. The Authority shall be entitled to control the handling of any such claim and to defend or settle any such claim, in its sole discretion, with counsel of its own choosing that is reasonably acceptable to the Manager Indemnified Party; provided, however, that, in the case of any such settlement, the Authority shall obtain written release of all liability of the Manager Indemnified Party, in form and substance reasonably acceptable to the Manager Indemnified Party. Notwithstanding the foregoing, each Manager Indemnified Party shall have the right to employ its own separate counsel in connection with, and to participate in (but, except as provided below, not control) the defense of, such claim, but the fees and expenses of such counsel incurred after notice to the Authority of its assumption of the defense thereof shall be at the expense of such Manager Indemnified Party unless: (i) the employment of counsel by such Manager Indemnified Party has been authorized by the Authority; (ii) counsel to such Manager Indemnified Party shall have reasonably concluded that there may be a conflict on any significant issue between the Authority and such Manager Indemnified Party in the conduct of the defense of such claim; or (iii) the Authority shall not in fact have employed counsel reasonably acceptable to the Authority Indemnified Party to assume the defense of such claim within twenty (20) days following the receipt by the Authority of the notice from the Manager Indemnified Party regarding the assertion of the applicable claim, in each of which cases the fees and expenses of counsel for such Manager Indemnified Party shall be at the expense of the Authority; provided, however, that, with respect to clauses (ii) and (iii) of this sentence, the Authority shall not be obligated to pay the fees and expenses of more than one law firm, plus local counsel if necessary in each relevant jurisdiction, for all such Manager Indemnified Parties with respect to any claims arising out of the same events or facts or the same series of events or facts. The Authority shall not be entitled, without the consent of such Manager Indemnified Party, to assume or control the defense of any claim as to which counsel to such Manager Indemnified Party shall have reasonably made the conclusion that there may be a conflict on any significant issue between the Authority and such Manager Indemnified Party in the conduct of the defense of such claim as set forth in clause (ii) above, provided that the foregoing limitation shall apply only with respect to those issues for which there may be such a conflict. These indemnification provisions are for the protection of the Manager Indemnified Parties only and shall not establish, of themselves, any liability to third parties. The provisions of this Section 9.3(B) shall survive termination of this Agreement. SECTION 9.4. PROPERTY RIGHTS. The Manager shall pay, subject to Authority reimbursement as a Third Party Cost, all royalties and non-governmental license fees relating to the operation and maintenance of the T&D System and the design, construction and testing of any Major Capital Improvements. The Manager agrees that it will protect, indemnify and hold harmless the Authority and any of the Authority Indemnified Parties from and against all Loss-and-Expenses, and will defend the Authority Indemnified Parties in any suit, including appeals, arising out of or related to infringement of such patent, trademark or copyright relating to, or for the unauthorized use of trade secrets by reason of, the operation or maintenance of the T&D System or the design, construction or testing of any Major Capital Improvements, or at its option, will acquire the rights of use under infringed patents, or modify or replace infringing equipment with equipment equivalent in quality, performance, useful life and technical characteristics and development so that such equipment does not so infringe. The Manager shall not, however, be required to reimburse or indemnify any person for any Loss-and-Expense 53 due to the negligence or wrongful conduct of such person. The provisions of this Section 9.4 shall survive termination of this Agreement, but only for a period of time equal to the unexpired statute of limitations applicable to any claim for which indemnification might be required. SECTION 9.5. PROPRIETARY INFORMATION. (A) Manager Request. The parties hereto hereby acknowledge that the Manager has a proprietary interest in certain information that may be furnished pursuant to the provisions of this Agreement. The Manager acknowledges that the Authority may be required to disclose information upon request under Applicable Law. The Manager shall have the right to request the Authority in writing not to publicly disclose any information which the Manager believes to be proprietary and not subject to public disclosure under Applicable Law, any such request to be accompanied by an explanation of its reasons for such belief. Any information which is the subject of such a request shall be clearly marked on all pages, shall be bound, and shall be physically separate from all non-proprietary information. At the Manager's request, the Authority and its agents, consultants and employees (including the Consulting Engineer) given access to such information shall execute and comply with the terms of a confidentiality agreement in a mutually acceptable form, subject to Applicable Law. (B) Authority Non-Disclosure. In the event the Authority receives a request from the public for the disclosure of any information designated as proprietary by the Manager pursuant to subsection (A) of this Section, the Authority (1) shall use reasonable efforts, consistent with Applicable Law, to provide notice to the Manager of the request prior to any disclosure, and (2) shall use reasonable efforts, consistent with Applicable Law, to keep in confidence and not disclose such information unless it is entitled to do so pursuant to the provisions of subsection (C) of this Section. The Manager shall indemnify, hold harmless and defend the Authority against all Loss-and-Expense incurred from the withholding from public disclosure of information designated as proprietary by the Manager or otherwise requested by the Manager to be withheld. (C) Permitted Disclosures. Notwithstanding any confidential or proprietary designation thereof by the Manager, the Authority may disclose the following: (1) information which is known to the Authority without any restriction as to disclosure or use at the time it is furnished, (2) information which is or becomes generally available to the public without breach of any agreement, (3) information which is received from a third party without limitation or restriction on such third party or the Authority at the time of disclosure, or (4) following notice to the Manager pursuant to subsection (B) of this Section, information which, in the opinion of counsel for the Authority, is required to be or may be disclosed under any Applicable Law, an order of a court of competent jurisdiction, or a lawful subpoena. SECTION 9.6. RELATIONSHIP OF THE PARTIES. Except as otherwise expressly provided herein, neither party to this Agreement shall have any responsibility whatsoever with respect to services provided or contractual obligations assumed by the other party hereto, and nothing in this Agreement shall be deemed to constitute either party a partner, agent or legal representative of the other party or to create any fiduciary relationship between the parties. SECTION 9.7. ASSIGNMENT AND TRANSFER. This Agreement may be assigned by either parry hereto only with the prior written consent of the other party, except that without the consent of the other party (1) the Authority may make such assignments, create such security interests in its rights hereunder and pledge such monies receivable hereunder as may be required in connection with issuance of Revenue Bonds; (2) the Authority may assign its rights, obligations and interests hereunder, or transfer such rights and obligations by operation of law, to any other governmental entity or to a subsidiary of the Authority provided that the successor entity gives reasonable assurances to the Manager that it will be able to fulfill the Authority's obligations hereunder; and (3) the Manager may 54 assign its rights, obligations and interests hereunder to the Parent or any Affiliate thereof; provided, however, that with respect to clause (3) immediately above, the Manager may not, without the consent of the Authority, make any assignment or other transfer to any person of its rights and obligations under this Agreement unless the Guaranty is and remains in full force and effect and unless the Guarantor or a majority-owned direct or indirect subsidiary of the Guarantor shall have control of and responsibility for the Operation and Maintenance Services and any Construction Work. Effective upon the Closing Date, the Authority may assign its rights, obligations and interests hereunder to Long Island Lighting Company and the Manager shall assign all of its rights, obligations and interests hereunder to the Parent or any Affiliate thereof pursuant to clause 3 above. SECTION 9.8. INTEREST ON OVERDUE OBLIGATIONS. Except as otherwise provided herein, all amounts due hereunder, whether as damages, credits, revenue or reimbursements, that are not paid when due shall bear interest at the Base Interest Rate on the amount outstanding from time to time, on the basis of a 365-day year, counting the actual number of days elapsed, and all such interest accrued at any time shall, to the extent permitted by law, be deemed added to the amount due, as accrued. The parties agree that the Base Interest Rate will apply to payments under this Agreement as specified herein in lieu of any different rate that would otherwise apply generally to late payments by the Authority. SECTION 9.9. NO DISCRIMINATION. The Manager shall not discriminate nor permit discrimination by any of its officers, employees, agents and representatives against any person because of age, race, color, religion, national origin, sex or, with respect to otherwise qualified individuals, handicap. The Manager will take all actions reasonably necessary to ensure that applicants are employed, and that employees are treated during employment, without regard to their age, race, color, religion, sex, national origin or, with respect to otherwise qualified individuals, handicap. Such action shall include, without limitation, recruitment and recruitment advertising; layoff or termination; upgrading, demotion, transfer, rates of pay or other form of compensation; and selection for training, including apprenticeship. The Manager shall impose the non-discrimination provisions of this Section 9.9 by contract on all Subcontractors hired to perform work related to the T&D System and shall take all reasonable actions necessary to enforce such provisions. The Manager will post in conspicuous places, available to employees and applicants for employment, notices setting forth the provisions of this nondiscrimination clause. SECTION 9.10. APPROVAL OF SUBCONTRACTORS. The Authority shall have the right to approve all Subcontractors engaged to perform any work related to the T&D System, or any portion of the Construction Work or Operation and Management Services. For contracts in which at least $250,000 would be paid to a Subcontractor in a Contract Year the Authority shall have the right to approve such Subcontractors on a contract-by-contract basis. Prior to the beginning of each Contract Year Manager shall propose a list of pre-approved Subcontractors for the Authority's review and approval, which shall specify the proposed categories of potential work under contracts pursuant to which less than $250,000 would be paid for each such Subcontractors for such Contract Year. The Manager also shall furnish the Authority, along with such list, with all information requested by the Authority to the extent reasonably available to the Manager pertaining to the proposed Subcontractors and categories of subcontracts in the following areas: (1) the qualification and experience of the proposed subcontractors for the services to be performed or for the supplies or equipment to be furnished, (2) any conflicts of interest, (3) any record of felony criminal convictions or pending felony criminal investigations, (4) any final judicial or administrative finding or adjudication of illegal employment discrimination, and (5) any known final judicial or administrative finding or adjudication of non-performance in contracts with the Authority or the State. In its sole discretion, Authority may approve any proposed Subcontractor for such Contract Year or for a designated shorter period or for a specific subcontract. If a Subcontractor is approved for a Contract Year or shorter period, such Subcontractor shall be deemed to be approved for 55 the specified categories of potential work for the duration of such Contract Year or shorter period unless the Authority otherwise notifies the Manager. The approval or withholding thereof by the Authority of any proposed Subcontractor shall not create any liability of the Authority to the Manager, such Subcontractor, third parties or otherwise. SECTION 9.11. ACTIONS OF THE AUTHORITY IN ITS GOVERNMENTAL CAPACITY. Nothing in this Agreement shall be interpreted as limiting the rights and obligations of the Authority in its governmental or regulatory capacity, or as limiting the right of the Manager to bring any legal action against the Authority, not based on this Agreement, arising out of any act or omission of the Authority in its governmental or regulatory capacity. SECTION 9.12. BINDING EFFECT. This Agreement shall become binding and effective on the Closing Date and shall thereafter bind and inure to the benefit of the parties hereto and any successor or assignee acquiring an interest hereunder in compliance with the provisions of Section 9.7 hereof. SECTION 9.13. AMENDMENTS. Neither this Agreement nor any provision hereof may be changed, modified, amended or waived except by written agreement duly executed by all parties. SECTION 9.14. NOTICES. Any notices or communications required or permitted hereunder shall be in writing and shall be sufficiently given if sent by registered or certified mail return receipt request, postage prepaid, or by nationally recognized overnight delivery service, signature required upon signed receipt to the following: If to the Manager: Long Island Lighting Company Executive Offices 175 East Old Country Road Hicksville, New York 11801 Attention: Chief Executive Officer If to the Authority: Long Island Power Authority 333 Earle Ovington Boulevard Uniondale, New York 11553 Attention: Executive Director With copy to: Chairman, Long Island Power Authority 333 Earle Ovington Boulevard Uniondale, New York 11553 Changes in the respective addresses to which such notices may be directed may be made from time to time by any party by written notice to the other party. Notices and communications given by mail hereunder shall be deemed to have been given 5 days after the date of dispatch; all other notices shall be deemed to have been given upon receipt. SECTION 9.15. FURTHER ASSURANCES. Each party agrees to execute and deliver any instruments and to perform any acts as may be necessary or reasonably requested by the other in order to give full effect to this Agreement. The Authority and the Manager, in order to carry out this Agreement, each shall use all reasonable efforts to provide such information, execute such further instruments and documents and take such actions as may be reasonably requested by the other and not inconsistent with the provisions of this Agreement and not involving the assumption of obligations or liabilities different from or in excess of or in addition to those expressly provided for herein. 56 SECTION 9.16. NO THIRD PARTY BENEFICIARIES. Unless specifically set forth herein, neither party to this Agreement shall have any obligation to any third party other than Indemnified Parties as a result of the agreements contained herein. SECTION 9.17 STATE LAW REQUIREMENTS. All contracts entered into by the Authority are required under State law to contain certain terms and conditions, as set forth in Appendix 13 hereto and the provisions of such Appendix 13 are hereby deemed incorporated in this Agreement at this place. To the extent of any conflict between any other provision of this Agreement and Appendix 13, Appendix 13 shall control. The Manager shall comply with such terms and conditions during the Term of this Agreement. 57 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers or representatives as of the date first above written. LONG ISLAND POWER AUTHORITY By /s/ Richard M. Kessel ---------------------------------- Name: Richard M. Kessel Title: Chairman By /s/ Patrick Foye ---------------------------------- Name: Patrick Foye Title: Deputy Chairman LONG ISLAND LIGHTING COMPANY By /s/ W. J. Catacosinos ---------------------------------- Name: Dr. William J. Catacosinos Title: Chief Executive Officer 58 APPENDICES ---------- 1. Definitions 2. Description of T&D System and T&D System Site Related Documents 3. Notice Appendix 4. Insurance 5. Direct Cost Budget Indices 6. Exit Test 7. Non-Cost Performance Guarantees, Obligations, Incentives and Disincentives 8. Major Capital Improvements Construction Standards and Procurement Requirements 9. Operations Information and Format 10. Budget Information and Format 11. Cost Allocation Methodology 12. Sample Service Fee Calculation 13. Certain State Law Requirements 14. System Policies and Procedures APPENDIX 1 DEFINITIONS 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth below: "Acquisition Agreement" means the Agreement of Plan of Exchange and Merger dated as of June 26, 1997 by and among BL Holding Corp., Long Island Lighting Company, Long Island Power Authority and LIPA Acquisition Corp. "Act" means the Long Island Power Authority Act, N.Y. Pub. Auth. Law ss. 1020 et. seq. "Affiliate" means any person, corporation or other entity directly or indirectly controlling or controlled by another person, corporation or other entity or under direct or indirect common control with such person, corporation or other entity. "Agreement" means this Management Services Agreement between the Manager and the Authority, including the Appendices hereto, as the same may be amended or modified from time to time in accordance herewith. "Agreement in Principle" means the Agreement in Principle, dated as of March 19,1997 by and among the Authority, Long Island Lighting Company and The Brooklyn Union Gas Company, concerning, among other things, agreements among the parties to transfer certain assets, to purchase power and to provide management services. "Allocated Common Facilities" means the offices and workspace at the current LILCO headquarters building or other suitable mutually agreed upon site dedicated by the Manager for use by the Authority and its representatives and consultants. "Annual Settlement Statement" has the meaning specified in subsection 6.8 hereof. "Annual T&D Budget" has the meaning set forth in Section 6.2 hereof. "Appendix" means an appendix to this Agreement, as the same may be amended or modified from time to time in accordance with the terms hereof. "Applicable Law" means any law, rule, regulation, condition or requirement, guideline, ruling, ordinance or order of or any Legal Entitlement issued by, any Governmental Body and applicable from time to time to the performance of the obligations of the parties hereunder. Authority" means the Long Island Power Authority and its subsidiaries, and its successors or assigns as permitted hereunder. 1-1 "Authority Customer & Operations Data" has the meaning set forth in subsection 4.14(C) hereof. "Authority Fault" means any breach, failure of compliance, or nonperformance by the Authority with its obligations hereunder or any negligence or willful misconduct by the Authority under this Agreement (whether or not attributable to any officer, trustee, member, agent, employee, representative, contractor, subcontractor of any tier, or independent contractor of the Authority other than the Manager and its Subcontractors) that materially and adversely affects the Manager's performance or the Manager's rights or obligations under this Agreement. "Authority Indemnified Parties" has the meaning specified in subsection 9.3(A) hereof. "Base Interest Rate" means the lesser of (1) the maximum rate of interest permitted by Applicable Law and (2) (a) for interest accuring during the first six months or less after the date on which a payment was payable hereunder, 6 month LIBOR, and (b) for interest accuring more than six months after the date on which such payment was payable hereunder, the Prime Rate plus 1.00%, in each case, as 6 month LIBOR or the Prime Rate was reported in the Wall Street Journal for each day. "Billing Period" means each calendar month in each Contract Year, except that (1) the first Billing Period shall begin on the Closing Date and shall continue to the last day of the month in which the Closing Date occurs and (2) the last Billing Period shall end on the last day of the Term of this Agreement. Any computation made on the basis of a Billing Period shall be adjusted on a pro rats basis to take into account any Billing Period of less than the actual number of days in the month to which such Billing Period relates. "Billing Statement" has the meaning specified in Section 6.6 hereof. "Bondholders" means the holders of the Revenue Bonds. "Bond Resolution" means the bond resolutions to be adopted by the Authority, pursuant to which the Authority shall issue the Revenue Bonds or other indebtedness described therein to finance certain costs of the T&D System and other purposes of the Authority. "BUGLILCO Agreement" means the Amended and Restated Agreement and Plan of Exchange dated as of June 26,1997, by and among the Guarantor, LILCO and The Brooklyn Union Gas Company. "Capital Assets" has the meaning specified in Section 4.18 hereof. "Change in Law" means any of the following events or conditions having, or which may reasonably be expected to have, a material and adverse effect on the performance by the parties of their respective obligations under this Agreement (except for payment obligations), or on the operation or maintenance of the T&D System: (1) the adoption, promulgation, issuance, modification or written change in administrative or judicial interpretation on or after the Closing Date of Applicable Law, unless such Applicable Law was on or prior to the Closing Date duly adopted, promulgated, issued or 1-2 otherwise officially modified or changed in interpretation, in each case in final form, to become effective without any further action by any Governmental Body or governmental official having jurisdiction; (2) the order or judgment of any Governmental Body, on or after the Closing Date, to the extent such order or judgment is not the result of willful misconduct or negligent action or omission or lack of reasonable diligence of the Manager or of the Authority, whichever is asserting the occurrence of a Change in Law; provided, however, that the contesting in good faith or the failure in good faith to contest any such order or judgment shall not constitute or be construed as such a willful misconduct or negligent action or omission or lack of reasonable diligence; or (3) the denial of an application for, delay in the review, issuance or renewal of, or suspension, termination, interruption, imposition of a new condition in connection with the issuance, renewal or failure of issuance or renewal on or after the Closing Date of any Legal Entitlement to the extent that such denial, delay, suspension, termination, interruption, imposition or failure interferes with the performance of this Agreement, and to the extent that such denial, delay, suspension, termination, interruption, imposition or failure is not the result of willful misconduct or negligent action or omission or a lack of reasonable diligence of the Manager or of the Authority, whichever is asserting the occurrence of a Change in Law; provided, however that the contesting in good faith or the failure in good faith to contest any such denial, delay, suspension, termination, interruption, imposition or failure shall not be construed as such a willful misconduct or negligent action or omission or lack of reasonable diligence. A "Change in Law" shall not include a change in any tax or similar law regarding taxes or similar charges not chargeable to or reimbursable by the Authority under Article VI hereof. "Change of Control" means (i) the acquisition of beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "1934 Act")) of 35% or more of the outstanding shares of securities the holders of which are generally entitled to vote for the election of directors of the Manager or the Guarantor, as the case may be (including securities convertible into, or exchangeable for, such securities or rights to acquire such securities or securities convertible into, or exchangeable for such securities, "Voting Stock"), on a fully diluted basis, by any Person or group of Persons (within the meaning of Section 13 or 14 of the 1934 Act); (ii) any sale, transfer or other disposition of beneficial ownership of 35% or more of the outstanding shares of Voting Stock, on a fully diluted basis, of the Manager or the Guarantor, as the case may be; (iii) any merger, consolidation, combination or similar transaction of the Manager or the Guarantor, as the case may be, with or into any other Person, whether or not the Manager or the Guarantor, as the case may be, is the surviving entity in any such transaction; (iv) any sale, lease, assignment, transfer or other disposition of the beneficial ownership in 35% or more of the property, business or assets of the Manager or the Guarantor, as the case may be; (v) a Person other than the current shareholders of the Manager or the Guarantor, as the case may be, obtains, directly or indirectly, the power to direct or cause the direction of the management or policies of the Manager or the Guarantor, as the case may be, whether through the ownership of capital stock, by contract or otherwise; (vi) during any period of 12 consecutive calendar months when individuals who were directors of the Manager or the Guarantor, as the case may be, on the first day of such period cease to constitute 1-3 a majority of the board of directors of the Manager or the Guarantor, as the case may be; or (vii) any liquidation, dissolution or winding up of the Manager or the Guarantor, as the case may be. "Code" mean the Internal Revenue Code of 1986, as amended. "Closing Date" has the meaning ascribed to that term in the Acquisition Agreement. "Common Facilities" shall have the meaning attributed to that term in the FERC Uniform System of Accounts. "Construction Work" means the services to be provided and materials to be supplied by Manager relating to the design, procurement, construction, start-up and testing of the Major Capital Improvements and Public Works Improvements. "Construction Work" shall include, without limitation, the employment and furnishing of all labor, materials, equipment, supplies, tools, plant, scaffolding, transportation, insurance, temporary facilities, and other things and services necessary in order for Manager to perform its obligations under this Agreement with respect to the Major Capital Improvements and Public Works Improvements as well as all permitting, design, engineering, construction, shakedown, testing, administrative, accounting, record-keeping, notification and similar services relating to such obligations. A reference to "Construction Work" shall mean "any part and all of the Construction Work" unless the context otherwise requires. "Consulting Engineer" means a nationally recognized consulting engineer or firm of consulting engineers, having experience with respect to the design, construction, testing, operation and maintenance of electricity transmission and distribution systems, which is designated as the Consulting Engineer for the purposes of this Agreement from time to time in writing by the Authority. "Contract Date" means the date of delivery of this Agreement as executed by the parties hereto. "Contract Standards" means the terms, conditions, requirements, methods, techniques, standards and practices of (1) Applicable Law, (2) the System Policies and Procedures, (3) the substantive requirements and standards and guidelines established by the NYSPSC that apply as of the Closing Date to the operation and maintenance of the T&D System, except to the extent otherwise directed by the Authority, (4) Prudent Utility Practice, (5) the Performance Guarantees, (6) the Operation and Maintenance Manual, (7) applicable equipment manufacturer's specifications and reasonable recommendations, (8) applicable Insurance Requirements, and (9) any other term, condition or requirement specifically provided in this Agreement to be observed by the Manager. "Contract Year" except as the Authority shall otherwise propose subject to the approval of the Manager, which approval shall not be unreasonably withheld, means the calendar year commencing on January 1 in any year and ending on December 31 of that year; provided, however, that the first Contract Year shall commence on the Closing Date and shall end on December 31 of that year, and the last Contract Year shall commence on January 1 prior to the date this Agreement expires or is terminated, whichever is appropriate, and shall end on the last day of the Term of this Agreement or the effective date of any termination, whichever is appropriate. Any computation made on the basis of a Contract Year shall be adjusted on a pro rata basis to take into account any Contract Year of less than 365/366 days. 1-4 "Cost Incentive Fee" has the meaning set forth in Section 6.1 hereof. "Cost Substantiation" or "Cost Substantiated" means, with respect to any cost reasonably incurred or to be incurred by the Manager which is directly or indirectly chargeable in whole or in part -- to the Authority as an Other Cost, a Major Capital Improvement Cost or a Public Works Improvement Cost hereunder, the delivery to the Authority of a certificate reasonably acceptable to the Authority signed by an authorized engineering officer and an authorized financial officer of the Manager, certifying that it is true, complete and correct and setting forth the amount of such cost and the provisions of this Agreement under which such cost is properly chargeable to the Authority, stating that such cost is a fair and reasonable price for the service or materials supplied or to be supplied and that such services and materials are reasonably required pursuant to this Agreement, and accompanied by copies of such documentation as shall be necessary to reasonably demonstrate that the cost as to which Cost Substantiation is required has been or will be paid or incurred. Such documentation, to the extent applicable, shall include reasonably detailed information concerning (1) all applicable Subcontracts, (2) the amount and character of materials furnished, the persons from whom purchased, the amounts payable therefor and related delivery and transportation costs and any sales or personal property taxes, (3) a statement of the equipment used and any rental payable therefor, (4) Manager and Subcontractor worker hours, duties, wages, salaries, benefits, assessments, taxes and premiums, (5) Manager administration, bonds, insurance, and other expenses, and (6) in the case of costs incurred by Affiliates of the Manager, such additional information as may be reasonably requested by the Authority to demonstrate that such costs do not reflect any inter-company profit and reflect a fair and reasonable price for the work or services. Any Cost Substantiation required with respect to costs reasonably incurred by the Authority which are directly or indirectly chargeable in whole or in part to the Manager hereunder shall include similarly detailed information, and shall be certified by an authorized administrative and financial official of the Authority. "Direct Cost Budget" has the meaning set forth in Section 6.2 hereof. "Direct Cost Budget Indices" has the meaning specified in Appendix 6 hereto. "Direct Costs" has the meaning set forth in Section 6.2 hereof. "Disposal Facility" means either a sanitary Hazardous Waste landfill or other Hazardous Waste disposal or management facility, selected by the Manager which (1) is operated in accordance with prudent industry practices (as applicable to Hazardous Waste disposal facilities) and the applicable Contract Standards and (2) is being operated at the time of disposal or delivery in accordance with Applicable Law as evidenced by the absence of any regulatory sanctions, notices of violations or other significant enforcement actions with respect to material environmental matters. "Encumbrances" means any lien, lease, mortgage, security interest, charge, judgment, judicial award or encumbrance with respect to the T&D System (other than those associated with any retainage holdback on construction materials, supplies and equipment). "Energy Management Agreement" means the Energy Management Agreement dated as of June 26, 1997 by and between Long Island Lighting Company and the Authority, as the same may be amended from time to time in accordance therewith. 1-5 "Event of Default" has the meaning specified in Sections 7.2 and 7.3 hereof. "Exit Test" has the meaning set forth in Section 8.3 hereof. "Existing Power Supply Agreements" means the power supply agreements which exist between LILCO and other parties for the purchase of capacity and/or energy which are in effect as of the Contract Date and which were, either in existence as of March 19, 1997 or which were entered into in accordance with the provisions of Section 6.1(p) of the Acquisition Agreement on or prior to the Closing Date. "Fees-And-Costs" means reasonable fees and expenses of employees, attorneys, architects, engineers, accountants, expert witnesses, contractors, consultants and other persons, and costs of transcripts, printing of briefs and records on appeal, copying and other reimbursed expenses, and expenses of any Legal Proceeding. "Final Determination" means a judgment, order, or other determination in any Legal Proceeding which has become final after all appeals or after the expiration of all time for appeal. "Five-Year Planning Budget" has the meaning, set forth in Section 6.2 hereof. "Fixed Direct Fee" has the meaning set forth in Section 6.1 hereof. "GENCO" means the owner of the Generating Facilities, as defined in the Power Supply Agreement. "Governmental Body" means any federal, State or local legislative, executive, judicial or other governmental board, agency, authority, commission, administration, court or other body other than the Authority, or any official thereof having jurisdiction with respect to any matter which is a subject of this Agreement. "Guarantor" means BL Holding Corp. and its successors and assigns permitted under the Guaranty Agreement. "Guaranty Agreement" or "Guaranty" means the Guaranty Agreement to be entered into prior to the Closing Date from the Guarantor to the Authority substantially in the form provided as an Exhibit to the Acquisition Agreement, as the same may be amended from time to time in accordance therewith. "Hazardous Waste" means any waste which by reason of its composition or characteristics is defined or regulated as a hazardous waste, toxic substance, hazardous chemical substance or mixture, or asbestos under Applicable Law, as amended from time to time, including, but not limited to, "Hazardous Substances" as defined in CERCLA and the regulations promulgated thereunder. "Incremental Internal Costs" has the meaning set forth in Section 6.3 hereof. "Independent Engineer" means a nationally recognized engineer or firm of engineers having experience with respect to the planning, design, construction, testing, operation and maintenance 1-6 of electricity transmission and distribution systems, and with respect to electricity rate design which is selected by the parties for mediation purposes pursuant to Section 7.8 hereof. "Insurance Requirement" means any rule, regulation, code, or requirement issued by any fire insurance rating bureau or any body having similar functions or by any insurance company which has issued a policy of Required Construction Work Insurance or Required Operation Period Insurance under this Agreement, as in effect during the term hereof. "ISO" means the party or governing board responsible for the operation of transmission facilities and the dispatch of power generation facilities contemplated to succeed the New York Power Pool as part of the restructuring of the electric utility industry within the State of New York. "Legal Entitlement" means any permit, license, approval, authorization, consent and entitlement of whatever kind and however described which is required under Applicable Law to be obtained or maintained by any person with respect to the performance of any obligation under this Agreement. "Legal Proceeding" means every action, suit, litigation, arbitration, administrative proceeding, and other legal or equitable proceeding having a bearing upon this Agreement. "Lien" means any and every lien against the T&D System, the T&D System Site, the Construction Work, the Operation and Maintenance Services or against any monies due or to become due from the Authority to the Manager under this Agreement, for or on account of the Construction Work or the Operation and Maintenance Services. "LILCO", as of the date hereof, means Long Island Lighting Company. "Loss-and-Expense" means any and all losses, liabilities, obligations, damages, delays, fines, penalties, judgments, deposits, costs, claims, demands, charges, assessments, taxes, or expenses, including all Fees-And-Costs. "Major Capital Improvement" means any repair, replacement, improvement, alteration or addition to the T&D System or any part thereof (other than any repair, replacement, improvement, alteration or addition constituting routine maintenance of the T&D System) contained in the Major Capital Plan and Budget and that has a useful life at least equal to three years. "Major Capital Improvement Cost" means the cost of any Major Capital Improvement which the Manager reasonably incurs hereunder and proves by Cost Substantiation including, without limitation, expenditures for material, equipment, incremental labor, and services supplied by architects, engineers and Subcontractors, and expenses related to managing and administering the Major Capital improvement. "Major Capital Improvement Cost" shall not include amounts for an allowance for overhead, profit, or contingency. "Major Capital Plan and Budget" has the meaning set forth in Section 5.2 hereof. "Management Fee" has the meaning set forth in Section 6.2 hereof. 1-7 "Manager" means the Long Island Lighting Company and its successors or assigns expressly permitted pursuant to Section 9.7. "Manager Fault" means any breach, failure of compliance, or nonperformance by the Manager with its obligations hereunder or any negligence or willful misconduct by the Manager under this Agreement (whether or not attributable to any officer, member, agent, employee, representative, contractor, Subcontractor of any tier, or independent contractor of the Manager or any Affiliate of the Manager) that materially and adversely affects the Manager's performance or the Manager's rights or obligations under this Agreement. "Manager Indemnified Parties" has the meaning specified in subsection 9.3(B) hereof. "Minimum Reliability Standard" has the meaning set forth in Appendix 7 hereto. "Minimum Worker Safety Standard" has the meaning set forth in Appendix 7 hereto. "Minimum Customer Service Standard" has the meaning set forth in Appendix 7 hereto. "New York Power Pool" means the member system currently comprising of Consolidated Edison Company of New York, Inc., Central Hudson Gas and Electric Company, Long Island Lighting Company, Orange and Rockland Utilities, Rochester Gas and Electric Company, New York State Electric and Gas Corporation, Niagara Mohawk Power Corporation, and the Power Authority of the State of New York, as such organization or membership may change from time to time. "Nine Mile Point 2" means the Authority's 18 percent ownership interest in Unit No. 2 of the Nine Mile Point Nuclear Power Generating Station located in Scriba, New York and operated pursuant to a joint operating agreement by Niagara Mohawk Power Corporation. "Non-Electric Utilities" means any and all utility services and installations whatsoever other than electricity (including gas, water, telephone, other telecommunications of every kind and sewer), and all piping, wiring, conduit, and other fixtures of every kind whatsoever related thereto or used in connection therewith. "NYSDEC" or "DEC" means the Department of Environmental Conservation of the State of New York. "NYSPSC" or "PSC" means the Public Service Commission of the State of New York. "Operating Assets" means the T&D System and all of the assets of the Manager used in the operation and maintenance of the T&D System and the performance of the Manager's obligations under this Agreement. "Operation and Maintenance Manual" has the meaning set forth in Section 4.2(D) hereof. "Operation Period" means the period commencing on the Closing Date and ending on the date this Agreement expires in accordance with its terms, or if earlier, on the Termination Date. 1-8 "Operation and Maintenance Services" means the services to be provided and materials to be supplied by the Manager pursuant to this Agreement during the Operation Period, except Construction Work. Operation and Maintenance Services shall include, without limitation, the employment and furnishing of all labor, materials, equipment, supplies, tools, storage, transfer, transportation, insurance, delivery and other items and services necessary in order for Manager to perform its routine operation and maintenance obligations under this Agreement, as well as all related administrative, accounting, record-keeping, notification and similar services relating to such obligations. A reference to "Operation and Maintenance Services" shall mean "any part and all of the Operation and Maintenance Services" unless the context otherwise requires. "Other Costs" shall have the meaning set forth in Section 6.3 hereof. "Parent" has the meaning ascribed to such term in the Acquisition Agreement. "Performance Guarantees" means the Minimum Reliability Standard, the Minimum Worker Safety Standard and the Minimum Customer Service Standard. "Plans" has the meaning given in the Acquisition Agreement. "Power and Energy" means the electrical energy and capacity available from the System Power Supply. "Power Supply Agreement" means the Power Supply Agreement dated as of June 26, 1997, between Authority and Long Island Lighting Company for the purchase of electric capacity and energy as the same may be amended from time to time in accordance therewith. "Pre-Closing Period" means the period, from and including the Contract Date up to and including the day preceding the Closing Date. "Prime Rate" means the rate announced by Citibank, N.A. from time to time at its principal office as its prime lending rate for domestic commercial loans, the Prime Rate to change when and as such prime lending rate changes. "Prudent Utility Practice" at a particular time means any of the practices, methods, and acts (including but not limited to the practices, methods and acts engaged in or approved by a significant portion of the electrical utility industry prior thereto), which, in the exercise or reasonable judgment in light of the facts and the characteristics of the T&D System and System Power Supply known at the time the decision was made, would have been expected to accomplish the desired result at the lowest reasonable cost consistent with reliability, safety and expedition and good customer relations. Prudent Utility Practice is not intended to be limited to the optimum practice, method or act, to the exclusion of all others, but rather to be a spectrum of possible practices, methods or acts. "Public Works Improvements" means Major Capital Improvements performed as a result of requirements or requests of a Governmental Body. "Public Works Improvement Costs" means the cost of any Public Works Improvement which the Manager reasonably incurs hereunder and proves by Cost Substantiation including, without 1-9 limitation, expenditures for material, equipments, incremental labor and services supplied by architects, engineers and Subcontractors, and expenses related to managing and administering the Public Works Improvements. "Public Works Improvement Costs" shall not include amounts for an allowance for overhead, profit or contingency. "Rating Services" means Moody's Investors Service, Inc., Standard and Poor's Rating Services, Fitch Investors Services, and Duff & Phelps or any of their successors. "Required Construction Work Insurance" has the meaning specified in Appendix 5 hereto. "Required Operating Period Insurance" has the meaning specified in Appendix 5 hereto. "Resource Conservation and Recovery Act" or "RCRA" means the Resource Conservation and Recovery Act, 42 U.S.C.A. ss. 6901 et.seq., as amended or superseded. "Revenue Bonds" means any bonds, notes or other obligations issued or secured under the Bond Resolution. "Schedule of Rates" has the meaning set forth in subsection 4.9(B) hereof. "Senior Executives" has the meaning set forth in subsection 4.2(C) hereof. "Service Area" means the counties of Suffolk and Nassau and that portion of the County of Queens constituting LILCO's franchise area as of the effective date of the Act. "Service Area" does not include the Villages of Freeport, Greenport and Rockville Centre. "Service Fee" has the meaning specified in Section 6.1 hereof. "State" means the State of New York. "Subcontract" means an agreement between the Manager and a Subcontractor, or between two Subcontractors, as applicable. "Subcontractor" means every person (other than employees of the Manager) employed or engaged by the Manager or any person directly or indirectly in privity with the Manager (including every sub-subcontractor of whatever tier) for any portion of the Construction Work or Operation and Maintenance Services, whether for the furnishing of labor, materials, supplies, equipment, services, or otherwise. "System Policies and Procedures" means the policies and procedures adopted from time to time by the Authority with respect to the T&D System and the System Power Supply in accordance with Applicable Law and Prudent Utility Practices. "System Power Supply" means electric capacity and energy from all power supply sources owned by or under contract to the Authority, including, but not limited to, the Existing Power Supply Agreements, the Power Supply Agreement, the Authority's rights and interests with respect to the Nine Mile Point 2, and the Authority's interest in any future generating facilities, spot market capacity and 1-10 energy purchases made on behalf of the Authority, and any load control programs or measures adopted by the Authority. "System Revenue Requirements" means the sum of the annual Service Fee, plus an estimate of other costs plus debt service requirements on the Authority's Revenue Bonds plus the Authority's costs as reported to the Manager pursuant to Section 6.2(B)(2) hereof. "T&D System" means the electricity transmission and distribution system owned by the Authority, as described in Appendix 2 hereto, and all other assets, facilities, equipment or contractual arrangements of the Authority used to provide the transmission and distribution of Power and Energy to the Service Territory. "T&D System" also shall include all capital improvements made to the T&D System after the Contract Date, less retirements. "T&D System Supervisor" has the meaning specified in subsection 4.2(C) hereof. "T&D System Site" means the real property and interests therein upon which the components of the T&D System are and will be located, including, without limitation, those described in Appendix 2 hereto "Term" has the meaning set forth in Section 8.l hereof. "Termination Date" has the meaning set forth in subsection 7.4(A) hereof. "Termination Notice Period" has the meaning set forth in subsection 7.4(B) hereof. "Third Party Cost Budget" has the meaning set forth in Section 6.2 hereof. "Third Party Costs" has the meaning set forth in Section 6.2 hereof. "Total Cost" has the meaning set forth in Section 6.1 hereof. "Transaction Agreement" means any agreement entered into by any person in connection with the transactions contemplated by this Agreement including, without limitation, the Bond Resolution, the Power Supply Agreement, the Energy Management Agreement and the Acquisition Agreement. "Trustee" means the trustee acting under the Bond Resolution for the benefit of the Bondholders. "Uncontrollable Circumstance" means any act, event or condition, whether affecting the T&D System, the System Power Supply, the Authority, the Manager, or any of the Authority's subcontractors or the Manager's Subcontractors to the extent that it materially and adversely affects the ability of either party to perform any obligation under the Agreement (except for payment obligations), if such act, event or condition is beyond the reasonable control and is not also the result of the misconduct or negligent action or omission or failure to exercise reasonable diligence on the part of the party relying thereon as justification for not performing an obligation or complying with any condition required of such party under the Agreement; provided, however, that the contesting in good faith or the 1-11 failure in good faith to contest such action or inaction shall not be construed as willful or negligent action or a lack of reasonable diligence of either party. (1) Inclusions. Subject to the foregoing, such acts or events may but not necessarily shall include, and shall not be limited to, the following: (a) an act of God (but not including reasonably anticipated weather conditions for the geographic area of the T&D System, other than major storms and extreme weather events) landslide, lightning, earthquake, fire, explosion, flood, sabotage or similar occurrence, acts of a public enemy, extortion, war, blockade or insurrection, riot or civil disturbance; (b) a Change in Law; (c) the failure of any appropriate Governmental Body or private utility having operational jurisdiction in the area in which the T&D System is located, to provide and maintain Non-Electric Utilities to any facility comprising part of the T&D System which are required for the performance of this Agreement and which failure directly results in a delay or curtailment of the performance of the Operation and Maintenance Services or any Construction Work; (d) any failure of tide to any portion of the T&D System Site or any enforcement of any Encumbrance on the T&D System Site or on any improvements thereon not consented to in writing by, or arising out of any action or agreement entered into by, the party adversely affected thereby; (e) the preemption of materials or services by a Governmental Body in connection with a public emergency or any condemnation or other taking by eminent domain of any portion of the T&D System. (f) the presence of archeological finds, endangered species, Hazardous Waste or Hazardous Substances at the T&D System Site, except to the extent the Manager or the Guarantor knew or should have known of such presence or to the extent identified in the documents referenced in Appendix 2 hereto. (2) Exclusions. It is specifically understood that none of the following acts or conditions shall constitute Uncontrollable Circumstances: (a) general economic conditions, interest or inflation rates, or currency fluctuations or exchange rates, (b) the financial condition of the Authority, the Manager, the Guarantor, any of their Affiliates or any Subcontractor, (c) the consequences of error, neglect or omissions by the Manager, the Guarantor, any Subcontractor, any of their Affiliates or any other person in the performance of any work hereunder; 1-12 (d) any increase for any reason in premiums charged by the Manager's insurers or the insurance markets generally for the Required Construction Work Insurance or the Required Operating Period Insurance; (e) the failure of the Manager to secure patents or licenses in connection with the technology necessary to perform its obligations hereunder; (f) equipment malfunction or failure; (g) union work rules, requirements or demands which have the effect of increasing the number of employees employed at the T&D System, reducing the operating flexibility of the Manager or otherwise increase the cost to the Manager of operating and maintaining the T&D System. (h) any impact of prevailing wage laws on the Manager's operation and maintenance costs with respect to wages and benefits, (i) the failure of any Subcontractor or supplier to furnish labor, materials, services or equipment for any reason; (j) strikes, work stoppages or other labor disputes or disturbances, or (k) any act, event or circumstance occurring outside of the United States. "Variable Payment" has the meaning set forth in Section 6.1 hereof. 1-13 APPENDIX 2 DESCRIPTION OF T&D SYSTEM AND T&D SYSTEM SITE RELATED DOCUMENTS The T&D System consists of all real and personal property, equipment, machinery, tools and materials and other similar items relating to the transmission and distribution of Power and Energy retained by Long Island Lighting Company at the time of its merger with the Authority's subsidiary under the terms of the Acquisition Agreement. The T&D System extends, without limitation, from the points of interconnection with Consolidated Edison Company of New York, the New York Power Authority, and Connecticut Light & Power and the on-island generating plants owned by GENCO on the low voltage side of the step-up transformers in the switch yards, or others and interconnections as they are built to the meters of the transmission and distribution facilities, equipment and property up through the retail and wholesale electric customers' point of interconnection with the meter. Prior to the adoption of the initial Annual T&D Budget, the parties shall further specify the detailed description of the T&D System based upon, among other things, documents and information provided by the Manager or an Affiliate of the Manager. 2-1 APPENDIX 3 NOTICE APPENDIX The Manager shall give notice to the Authority as to the matters relating to Operation and Maintenance Services and Construction Work, at the times and in the manner as shall be specified in the System Policies and Procedures. Except as the Authority shall otherwise agree, such notice shall, at a minimum, be consistent with the notices provided to the NYSPSC by LILCO as of the Contract Date under applicable NYSPSC requirements. 3-1 APPENDIX 4 INSURANCE In accordance with Section 4.13 of the Agreement, the Manager shall obtain and maintain insurance policies with respect to the Operation and Maintenance Services (the "Required Operation Period Insurance") and the Construction Work (the "Required Construction Work Insurance"), covering such risks and in such amounts as are required under Applicable Law and as are consistent with Prudent Utility Practice. The parties shall agree upon the types and amounts of coverage and deductible amounts prior to the Closing Date. In addition, the Manager shall obtain and maintain such other insurance coverages as requested by the Authority during the Term. The Authority, its trustees, officers and employees shall be additional or named insureds, as appropriate, on all such policies, which shall require 30 days prior written notice to the Authority prior to any change in or cancellation of such policies. Such coverages shall be maintained with generally recognized financially responsible insurers reasonably acceptable to the Authority and qualified and authorized to insure risks in the State of New York. At the Authority's discretion, it may, at its expense, cancel or replace and obtain independently some or all of such insurance, following at least 90 days' written notice to the Manager. 4-1 APPENDIX 5 DIRECT COST BUDGET INDICES Indices to be used in determining the initial and subsequent Direct Cost Budgets as described in subsection 6.2(B)(3) shall be mutually agreeable objective indices such as: - -------------------------------------------------------------------------------- Cost Component Cost Index - -------------------------------------------------------------------------------- Union Labor and Benefits Local 1381 and Local 1049 February 14, 1998 - 2.5% increase August 14, 1998 - 1% increase February 14, 1999 - 2.5% increase August 14, 1999 - 1% increase February 14, 2000 - 2.5% increase August 14, 2000 - 1% increase Effective February 14, 2001 - Employment Cost Index - Service Producing Industries, Union workers* - -------------------------------------------------------------------------------- Non-Union Labor Regional Employment Cost Index - Service Producing Industries, Non-union workers - -------------------------------------------------------------------------------- Administrative and General: - - Labor and employee Regional Employment Cost Index - Service Producing benefits Industries, Non-union workers - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Cost Component Growth Indices - -------------------------------------------------------------------------------- Distribution Cost - - Meter Expenses Percentage Increase in Number of Active Meters (586,587,597) - - Other Distribution O&M Percentage in Conductor Miles - -------------------------------------------------------------------------------- Customer Service & Customer Percentage increase in Number of Customers Accounts - -------------------------------------------------------------------------------- o Commencing on the Closing Date, non-union labor and benefit costs included in the Direct Cost Budget shall be escalated annually at the beginning of each contract year using the U.S. Labor Department's Bureau of Labor Statistics Employment Cost Index (ECI) for nonunion workers in service-producing industries. Commencing February 14, - ---------- * As published by the United States Labor Department's Bureau of Labor Statistics 2001, union labor and benefit costs included in the Direct Cost Budget shall be escalated annually at the beginning of each contract year using the U.S. Labor Department's Bureau of Labor Statistics Employment Cost Index (ECI) for union workers in service-producing industries. Prior to February 14, 2001, escalations in union labor and benefit costs will be based on the percent wage increases outlined in the provisions of the existing labor contracts. The initial Direct Cost Budget shall be adjusted each year based on the difference between the 1997 base year index and the current year index. 5-2 APPENDIX 6 EXIT TEST The following provides an overview of the scope of the "Exit Test" to be performed on behalf of the Authority in accordance with Section 8.3 of the Agreement. The Exit Test will include, topically and in detail, those reviews, evaluations, inspections, and audits as contemplated in Section 8.3 of the Agreement undertaken on behalf of the Authority periodically during the course of the Agreement for assessment of the T&D System since the last regular periodic review, including determination of the need for corrective, remedial, or replacement actions noted in previous periodic reviews performed on behalf of the Authority, but not yet corrected or completed as of the date of completion of the Exit Test. The Exit Test will include review of reporting, testing, inspection, and recordkeeping performed by or on behalf of the Manager or its Affiliates, agents or Subcontractors, including, but not limited to, the topics set forth below. (A) Maintenance Review 1. Job Records 2. Document Review 3. Budget Compliance 4. Standards Compliance 5. Field Survey 6. Rights of Way Maintenance 7. Rolling Stock Condition 8. Reliability 9. Care of Equipment (B) Major Capital Improvements and Public Works Improvements Review 1. Job Records 2. Document Review 3. Budget Compliance 4. Standards Compliance 5. Schedule Performance 6. Field Survey (C) Deficiencies 1. Responsibility 2. Cure Policy Compliance Status 3. Remedial Activity 4. Resolution 6-1 (D) Reporting/Proof of Performance 1. Compliance 2. Budget 3. Inventory 6-2 APPENDIX 7 NON-COST PERFORMANCE INCENTIVES AND DISINCENTIVES; PILOT PAYMENTS The following are the formulas for non-cost performance incentives and disincentives in accordance with Section 6.4(A) of the Agreement related to reliability, worker safety, and customer service. 1. OPERATING AREA RELIABILITY The Manager will earn an incentive or incur a disincentive computed in accordance with a formula based on specific minimum, midpoint and objective System Avenge Annual Interruption Frequency Index (SAIFI) and Customer Avenge Interruption Duration Index ("CAIDI") levels for each of the four divisions as set forth below. For purposes of this incentive, interruptions during major storms are excluded from the SAIFI and CAIDI statistics. Major storms, as currently defined by the NYSPSC, are periods of adverse weather during which service interruptions affect at least 10 percent of the customers in an operating area and/or result in customers being without electric service for a duration of at least 24 hours.
=============================================================================================== SAIFI Levels CAIDI Levels Operating ======================================================================= Division Minimum Midpoint Objective Minimum Midpoint Objective - ----------------------------------------------------------------------------------------------- Queens-Nassau 1.230 1.080 0.930 1.120 1.025 0.930 - ----------------------------------------------------------------------------------------------- Central 1.400 1.245 1.090 1.350 1.230 1.110 - ----------------------------------------------------------------------------------------------- West Suffolk 1.600 1.450 1.300 1.210 1.150 1.090 - ----------------------------------------------------------------------------------------------- East Suffolk 2.100 1.925 1.750 1.190 1.040 0.890 ===============================================================================================
In each year, performance in each division for each reliability measure shall be compared to the minimum, midpoint, and objective standard set forth in the above table. For performance 7-1 at or below the minimum level for each division, the Manager shall incur a disincentive of $800,000 for SAIFI and $200,000 for CAIDI. For performance at or in excess of the objective level for each division, the Manager shall receive an incentive of $800,000 for SAIFI and $300,000 for CAIDI. For performance at the midpoint levels and below the objective levels, the Manager shall receive one-half of the full incentive payment. For performance between the minimum and midpoint levels (the "dead band"), the Manager shall neither incur a disincentive nor receive an incentive payment. The total possible incentive payment can be earned by equaling or exceeding the objective level for each measure in each division. The maximum total reliability incentive or disincentive shall be $4,000,000. For the purpose of Section 7.2, the Minimum Reliability Standards for SAIFI and CAIDI shall be as set forth below. ========================================================= Minimum Reliability Standard 0perating ============================== Division SAIFI CAIDI Queens-Nassau 1.53 1.31 - --------------------------------------------------------- Central 1.71 1.59 - --------------------------------------------------------- West Suffolk 1.90 1.33 - --------------------------------------------------------- East Suffolk 2.45 1.49 ========================================================= 2. WORKER SAFETY The Authority shall provide an annual incentive payment to the Manager of $100,000 per Chargeable Accident less than 75 rated on a three-year rolling average. The Manager shall neither earn an incentive payment nor incur a disincentive payment obligation for periods in which the number of chargeable accidents falls between 75 and 80, inclusive (the "dead band"). The Manager shall incur a penalty of $100,000 per Chargeable Accident for years in which the 7-2 three-year rolling average number of Chargeable Accidents is greater than the 80. Data from years prior to the Commencement Date shall be used to compute the three-year averages in the first and second years. The upper and lower limits of the dead band shall be adjusted annually in proportion to the changes in total workforce (full time equivalents) for the departments to which this incentive plan applies: Electric Design & Construction, Electric Service, Electric System Operations, and Meter Readers. The total annual incentive or disincentive shall not exceed $1,000,000. A Chargeable Accident, for incentive purposes, are those which are charged to the involved employee's department in accordance with LILCO General Operating Procedure 10103, Exhibit 9.9. It is any injury or illness suffered by an employee, while at work, that requires offsite treatment administered by a physician or registered professional under the direction of a physician, (whether the treatment is received at a clinic, doctor's office, hospital, or other medical facility) with the exception of injuries in the following categories: (1) company sanctioned sports activities (2) assaults by customers (3) insect bites (4) animal bites (5) injuries resulting from running to safety while being threatened with attack by customer, animal or insect (6) medical conditions not related to work (diabetic shock, etc.) (7) certain occupational illnesses that occur due to chronic exposure in the work place specifically: Carpal Tunnel Syndrome, respiratory illnesses (such as Asbestosis), 7-3 chronic hearing loss, or other medical conditions due to exposure to substances in work place (rashes from unknown substances, etc.) (8) Motor Vehicle accidents in which the employee is not at fault. For the purpose of Section 7.2, the Minimum Worker Safety Standard shall be 95 Chargeable Accidents on a three-year rolling average basis. 3. CUSTOMER SERVICE (A) Call Answering The Manager shall earn an incentive or incur a discentive for customer call answering performance on a basis that shall be mutually agreed to prior to the beginning of the second Contract Year. (B) Meter Reading For purposes of the meter reading incentive, "Estimated Meter Reads" are defined as those scheduled meter reads which were not performed. These exclude "management estimates" due to sustained periods of abnormal weather conditions or abnormal weather events such as hurricanes, nor'easters, winter storms, heavy snow cover, "black ice", flooding, and ice storms. When these conditions occur, and it is the opinion of the Manager of Customer Offices and the Senior Vice President of Customer Relations that meter reading effectiveness is diminished by slow travel or increased safety hazards, the resulting estimates will be excluded. The Manager will record specific data concerning the excluded estimated meter reads and the reasons for their exclusion. Management estimates due to meter reading personnel being assigned to storm response efforts are also excluded. 7-4 The meter reads considered by this mechanism currently are for both electric and gas meters, until such time as the meter reading performance for electric and gas meters can be separately determined. The percentage of Estimated Meter Reads shall be calculated for each month by dividing the number of scheduled meter readings that are not completed, by the total number of scheduled meter reads. The Authority shall provide an incentive payment of $200,000 to the Manager for each month in which the percentage of Estimated Meter Reads is equal to or less than 10.9%. The Manager shall neither earn an incentive payment nor incur a disincentive payment for months during which Estimated Meter Reads fall between 10.9% and 11.1%, exclusive (the "dead band"). In months during which the Estimated Meter Reads are at or above 11.1 percent, the Manager shall incur a disincentive payment of S200,OOO. For the purpose of Section 7.2, the Minimum Customer Service Standard shall be Estimated Meter Reads not in excess of 11.6% in more than six months during a year. (C) Accounts Receivable The Manager shall earn an incentive or incur a disincentive for accounts receivable performance on a basis that shall be mutually agreed to prior to the beginning of the second Contract Year. 4. PILOT PAYMENTS The Authority has the sole discretion for determining whether to challenge any payment in lieu of tax (PILOT) payments made on any Retained Asset. At the Authority's request, the Manager shall assist the Authority in evaluating whether to challenge any PILOT payment and with its concurrence shall represent the Authority in any litigation challenging such 7-5 PILOT payment. In the event the Manager challenges any excessive PILOT payment in court, any PILOT refunds received shall be shared 25%/75% between the Manager and the Authority, respectively. The Manager shall be responsible for all litigation-related costs pertaining to such challenge, provided, however, that if such litigation is terminated solely at the Authority's request, or if this Agreement expires or is terminated by either party, the Manager shall be reimbursed for all of its costs related to litigations brought at the request of the Authority plus interest at the Base Interest Rate to the extent such costs are not included in the Annual T&D Budget. 7-6 APPENDIX 8 MAJOR CAPITAL IMPROVEMENTS CONSTRUCTION STANDARDS AND PROCUREMENT REQUIREMENTS Construction Standards The Manager and its Subcontractors shall perform all Construction Work in a timely, safe and efficient manner consistent with the Contract Standards and the Major Capital Plan and Budget, unless otherwise directed in writing by the Authority. In developing any design and engineering specifications, whether for bid documents or for its own use, the Manager shall utilize good engineering practices and shall consult with and implement the reasonable recommendations of the Authority. The Authority shall have access to all construction sites in accordance with Section 3.1(F) and shall have the right to review all Construction Work on an on-going basis for, among other things, compliance with milestone schedules, performance testing, final completion and other customary construction contract provisions. The Authority and the Manager shall also agree to additional procedures or standards to be followed on a project-by-project basis prior to the adoption of each Major Capital Plan and Budget. Procurement Requirements In conducting any procurements for all or a portion of Construction Work, the Manager shall comply with Applicable Law and shall use its best efforts to obtain such services or materials on a least cost basis, subject to the Contract Standards. The parties shall agree on additional guidelines for such procurements prior to the adoption of the initial Major Capital Plan and Budget and from time to time during the Term. Any decision by the Manager to perform Construction Work with its own workforce rather than by use of a Subcontractor shall be made with due consideration of the goal of utilizing the lowest cost responsible party to perform such work, unless otherwise directed by the Authority or warranted due to the cost, size, scope or complexity of a particular Major Capital Improvement or Public Works Improvement, as well as additional provisions to be agreed to by the parties prior to the adoption of the Major Capital Plan and Budget. 8-1 APPENDIX 9 OPERATIONS INFORMATION AND FORMAT The parties shall establish prior to the Closing Date the format and types of such additional information and data concerning the T&D System and the performance of the Manager's obligations under this Agreement that shall be provided by the Manager with the Annual Settlement Statement after the end of each Contract Year. Such information shall include, without limitation, data sufficient to allow the Authority to verify the amounts set forth in the Annual Settlement Statement, information concerning the performance of the Manager with its maintenance and Construction Work responsibilities, any fines or penalties incurrent to a Governmental Body, and known violations of Applicable Law and such other matters to enable the Authority to oversee the Manager's compliance with the terms of this Agreement. 9-1 APPENDIX 10 BUDGET INFORMATION AND FORMAT Utilizing the FERC Uniform System of Accounts (USoA) as a framework, the Manager shall prepare proper, accurate and complete Direct Cost and Third Party Costs Budgets. The Manager may establish subaccounts within the USoA prime accounts to provide greater detailed descriptions of cost activities. Detail shall be sufficient enough to enable the Authority to prepare pro forma financial statements and financial ratios regarding the operations of the T&D System. Underlying accounting data shall be maintained to provide adequate support for the respective budgets. The format of the Direct Cost Budget and Third Party Cost Budget shall be mutually agreed to by the Authority and the Manager no later than six months prior to the anticipated Closing Date. 10-1 APPENDIX 11 COST ALLOCATION METHODOLOGY The cost allocation methodology described herein shall be developed jointly by a team composed of representatives from the Authority and the Manager. This team will recommend a plan to establish the cost allocation procedures to be followed by the Manager in performing its Operation and Maintenance Services and Construction Work. The initial task of this joint project team will be to obtain a detailed understanding of the nature of (1) the restructured operations of the Parent to determine an appropriate definition of the segments or recipients of activity and related costs, (2) costs directly incurred and (3) costs which are or could be charged to residual overhead pools for subsequent allocation to the segments or recipients of activity. Upon completing this task, the joint project team will recommend appropriate allocation methodologies and procedures to charge its direct costs and allocate its indirect costs to its internal constituents. Such procedures and methods will be based on cost causation principles consistent with generally accepted cost accounting principles. Allocations shall be based on cost without mark-up. The parties recognize that in establishing cost allocation methodologies, appropriate consideration must be given to the NYSPSC accepted allocation methodology for the gas business and the FERC accepted allocation methodology for the generation business. The objectives of the joint team will be to: (i) review LILCO's current allocation practices with regard to costs charged to O&M T&D costs and T&D capital projects, identify changes to existing processes related to restructuring and develop alternatives appropriate to the new corporate organization, considering prospective changes to the way the Manager will charge its costs to the Authority in the future; (ii) review LILCO's current and proposed cost accounting systems and develop appropriate analysis techniques and cost tracking framework; and (iii) develop budgeting and monitoring techniques. The joint team will determine the number of cost pools to be used and prepare a schedule of cost elements for the Annual T&D Budget year by responsibility area, FERC prime account and general ledger posting source. For each cost pool, the joint teams will establish an allocation methodology. Some typical methodology examples used include: 11-1 Cost Function Examples - ------------- -------- 1. Payroll-related Direct labor costs Total labor costs 2. Personnel-related Number of employees Number of hires 3. Activity-related Number of transactions Volume Number of reports 4. Space-related Square footage 5. Revenue and/or expense-related Revenues O&M Expenses Net income Total revenues and expenses 6. Asset-related Book value Net book value Replacement value 11-2 APPENDIX 12 SAMPLE SERVICE FEE CALCULATION The examples set forth below are sample calculations of the Service Fee, as provided for in the Agreement. These examples are provided for reference only and are not meant to be indicative of expected amounts of the applicable budgets and costs. The language contained in the provisions of the body of the Agreement shall control with respect to such applicable provisions in the event of any conflict with this Appendix.
Years Formula 1 2 3 Direct Cost Budget -------------------------------------------- T&D Salaries 255.0 261.4 267.9 Common Plant Capital Recovery 14.0 14.4 14.7 Management Fee 15.0 15.0 15.0 -------------------------------------------- Direct Cost Budget 284.0 290.7 297.6 LILCO/BU Synergy Savings (20.0) (45.0) (60.0) Management Savings (5.0) (5.0) (5.0) Efficiency/Productivity Savings (2.0) (4.0) (5.0) -------------------------------------------- Net Direct Cost Budget A 257.0 236.7 227.6 -------------------------------------------- Third Party Cost Materials & Supplies 0.0 0.0 0.0 Included for illustration Sub-contract Labor 0.0 0.0 0.0 purposes Professional Fees 0.0 0.0 0.0 Mailing 0.0 0.0 0.0 Other 0.0 0.0 0.0 -------------------------------------------- Third Party Cost Budget B 116.0 118.9 121.9 -------------------------------------------- Budgeted Total Costs C 373.0 355.6 349.5 (A+B) ============================================ Actual Cost Direct Cost D 242.0 226.2 208.4 Management Fee E 15.0 15.0 15.0 -------------------------------------------- Third Party Cost F 257.0 241.2 223.4 (D+E) G 116.0 121.3 119.4 -------------------------------------------- Actual Total Costs H 373.0 362.4 342.8 (F+G) -------------------------------------------- G Payment Calculation Fixed Direct Fee I 231.3 213.0 204.9 (A * 90%) Variable Payment J 25.7 23.7 18.5 Lesser of (C-I-N) or (H-I-N) Cost Incentive Fee K 0.0 0.0 3.3 Greater of (C-H) *50% or zero Non-cost Performance Incentives L L 5.0 5.0 5.0 Direct input -------------------------------------------- M 262.0 241.7 231.7 (I+J+K+L) Third-party Costs N 116.0 118.9 119.4 Lesser of B or G -------------------------------------------- Service Fee O 378.0 360.6 351.1 (M+N) Overrun Payment P 0.0 0.0 0.0 (H-E)-(C-10)or zero -------------------------------------------- Total Q $378.0 $360.6 $ 351.1 (O+P) ============================================
Included for illustration APPENDIX 13 PROVISIONS REQUIRED BY STATE LAW 1.1 MANAGER TO COMPLY WITH LEGAL REQUIREMENTS. The Manager, in performing its obligations under this Agreement, shall comply with all applicable laws and regulations. All provisions required by such laws and regulations to be included in this Agreement shall be deemed to be included in this Agreement with the same effect as if set forth in full. 1.2 MANAGER TO OBTAIN PERMITS. ETC. Except as otherwise instructed in writing by the Authority, the Manager shall obtain and comply with all legally required licenses, consents, approvals, orders, authorizations, permits, restrictions, declarations, and filings required to be obtained by the Authority or the Manager in connection with this Agreement. 1.3 WORKERS' COMPENSATION INSURANCE. The Manager agrees that: (a) It will secure Workers' Compensation and Disability Insurance and keep insured during the life of this Agreement such employees as are required to be insured by the provisions of Chapter 41 of the Laws of 1914, as amended, known as the Worker's Compensation Law; ax~ (b) This Agreement shall be voidable at the election of the Authority and of no effect unless the Manager complies with the requirement in paragraph (a) of this Section. 1.4 NO ASSIGNMENT WITHOUT CONSENT. The Manager agrees that: (a) It is prohibited from assigning, transferring, or otherwise disposing of this Agreement, or of its rights or interests therein, or its power to execute such Agreement to any person, company, partnership, or corporation, without the previous written consent of the Authority. Assignments of this Agreement expressly referred to in clause (3) of the first sentence of Section 9.7 of this Agreement have been so consented to. (b) If the prohibition contained in paragraph (a) above is violated, the Authority may revoke and annul this Agreement and the Authority shall be relieved from any and all liability and obligations hereunder to the Manager and to the person, company, partnership, or corporation to whom such assignment, transfer, or other disposal shall have been made, and the Manager and such assignee or transferee shall forfeit and lose all the money theretofore earned under this Agreement. 1.5 NON-DISCRIMINATION. (a) The Manager shall not discriminate against employees or applicants for employment because of race, creed, color, national origin, sex, age, disability, 13-1 or marital status, and will undertake or continue existing programs of affirmative action to ensure that minority group persons and women arc afforded equal opportunity without discrimination. Such programs shall include, but not be limited to, recruitment, employment, job assignment, promotion, upgrading, demotion, transfer, layoff, termination, rates of pay or other forms of compensation, and selection for training and retraining, including apprenticeship and on-the-job training. (b) At the request of the Authority, the Manager shall request each employment agency, labor union, or authorized representative of workers with which it has a collective bargaining or other agreement or understanding and which is involved in the performance of this Agreement to furnish a written statement that such employment agency, labor union, or representative shall not discriminate because of race, creed, color, national origin, sex, age, disability, or marital status and that such union or representative will cooperate in the implementation of the Manager's obligations hereunder. (c) The Manager shall state, in all solicitations or advertisements for employees placed by or on behalf of the Manager in the performance of this Agreement, that all qualified applicants will be afforded equal employment opportunity without discrimination because of race, creed, color, national origin, sex, age, disability, or marital status. The Manager shall submit an equal employment opportunity policy statement to the Authority which shall contain, but not be limited to, the provisions (a) through (c) of this section. (As required by NYCRR ss.142.1(d)(2) and (3)). (d) The Manager will include provisions (a) through (c) of this section in every subcontract or purchase order in such a manner that such provisions will be binding upon each subcontractor or vendor as to its work in connection with this Agreement. (e) The Manager shall furnish to the Authority such information and reports regarding its compliance with the above requirements as the Authority may from time to time request. (f) The provisions of this section shall not be binding upon the Manager or any subcontractor in the performance of work or the provision of services or any other activity that is unrelated, separate or distinct from this Agreement, as expressed by its terms. (g) The requirements of this section do not apply to any employment outside the State of New York or application for employment outside the State of New York or solicitations or advertisements therefor, or to any existing programs of affirmative action regarding employment outside the State of New York. (h) Any disputes regarding this section shall be resolved as provided in Section 316 of the New York State Executive Law. 13-2 1.6 INTERNATIONAL BOYCOTT PROHIBITION. The Manager expressly agrees and certifies that neither the Manager nor any person, firm, partnership, or corporation which is substantially owned by or affiliated with the Manager has participated, is participating, or will participate in an international boycott in violation of the provisions of the United States Export Administration Act of 1969, as amended, or the Export Administration Act of 1979, as amended, or the regulations of the United States Department of Commerce promulgated thereunder. The Manager understands that such agreement and certification constitutes a material term of this Agreement. 1.7 FAILURE OR REFUSAL TO TESTIFY. Upon the refusal of any person, including any member, officer, or director of the Manager, when called before a grand jury, head of state department, temporary state commission or other state agency, the organized crime task force in the department of law, head of a city department, or other city agency, which is empowered to compel the attendance of witnesses and examine them under oath, to testify in an investigation concerning any transaction or contract had with the state, any political subdivision thereof or of a public authority, to sign a waiver of immunity against subsequent criminal prosecution or to answer any relevant question concerning such transaction or contract: (a) such person, and any firm, partnership, or corporation of which he or she is a member, partner, director, or officer (including, if applicable, the Manager), shall be disqualified from thereafter selling to or submitting bids to or receiving awards from or entering into any contracts with any public authority or official thereof, for goods, work, or services, for a period of five years after such refusal, or until a disqualification shall be removed pursuant to law; and (b) any and all contracts made with any public authority or official thereof, since July 1, 1959 (including if applicable, this Agreement), by such person and by any firm, partnership or corporation of which he is a member, partner, director, or officer (including, if applicable, the Manager), may be canceled or terminated by the public authority without incurring any penalty or damages on account of such cancellation or termination, but any monies owing by the public authority for goods delivered or work done prior to the cancellation or termination shall be paid. 1.8 MINORITY AND WOMEN-OWNED BUSINESS ENTERPRISE PROCEDURES (a) DECLARATION OF POLICY AND STATEMENT OF GOALS. It is the policy of the Authority to provide Minority and Women-Owned Business Enterprises ("M/WBEs") the greatest practicable opportunity to participate in the Authority's contracting activity for the procurement of goods and services. To effectuate this policy, the Manager shall comply with the provisions of this section and the provisions of Article 15-A of the New York State Executive Law. The Manager will use its best efforts to achieve the below-stated M/WBE Goals 13-3 set for the Agreement, and will cooperate in any efforts of the Authority, or any government agency which may have jurisdiction, to monitor and assist the Manager's compliance with the Authority's M/WBE policy. Minority-Owned Business Enterprise (MBE) Subcontracting Goal *% Women-Owned Business Enterprise (WBE) Subcontracting Goal *% (b) DEFINITIONS. (1) "CERTIFICATION". The process conducted by the Director of the Division of Minority and Women's Business Development in the Department of Economic Development to verify that a business enterprise qualifies for New York State Minority or Women-Owned Business Enterprise status. To initiate the certification process, contact one of the offices listed below. ALBANY OFFICE: (518) 474-6342 State Capitol, 2nd Floor Albany, New York 12224 NEW YORK CITY OFFICE 2 World Trade Center, 58th Floor New York, New York 10047 (2) "CERTIFIED BUSINESS". A business enterprise which has been approved by the Director for status as a MBE or WBE subsequent to verification that the business enterprise is owned, operated, and controlled by Minority Group Members, or women. (3) "CONTRACT SCOPE OF WORK". For purposes of this section, this means: (i) Specific tasks required by the Agreement; (ii) Services or products which must be provided to perform specific tasks required by this Agreement; and (iii) Components of any overhead costs billed to the Authority pursuant to this Agreement. - ---------- ** To be specified at time of adoption of initial Annual T&D Budget. 13-4 (4) "DAY". A calendar state business day unless otherwise specified. (5) "DIRECTOR". The Director of the Division of Minority and Women's Business Development in the Department of Economic Development. (6) "DIRECTORY". The Directory of Certified Businesses, prepared by the Director. (7) "GOAL". A percentage of participation, which is not a set aside or quota, that represents a target toward which the Manager must aim in expending good faith efforts to subcontract with or otherwise ensure the commercial involvement of minority and women-owned businesses on this Agreement. (8) "OFFICE" or "OFFICE OF MINORITY AND WOMEN'S BUSINESS DEVELOPMENT". Office in the New York State Department of Economic Development created by Article 15-A of the Executive Law. (9) MINORITY GROUP MEMBER. A United States citizen or permanent resident alien who is and can demonstrate membership in one of the following groups: (i) Black persons having origins in any of the Black African racial groups; (ii) Hispanic persons of Mexican, Puerto Rican, Dominican, Cuban, Central or South American descent of either Indian or Hispanic Origin, regardless of race; (iii) Native American or Alaskan native persons having origins in any of the original peoples of North America; (iv) Asian and Pacific Islander persons having origins in any of the Far East countries, South East Asia, the Indian subcontinent or the Pacific Islands; (v) Other groups which the Office may determine to be eligible for M/WBE status. (10) MINORITY-OWNED BUSINESS ENTERPRISE. A business enterprise, including a sole proprietorship, partnership or corporation that is: (i) At least fifty-one percent owned by one or more Minority Group Members; 13-5 (ii) An enterprise in which such minority ownership is real, substantial and continuing; (iii) An enterprise in which such minority ownership has, and exercises the authority to control independently, the day-to-day business decisions of the enterprise for at least one year; and (iv) An enterprise authorized to do business in New York State and is independently owned and operated. (11) "SUBCONTRACT. An agreement in which a portion of the Manager's obligation under this Agreement is undertaken or assumed. (12) "WOMEN-OWNED BUSINESS ENTERPRISE". A business enterprise, including a sole proprietorship, partnership or corporation that is: (i) At least fifty-one percent owned by one or more United States citizens or permanent resident aliens who are women; (ii) An enterprise in which the ownership interest of such women is real, substantial and continuing; (iii) An enterprise in which such women ownership has, and exercises the authority to control independently, the day-to-day business decisions of the enterprise for at least one year; and (iv) An enterprise authorized to do business in New York State and is independently owned and operated. (c) REQUIREMENTS (1) The Manager shall search for, assess the capabilities of and generally deal with potential M/WBE subcontractors in a fair and responsive manner, allowing them the opportunity to participate in the Contract Scope of Work. (2) The Manager will designate, and make known to the Authority an M/WBE Officer who will have the responsibility for and authority to effectively administer the M/WBE Program. (3) The Manager shall submit its Preliminary Subcontracting Plan on a preliminary subcontracting plan form, which shall identify the Certified Businesses it will utilize to meet its M/WBE Contract Goals. Approval of any such firm is solely within the 13-6 discretion of the Authority. The Manager will also designate an M/WBE Officer who will have the responsibility for, and authority to, effectively administer these procedures. If the Manager believes it may be unable to meet the Goals, the reasons shall be submitted in writing with the form. (4) The Manager may inspect the current New York State Certification Directory of Minority and Women Owned Businesses, prepared for use by state agencies and contractors in complying with Executive Law Article 15-A, (the Directory) at the Authority's office. In addition, printed or electronic copies of the Directory may be purchased from the Office of Minority and Women's Business Development. (5) Firms certified as both MBE and WBE may count toward either the MBE or WBE Goal on a single contract, but not both, regardless of whether either Goal is thus exceeded. The Manager must choose the Goal to which the participation value is to be applied in the preliminary Subcontracting Plan. (6) Within 10 days following the adoption of the initial Annual T&D Budget and in any event no later than 60 days prior to the anticipated Closing Date, the Manager shall submit a complete Utilization Plan, which shall include identification of the M/WBEs which the Manager intends to use; the dollar amount of business with each such M/WBE; the Contract Scope of Work which the Manager intends to have performed by such M/WBEs; and the commencement and end dates of such performance. The Authority will review the plan and, within 20 days of its receipt, issue a written acceptance of the plan or comments on deficiencies in the plan. (7) The Authority shall consider a partial or total waiver of Goal requirements only upon the submission of a written request for a waiver following the Manager's unsuccessful good faith efforts at compliance. Such waiver request may be made simultaneously with the submission of the Utilization Plan. (8) The Manager shall include in each Subcontract, in such a manner that the provisions will be binding upon each subcontractor, all of the provisions herein including those requiring subcontractors to make a good faith effort to solicit participation by M/WBEs. (9) The Manager shall keep records, canceled checks and documents for at least one (1) year following completion of this Agreement. These records, and canceled checks, documents or copies thereof will be made available at reasonable times upon written request by the Authority or any other authorized governmental entity. (10) The Manager shall submit monthly compliance reports regarding its M/WBE utilization activity on a Compliance Report Form acceptable to the Authority. Reports 13-7 are due on the first business day of each month, beginning 30 days after the Closing Date. (11) The Authority will conduct compliance reviews for determination of the Manager's performance relative to meeting the specified M/WBE Goal which may include review and inspection of documents pertaining to the Manager's efforts towards meeting the Goals and on-site interviews with personnel of Manager and its subcontractors. The Manager will fully cooperate to assist the Authority in this endeavor. (12) The Manager shall not use the requirements of this section to discriminate against any qualified company or group of companies. (d) CONDITIONS FOR SATISFYING M/WBE GOALS. M/WBE participation will be counted toward the total Contract M/WBE Goals subject to the following conditions: (1) If the Manager is unable to meet the Goals with Certified Businesses by making all of the good faith efforts defined herein, the Manager shall actively solicit uncertified M/WBEs to satisfy the Goals. Uncertified firms will be required to submit an application for certification (to the Office of Minority and Women's Business Development) and will be counted as contributing towards the contract Goals only after they have been certified. (2) The Manager must keep records of efforts to utilize certified M/WBE's including (i) The firm's name, address and telephone number. (ii) A description of the information provided to the M/WBE. (iii) A written explanation of why an agreement with the M/WBE was not obtained. (3) Price alone will not be an acceptable basis for rejecting M/WBE bids if any of the bids are reasonable. (4) Geographical limitation in the M/WBE search is not an acceptable reason for not meeting the M/WBE goal when traditionally non-local firms have been generally utilized. (5) the Authority reserves the right to reject any firm as counting toward meeting the Manager's M/WBE goal if, in the opinion of the Authority, the facts as to that firm's business and technical organization and practices justify the rejection. 13-8 (e) MANAGER'S GOOD-FAITH EFFORTS. To satisfy the M/WBE participation requirements, the Manager agrees to make the following good-faith efforts in a timely manner: (1) Submission of a completed, acceptable Utilization Plan as described herein. (2) Advertising in appropriate general circulation, trade and minority and women-oriented publications. (3) Written solicitations made in a timely manner of certified minority and women-owned business enterprises listed in the Directory. (4) Attendance at meetings, if any, scheduled by the Authority with certified M/WBEs capable of performing the Contract Scope of Work. (5) Written notification to M/WBE trade associations located within the region where the Contract Scope of Work will be performed. (6) Structuring the Contract Scope of Work for purposes of subcontracting with certified M/WBEs. (7) Where certified M/WBEs have expressed an interest to the Manager in performing work that the Manager normally performs with its own sources and the Contract Scope of Work has not been fully performed, the Manager shall consider subcontracting such work or portions of it to meet the M/WBE Goals. 1.9. COMMENCEMENT OF ACTIONS ON STATE PUBLIC WORKS CONTRACTS. The time within which an action on this Agreement against the Manager must be commenced shall be computed from the date of completion of the physical work. The Manager may notify the Authority in writing, that such physical work has been completed by specifying a completion date, which date shall be no more than thirty days previous to the date of such notice, in which case the completion date set forth in such notice shall be deemed to be the date of completion of the physical work unless the Authority, within tiny days of receipt of such notice, notifies the Manager in writing of its disagreement. In the event that the Manager fails to send the notice provided for herein or the Authority disagrees in the manner provided herein, the date of completion of the physical work shall be determined in any other manner provided by law. C.2 13-9 APPENDIX 14 OUTLINE OF T&D SYSTEM POLICIES AND PROCEDURES Terms And Conditions Of Electric Service The following is a representative outline of the topics to be addressed by Authority in the T&D System Policies and Procedures in accordance with Section 4.5(B). (A) Introduction 1. Purpose 2. Application 3. Modification 4. Responsibility of Enforcement (B) General Information 1. Definitions 2. Application for Electric Service (a) New Occupancy (b) Responsibility for Changes in Service 3. Characteristics of Electric Service 4. Service Interruptions 5. Application of Rates 6. Extension of Customer's Wiring System 7. Continuity and Quality of Electric Service 8. Single Phase and Three Phase Service to Customers Served Under Residential Rate Schedules 9. Single Phase and Three Phase Service to Customers Served Under Commercial Rate Schedules 10. Method of Supplying Electric Service (a) General Residential Service (b) Multiple Dwelling Units, Apartment Complexes (c) Commercial Service (d) Industrial Service (e) Temporary Service (f) Other 11. Access by Authorized Agents to Customer's Premises 12. Electric Service Deposits (a) Commercial Deposits 14-1 (b) Residential Deposits (c) Interest on Utility Service Deposits (d) Errors in Usage Records (e) Unclaimed Deposits 13. Billing for Electric Service (a) Average/Level Billing Program (b) Defined Payment Program (c) Utility Assistance Programs (d) Law Payment Charge (e) Estimated Billing (f) Delinquent Bills (g) Shared Customer Meter Billing 14. Testing of Meters Upon Request of Customer 15. Adjustment of Bills for Meter Inaccuracy and Incorrect Metering 16. Change of Occupancy 17. Discontinuance of Electric Service 18. Denial of Electric Service to a Customer 19. Customer's Responsibility for Utility Property 20. Tampering with the Utility's Measuring Equipment or Other Property (a) Sub-Metering (b) Meter Seals (c) Tampering with Shut-Off Device (d) Penalties for Energy Diversion (e) Responsibility of Enforcement 21. Fraudulent Use of Electricity 22. Street Light Policy (C) Electric Service Regulations 1. Customer's Wiring-National Electric Code 2. Electric Service Inspection 3. Availability of Electric Service 4. Minimum Service Connection 5. Exclusive Use of Utility's Electric Service 6. Resale of Utility's Electric Service 7. Point of Delivery of Electric Service 8. Grounding/Bonding Conductors and Electrodes Meters 9. Equipment Which Adversely Affects Electric Service (a) General (b) Motors (c) Intermittent Electric Loads (d) Voltage and Wave Form Sensitive Equipment 14-2 (e) Power Factor (f) Interference Producing Equipment (g) Radio Antennas (D) Standard Extension Policy 1. General 2. Rights-of-Way 3. Overhead Distribution System-Overhead Service 4. Single Phase Underground Secondary Service from Overhead Distribution System 5. Three Phase Underground Secondary Service from Overhead Distribution System 6. Single Phase Underground Secondary Service from Underground Distribution System-Residential (a) Easement Guidelines on Underground Distribution System 7. Underground Service from Primary System (a) Delivery at Primary Voltage Through Utility-Owned Transformers (Primary Extension) (b) Loads Served at Primary Voltage to Customer-Owned Equipment 8. Underground Distribution System 9. Permanent Electric Service 10. Indeterminate Electric Service 11. Temporary Electric Service for Construction (E) Storm Restoration Procedures 1. Safety (a) General Operations (b) General Procedures 2. Orientation and Training (a) Service Restoration Program - General (b) Pre-Storm Operations (c) Radio Procedure (d) Mapping (e) Hot-Stick Operator Training (f) Patrolling and Reporting Storm Damage (g) Storm Training (h) Training of Manager's affiliates and authorized company personnel 3. Customer Service During Storms/Storm -Restoration (a) Essential Customer Report (b) Portable Generators 14-3 4. Service Restoration (a) Area Storm Operations (b) Storm Damage Reporting (c) Lineworker Responsibilities (d) Map Posting (e) Initial Clearing of Main Lines (f) Restoration of Primary and Secondary Lines (g) Service Restoration/Trouble Calls (h) Switching (i) Hot-Stick Operations (j) Service Restoration Paperwork (k) Streetlight Restoration (1) Area Daily Crew Log (m) Tagging Out Procedures (n) Public, Fire & Emergency Coordination and Communication (o) Public, Governmental and Media Communications (p) Mutual Aid (F) Work Order. Status Assessment and Condition Reporting Forms (G) Operating Procedures 1. Planning (a) Job Planning Check List (b) Vehicle Material am! Equipment Check List (c) Job Preliminary Procedures (d) Clearing and Tree Trimming (e) Trenching (f) Commitment of Special Equipment (g) Street Crossings (h) Sketch Procedures (i) Revisions and Alterations to Jobs (j) Voiding Jobs (k) Conflicts of Interest (H) Customer Service -- General 1. Customer Calling Centers 2. Complaint Handling Procedure 3. Emergency Hotline 4. Billing Disputes 5. Alternative Power Supplier Policies 14-4 6. DSM/Energy Efficiency Program Communications 7. Billing Inserts and Customer Comnxnunications (I) Rights-of-Way and Easements 1. Transmission Facilities 2. Distribution Facilities 3. Changes to ROW 4. Locked Gates 5. Easement Encroachments 6. Railroad Crossings (J) General Job and Operation Procedures 1. Information on Job Sketches 2. Phase Diagrams 3. Slab/Conduit Inspections 4. Cable in Conduit Guidelines 5. Protection Coordination 6. Transformer Sizing 7. Wire Sag and Tension 8. Locating Buried Facilities 9. Clearances 10. Poles and Crossarms 11. Conductors am! Cables 12. Guying 13. Transformers 14. Grounding 15. Secondaries and Services 16. Metering 17. Voltage Regulation 18. Switching 19. Tagging Procedures 20. Outage Reporting 21. Tree Trimming 22. Care of Equipment 23. Customer-Owned Equipment 24. Coordination With Other Utilities 25. Communications (a) Inter-Utility (b) SCADA (c) Telephone System 14-5 (d) Radio (K) Load Forecasting and Resource Planning 1. Load Forecasting 2. Resource Planning (a) Off-System Purchases (b) Fully-Owned Generation 3. Competitive Positioning Strategies (a) ESCO Cooperation (b) DSM/Load Control (c) Energy Pricing - Compilation and Distribution (d) Retail Wheeling Policies (e) Transmission Access Policies (i) Network (ii) Point-to-Point 4. Power Supply Solicitation Procedures 14-6 EX-10.(B) 6 POWER SUPPLY AGREEMENT POWER SUPPLY AGREEMENT between LONG ISLAND LIGHTING COMPANY and LONG ISLAND POWER AUTHORITY Dated as of June 26, 1997 TABLE OF CONTENTS ARTICLE 1 - DEFINITIONS .................................................... 1 PART I - POWER SUPPLY ...................................................... 9 ARTICLE 2 - POWER SUPPLY ................................................... 9 2.1. Delivery of Power ............................................. 9 2.1.1. Capacity .............................................. 9 2.1.2. Energy ................................................ 9 2.1.3. Ancillary Services .................................... 9 2.2. Delivery Points ............................................... 9 2.3. Dispatch of Generating Facilities ............................. 9 2.4. Maintenance Scheduling ........................................ 10 2.5. Dependable Maximum Net Capability (DMNC) Testing .............. 10 2.6. DMNC Target ................................................... 11 2.7. T&D System Access ............................................. 11 PART II - POWER SUPPLY PLANNING AND OPERATIONS ............................. 11 ARTICLE 3 - FUTURE RESOURCE PLANNING ....................................... 11 3.1. Power Supply Planning ......................................... 11 3.1.1. Integrated Electric Resource Planning (IERP) .......... 11 PART III - OTHER ITEMS ..................................................... 12 ARTICLE 4 - GENERATING FACILITY SITES ...................................... 12 4.1. Interference Compensation ..................................... 12 4.2. Generating Facilities ......................................... 12 4.3. Transmission Requirements ..................................... 12 ARTICLE 5 - REGULATION ..................................................... 12 5.1. Regulation .................................................... 12 ARTICLE 6 - STORM RESTORATION .............................................. 13 6.1. Storm Declaration ............................................. 13 6.2. Responsibility During Storm Condition ......................... 13 ARTICLE 7 - ENVIRONMENTAL CONSIDERATIONS ................................... 13 7.1. Environmental Compliance ...................................... 13 - i - ARTICLE 8 - PURCHASE PRICE AND PAYMENT ..................................... 13 8.1. Price Components .............................................. 13 8.1.1. Monthly Capacity Charge ............................... 14 8.1.2. Monthly Variable Charge ............................... 14 8.1.3. Monthly Ancillary Service Charge ...................... 14 8.1.4. Monthly Capacity Payment Adjustment Charge ............ 15 8.1.5. Monthly Variable Payment Adjustment Charge ............ 15 8.1.6. NOx and SOx Emission Credits .......................... 15 8.2. Power Plant Electric Use ...................................... 15 8.3. Generating Facility Major Failure ............................. 15 8.4. Incentives/Disincentives ...................................... 16 8.5. Payment ....................................................... 16 8.6. Late Payment .................................................. 16 ARTICLE 9 - BUDGETS ....................................................... 17 9.1. Budget Preparation ............................................ 17 9.1.1. Initial Capacity and Variable Charge Determination .... 17 9.1.2 Five Year Capital Improvement Budgets ................. 17 9.2. Budget Review ................................................. 17 9.3. Failure To Adopt Contract Year Budget ......................... 18 9.4. Capital Improvement Budget Performance ........................ 18 ARTICLE 10 - INCENTIVES/DISINCENTIVES ...................................... 18 10.1. Incentives/Disincentives ...................................... 18 ARTICLE 11 - CAPACITY RAMP DOWN ............................................ 18 11.1. Capacity Ramp Down Option. .................................... 18 ARTICLE 12 - TERM and TERMINATION .......................................... 21 12.1. Term .......................................................... 21 12.2. Termination For Cause by GENCO ................................ 21 12.2.1 Events of LIPA Default Defined ........................ 21 12.3. Termination For Cause by LIPA ................................. 22 12.3.1 Events of GENCO Default Defined ....................... 22 12.4. Procedure For Termination For Cause. .......................... 23 ARTICLE 13 - DESIGNATION OF REPRESENTATIVES ................................ 24 13.1. LIPA Representative ........................................... 24 13.2. GENCO Representative .......................................... 24 ARTICLE 14 - METERING ...................................................... 24 14.1. Electric Metering ............................................. 24 14.1.1. Electric Metering Equipment ........................... 24 - ii - 14.1.2 Testing of Metering Equipment ......................... 24 14.1.3 Meter Reading ......................................... 25 14.1.4 Metering Inaccuracies ................................. 25 14.2. Gas Metering .................................................. 25 14.2.1. Gas Metering Equipment ................................ 25 14.2.2. Testing of Self Checking Gas Metering Equipment ....... 25 14.2.3. Testing of Non Self Checking Gas Metering Equipment ... 26 14.2.4. Gas Meter Reading ..................................... 26 14.2.5. Gas Metering Inaccuracies ............................. 26 14.3. Oil Fuel Measurement .......................................... 27 ARTICLE 15 - REPORTS ....................................................... 27 15.1. Reports ....................................................... 27 15.2. Other Information ............................................. 27 15.3. Litigation; Permit Lapses ..................................... 27 ARTICLE 16 - GENERAL SERVICE REQUIREMENTS .................................. 25 16.1. General Service Requirements .................................. 28 16.1.1. Standard of Performance ............................... 28 16.1.2. Limitation of Liability ............................... 28 16.1.3. Accounting Controls ................................... 28 ARTICLE 17 - INSURANCE ..................................................... 28 ARTICLE 18 - CREDIT ENHANCEMENT ............................................ 29 18.1. Credit Enhancement in Certain Circumstances ................... 29 18.1.1. Limitations ........................................... 29 18.1.2. Material Decline in the Guarantor's Credit Standing ... 29 18.1.3. Credit Enhancement .................................... 29 ARTICLE 19 - ALLOCATION OF RISK OF CERTAIN COSTS AND LIABILITIES ................................. 30 ARTICLE 20 - PROPRIETARY INFORMATION ....................................... 31 20.1. Request Not To Disclose ....................................... 31 20.2. LIPA's Non-Disclosure ......................................... 31 20.3. Permitted Disclosures ......................................... 32 ARTICLE 21 - MISCELLANEOUS PROVISIONS ...................................... 32 21.1. Agreement ..................................................... 32 21.2. Relationship of the Parties ................................... 32 21.3. Assignment .................................................... 32 21.4. Cooperation in Financing ...................................... 33 - iii - 21.5. Force Majeure ................................................. 33 21.5.1. Events Constituting Force Majeure ..................... 33 21.5.2. Event of Force Majeure ................................ 33 21.5.3. Scope ................................................. 34 21.6. Amendments .................................................... 34 21.7. No Waiver ..................................................... 34 21.8. Notices ....................................................... 34 21.9. Representations and Warranties ................................ 35 21.9.1. GENCO Representations and Warranties .................. 35 21.9.2. LIPA Representations and Warranties ................... 36 21.10. Counterparts .................................................. 36 21.11. Governing Law ................................................. 36 21.12. Captions; Appendices .......................................... 36 21.13. Non-Recourse .................................................. 37 21.14. Severability .................................................. 37 21.15. Rules of Interpretation ....................................... 37 21.16. Property Taxes ................................................ 37 21.17. Binding Effect .............................................. 38 APPENDIX A - FORMULA RATE .................................................. A-1 APPENDIX B - MONTHLY VARIABLE ADJUSTMENT CHARGE ............................ B-1 APPENDIX C - GENERATING UNITS .............................................. C-1 APPENDIX D - DELIVERY POINTS ............................................... D-1 APPENDIX E - MINIMUM LOADINGS, RAMP RATES, START-UP & SCHEDULED SHUTDOWN TIME APPENDIX F - PERFORMANCE INCENTIVES/DISINCENTIVES .......................... F-1 I. DMNC Incentive/Disintentives .................................. F-2 II. Availability Incentive/Disincentive ........................... F-2 III. Property Tax Incentive ........................................ F-4 IV. Heat Rate Incentive/Disincentive .............................. F-5 - iv - POWER SUPPLY AGREEMENT This POWER SUPPLY AGREEMENT ("Agreement") is entered into as of June 26, 1997 ("Contract Date") by and between Long Island Lighting Company, a New York corporation ("GENCO"), and LONG ISLAND POWER AUTHORITY, a corporate municipal instrumentality and political sub-division of the State of New York ("LIPA"). Each of the foregoing are sometimes referred to herein as a "Party" and collectively as the "Parties." RECITALS WHEREAS, GENCO, is currently the owner of the Generating Facilities (as defined herein), LIPA desires to purchase capacity and energy from the Generating Facilities in order to provide Electricity (as defined herein) to its customers on Long Island. WHEREAS, if LIPA exercises its right to purchase the Generating Facilities under the Generation Purchase Right Agreement dated the date hereof, the purchase of capacity and energy hereunder shall terminate. WHEREAS, GENCO and LIPA have set forth in this Agreement the terms and conditions for the sale and delivery of electric capacity and energy by GENCO to LIPA. NOW, THEREFORE, in consideration of the mutual promises set forth herein, the Parties agree as follows: ARTICLE 1 - DEFINITIONS Unless otherwise required by the context in which any defined term appears, the following capitalized terms have the meanings specified in this Article 1. 1.1. "Ancillary Service" means the ancillary services required by NYPP/ISO from time to time to enable the NYPP/ISO to operate the transmission system in New York State in a secure and reliable manner. 1.2. "Applicable Law" means any law, rule, regulation, condition or requirement, guideline, ruling, ordinance or order of or any Legal Entitlement issued by, any Governmental Authority and applicable from time to time to the performance of the obligations of the parties hereunder. 1.3. "Business Day" means any day other than a Saturday, Sunday or Legal Holiday (as defined herein). - 1 - 1.4. "Base Interest Rate" means the lesser of (1) the maximum rate of interest permitted by Applicable Law and (2) (a) for interest accruing during the first six months after the date on which a payment was payable hereunder, 6 months LIBOR, and (b) for interest accruing more than six months after the date on which a payment was payable hereunder, the prime interest rate plus one percentage point, in each case as six month LIBOR or the prime interest rate as reported in The Wall Street Journal for each day. 1.5. "Capacity Charge" has the meaning ascribed to that term in Section 8.1.1. 1.6. "Change of Control" means (i) the acquisition of beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "1934 Act")) of 35% or more of the outstanding shares of securities the holders of which are generally entitled to vote for the election of directors of GENCO or the Guarantor, as the case may be (including securities convertible into, or exchangeable for, such securities or rights to acquire such securities or securities convertible into, or exchangeable for such securities, "Voting Stock"), on a fully diluted basis, by any Person or group of Persons (within the meaning of Section 13 or 14 of the 1934 Act); (ii) any sale, transfer or other disposition of beneficial ownership of 35% or more of the outstanding shares of the Voting Stock, on a fully diluted basis, of GENCO or the Guarantor, as the case may be; (iii) any merger, consolidation, combination or similar transaction of GENCO or the Guarantor, as the case may be, with or into any other Person, whether or not GENCO or the Guarantor, as the case may be, is the surviving entity in any such transaction; (iv) any sale, lease, assignment, transfer or other disposition of the beneficial ownership in 35% or more of the property, business or assets of GENCO or the Guarantor, as the case may be; (v) a Person other than the current shareholders of GENCO or the Guarantor, as the case may be, obtains, directly or indirectly, the power to direct or cause the direction of the management or policies of GENCO or the Guarantor, as the case may be, whether through the ownership of capital stock, by contract or otherwise; (vi) during any period of 12 consecutive calendar months, when individuals who were directors of GENCO or the Guarantor, as the case may be, on the first day of such period cease to constitute a majority of the board of directors of GENCO or the Guarantor, as the case may be; or (vii) any liquidation, dissolution or winding up of GENCO or the Guarantor, as the case may be. 1.7. "Closing Date" has the meaning ascribed to that term in the Merger Agreement (as herein defined). 1.8. "Contract Date" means the date of this Agreement as set forth on page 1 hereof. 1.9. "Contract Year" except as LIPA shall otherwise propose subject to the approval of GENCO which approval shall not be unreasonably withheld, means the calendar year commencing on January 1 in any year and ending on December 31 of that year; - 2 - provided, however, that the first Contract Year shall commence on the Closing Date and shall end on December 31 of that year, and the last Contract Year shall commence on January 1 prior to the date this Agreement expires or is terminated, whichever is appropriate, and shall end on the last day of the Term of this Agreement or the effective date of any termination, whichever is appropriate. Any computation made on the basis of a Contract Year shall be adjusted on a pro rata basis to take into account any Contract Year of less than 365/366 days. 1.10. "Contract Year Budget Plan" shall mean a budget plan for the Contract Year. Thereafter, Contract Year Budget Plan means a budget plan for each Contract Year. 1.11. "Deliver," "Delivered," "Delivering" and "Delivery" shall mean the provision of Electricity at the Delivery Points (as defined herein) of a type known as three-phase alternating current. 1.12. "Delivery Point" shall mean that point at which Electrical Metering Equipment (as defined herein) is located, as described in Appendix D for each of the Generating Facilities. 1.13. "Dependable Maximum Net Capacity" shall mean the maximum amount of Electricity the Generating Facility can Deliver, as periodically determined through "NYPP Method and Procedure 2 -Uniform Method for Rating Generating Capability," as modified from time to time, for the applicable capability period. 1.14. "Dispatch" shall mean LIPA's adjustment and control of the Generating Facilities' net electrical energy output for the purpose of regulating the amount of Electricity Delivered. 1.15. "Electricity" shall mean the electrical energy (real and reactive) and capacity produced by the Generating Facilities and Delivered to the Delivery Point. 1.16. "Electricity Customers" means the retail and wholesale electricity customers of LIPA located in the Service Area. 1.17. "Energy Manager" means Long Island Lighting Company, and its permitted successors and assigns. 1.18. "Energy Management Agreement" means the Energy Management Agreement entered into between Energy Manager and LIPA on or about the date of the signing of this agreement. 1.19. "Event of Default" has the meaning ascribed to that term in Sections 12.2 and 12.3. - 3 - 1.20. "Existing Power Supply Agreements" means the power supply agreements which exist between GENCO and other parties for the purchase of capacity and/or energy which are in effect as of the Contract Date and which were, either in existence as of March 19, 1997 or which were entered into in accordance with the provisions of Section 6.1 of the Acquisition Agreement on or prior to the Closing Daze. 1.21. "Fees-and-Costs" means reasonable fees and expenses of employees, attorneys, architects, engineers, accountants, expert witnesses, contractors, consultants and other persons, and costs of transcripts, printing of briefs and records on appeal, copying and other reimbursed expenses, and expenses of any Legal Proceeding. 1.22. "FERC" means the Federal Energy Regulatory Commission. 1.23. "Financing Parties" means any and all Persons that are lenders, lessors, holders of notes, bonds, or mortgages or investors providing or potentially providing bridge, construction, interim or long-term debt or equity financing, or any refinancing of the same or any capital lease of the Generating Facilities, and any agent or trustee for any such Persons, and their respective successors and assigns. 1.24. "Five Year Capital Improvement Budget" has the meaning as ascribed to that term in Section 9.1.2. 1.25. "Fuel" means the fuel for operating the Generating Facilities. 1.26. "Generating Facilities" means the electric generating facilities owned by GENCO as of March 19, 1997, including, but not limited to: (a) all systems, structures, equipment and appurtenances associated with each Generating Facility's operation and forming a part thereof; (b) permanent administrative offices and building structures housing Generating Facility equipment; size improvements such as roads, drainage, fencing and landscaping; and (c) structures, pipelines and equipment for: (i) the delivery of Fuel; (ii) the transport of water, waste water and other waste disposal; and (iii) other materials, supplies and commodities required for the Services. A list of GENCO's generating units is contained in Appendix C. This definition is to be further developed in accordance with Schedule B of the Merger Agreement (as herein defined). 1.27. "Generating Facility Sites" means each parcel of land upon which each existing Generating Facility is situated, as well as the land contiguous thereto, owned by GENCO as of March 19, 1997. 1.28. "Governmental Authority" means any national, state or local government, any political subdivision or any governmental, quasi-governmental, judicial, public or statutory instrumentality, administrative agency, authority, body or other entity having jurisdiction - 4 - over the Generating Facilities or the electrical energy produced by those facilities or this Agreement other than LIPA. 1.29. "Governmental Rule" means any permit or any law, statute, act, regulation, code, ordinance, rule, judgment, order, decree, directive, requirement, guideline or any similar decision or determination, or any Governmental Authority's official interpretation or administration of any of the foregoing, excluding any acts of LIPA, that governs or affects the Generating Facilities. 1.30. "Guarantor" means the Parent (as defined in the Merger Agreement (as defined herein)). 1.31. "Hazardous Waste" means any waste which by reason of its composition or characteristics is defined or regulated as a hazardous waste, toxic substance, hazardous chemical substance or mixture, or asbestos under Applicable Law, as amended from time to time, including, but not limited to, "Hazardous Substances" as defined in CERCLA and the regulations promulgated thereunder. 1.32. "Legal Entitlement" means any permit, license, approval, authorization, consent and entitlement of whatever kind and however described which is required under Applicable Law to be obtained or maintained by any person with respect to the performance of any obligation under this Agreement. 1.33. "Legal Holiday" is defined as New Year's Day, Martin Luther King Jr.'s Birthday, Lincoln's Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving Day, Day After Thanksgiving, Christmas Eve, Christmas Day and New Year's Eve, or other such days as the Parties may mutually agree, from time to time. 1.34. "Legal Proceeding" means every action, suit, litigation, arbitration, administrative proceeding, and other legal or equitable proceeding having a bearing upon this Agreement. 1.35. "LIPA Fault" means any breach, failure of compliance, or nonperformance by LIPA with its obligations hereunder or any negligence or willful misconduct by LIPA under this Agreement (whether or not attributable to any officer, trustee, member, agent, employee, representative, contractor, subcontractor of any tier, or independent contractor of LIPA) that materially and adversely affects GENCO's performance or GENCO'S rights or obligations under this Agreement. 1.36. "Loss-and-Expense" means any and all losses, liabilities, obligations, damages, delays, disincentives, judgments, deposits, costs (including replacement power costs and incremental fuel costs) expenses, claims, demands, charges, taxes, or expenses, including all Fees-and-Costs. - 5 - 1.37. "Merger Agreement" means the Agreement and Plan of Exchange and Merger by and among BL Holding Corp., Long Island Lighting Company, LIPA and LIPA Acquisition Corp. dated as of the date hereof. 1.38. "Monthly Ancillary Service Charge" has the meaning ascribed to that term in Section 8.1.3. 1.39. "Monthly Capacity Charge" has the meaning ascribed to that term in Section 8.1.1. 1.40. "Monthly Capacity Payment Adjustment Charge" has the meaning ascribed to that term in Section 8.1.4. 1.41. "Monthly Variable Payment Adjustment Charge" has the meaning ascribed to that term in Section 8.1.5 1.42. "Monthly Variable Charge" has the meaning ascribed to that term in Section 8.1.2 1.43. "MW" shall mean megawatt. 1.44. "MWN" shall mean net megawatt. 1.45. "MWh" shall mean megawatt hour. 1.46. "MWhG" shall mean gross megawatt hour. 1.47. "Mvar" shall mean reactive megavolt amperes. 1.48. "New York Power Pool" or "NYPP" means the member system currently comprised of Consolidated Edison Company of New York, Inc., Central Hudson Gas and Electric Corporation, Long Island Lighting Company, Orange and Rockland Utilities, Inc., Rochester Gas and Electric Corporation, New York State Electric and Gas Corporation, Niagara Mohawk Power Corporation, and the New York Power Authority, as such organization or membership may change from time to time. 1.49. "NYPP/ISO" means the Independent System Operator ("ISO") into which the NYPP is proposed to be restructured, to the extent approved by FERC. In the event this restructuring occurs, the principal reliability, security and dispatch function of the NYPP will be performed by the ISO. 1.50. "Off System Sale" means the sale of capacity and/or energy to wholesale or retail customers located outside of the Service Area. 1.51. "Parent" shall have the meaning ascribed to such term in the Merger Agreement. - 6 - 1.52. "Person" means, unless otherwise specified, any individual, corporation, firm companies, trusts, business trusts, legal entities, general partnership, limited partnership, joint venture, association, joint-stock company, trust, limited liability company unincorporated organization, government or any agency or political subdivision therein or other entity, including a Governmental Authority. 1.53. "Prudent Utility Practice" at a particular time means any of the practices, methods and acts (including but not limited to the practices, methods and acts engaged in or approved by a significant portion of the electrical utility industry prior thereto), which, in the exercise of reasonable judgment in light of the facts and the characteristics of the T&D System and System Power Supply known at the time the decision was made, would have been expected to accomplish the desired result at the lowest reasonable cost consistent with reliability, safety and expedition and good customer relations. Prudent Utility Practice is not intended to be limited to the optimum practice, method or act, to the exclusion of all others, but rather to be a spectrum or possible practices, methods or act. 1.54. "Ramp Down" has the meaning ascribed in Article 11. 1.55. "Rating Services" means Moody's Investors, Inc., Standard and Poor's Rating Service, Fitch Investors Services, and Duff & Phelps or any of their successors. 1.56. "Receipt Points" shall mean those points at which gas is received at the Generating Facilities. 1.57. "Service Area" means the counties of Suffolk and Nassau and that portion of the county of Queens constituting GENCO's electric franchise area as of the effective date of the Long Island Power Authority Act. "Service Area" does not include the Villages of Freeport, Rockville Center, and Greenport. 1.58. "Summer Operating Period" shall mean the six month period commencing May 1 through and ending October 31. 1.59. "System Emergency" shall mean any abnormal system condition that requires automatic or immediate manual action to prevent or limit loss of transmission facilities generation resources that could adversely affect the reliability of an electric system. 1.60. "System Power Supply" means the electrical capacity and energy from all power supply sources owned by or under contract to LIPA, including, but not limited to, the Existing Power Supply Agreements, this Agreement, LIPA's rights and interests with respect to Nine Mile Point 2, LIPA's interest in any future generating facilities, spot mark capacity and energy purchases made by the Energy Manager on behalf of LIPA, and a load control programs or measure adopted by LIPA. - 7 - 1.61. "System Pre-Emergency" shall mean a condition which reasonably could be expected, if permitted to continue, to contribute to a System Emergency or to a degraded operating condition and includes the Alert, Warning, Major Emergency, and Restoration conditions described in NYPP Operating Procedure 1 - "Operation of the Bulk Power System," as it may be revised or replaced. 1.62. "T&D System" means the electric transmission and distribution system located in the Service Area which provides the means for transmitting and distributing Generating Facility Electricity and off-system capacity and/or for energy purchases and Off-System Sales. 1.63. "Term" has the meaning ascribed to that term in Article 12.1. 1.64. "Unit Heat Rate" means the Btu of fuel per kilowatt hour of gross generation. 1.65. "Winter Operating Period" shall mean the six month period commencing November 1 and ending April 30. 1.66. "Year Seven" is the twelve (12) month period commencing on the sixth anniversary of the Closing Date. PART I - POWER SUPPLY ARTICLE 2 - POWER SUPPLY 2.1. Delivery of Power. During the Term of this Agreement, except as otherwise provided herein, GENCO agrees to sell and Deliver to LIPA and LIPA agrees to purchase and accept Delivery from GENCO, as follows: 2.1.1. Capacity. GENCO will sell and Deliver to LIPA all the capacity (MW) from the Generating Facilities in accordance with this Agreement. 2.1.2. Energy. GENCO will sell and Deliver to LIPA all the energy (MWh) it produces from the Generating Facilities, in accordance with this Agreement, that LIPA requests to meet the Electricity requirements of its Electricity Customers and for making Off System Sales. 2.1.3. Ancillary Services. GENCO will provide the various Ancillary Services as required by LIPA. LIPA will pay GENCO in accordance with this Agreement, for any cost associated with any Ancillary Services not otherwise compensated by LIPA. 2.2. Delivery Points. Delivery of capacity and energy will be at the Delivery Points, identified in Appendix D, between LIPA's T&D System and GENCO's Generating Facilities. - 8 - 2.3. Dispatch of Generating Facilities. (a) LIPA shall have the responsibility for the Dispatch of the Generating Facilities for both real (MW) and reactive (Mvar) power requirements for providing Electricity to LIPA. LIPA shall also have the responsibility for the Dispatch of Ancillary Services at the Generating Facilities for its Electricity Customers. It is anticipated that Dispatch of the Generating Facilities will be accomplished by LIPA through the use of existing automatic generator control equipment at the Generating Facilities. If the automatic generator control equipment is not currently installed at a Generating Facility or becomes inoperable, GENCO shall manually implement LIPA's Dispatch requirements. Internal combustion units are not equipped with automatic generation control equipment and, therefore, LIPA's Dispatch requirements shall be implemented manually by GENCO. (b) GENCO may, in its sole discretion consistent with Prudent Utility Practice, override the automatic generation, reactive power and load frequency control equipment to preserve the safety and integrity of its Generating Facilities and to react to System Emergencies and System Pre-Emergencies. (c) When Dispatching the Generating Facilities, LIPA will comply with the limitations of Dispatch as set forth in Appendix E, including but not limited to, minimum loadings, ramp rates, scheduled shut down time, internal combustion loadings and start-up times on the Generating Facilities. GENCO will inform LIPA when Prudent Utility Practice requires changes to those limitations, either on a short term or long term basis. Such changes may be required due to conditions such as equipment problems (e.g. crack in turbine, build up in precipitators), opacity and voltage regulation. GENCO will provide LIPA with revised limitations of Dispatch reflecting such changes as required, but not less than once per year. (d) LIPA will provide GENCO with a preliminary schedule of the expected operation of the Generating Facilities (steam units only) on a week ahead and a day ahead basis. For next day and next seven (7) days of operation, the preliminary schedule must be provided to GENCO by 11 AM on the previous day. Schedules for Friday and Saturday must be provided on Thursday by 11 AM. Schedules for Sunday and Monday must be provided on Friday by 11 AM. In the event of a Legal Holiday the schedules must be provided on the last Business Day prior to the Legal Holiday. The above scheduling requirements may be modified in accordance with the NYPP/ISO requirements. LIPA will not be bound by such preliminary schedule and will be permitted to Dispatch the Generating Facilities on a real time basis consistent with the limitations set forth in Section 2.3(c). (e) GENCO will normally operate the Generating Facilities at a power factor between 0.90 and 1.0 (lead or lag Mvar) at the Delivery Points, subject to the limitations defined in Section 2.3(b). Notwithstanding the foregoing, during a System Emergency or System Pre-Emergency, GENCO may operate the Generating Facilities below a 0.90 power factor but not - 9 - below a 0.85 power factor (lead or lag Mvar) at the Delivery Point(s), subject to the limitations defined in Section 2.3(b). 2.4. Maintenance Scheduling. The Generating Facilities' five year maintenance outage schedule will be provided by GENCO ninety (90) days prior to the commencement of each Contract Year. GENCO will not schedule major maintenance outages in the months of June, July and August, except in the case of System Emergency or by mutual agreement, or in response to unusual circumstances in accordance with Prudent Utility Practice. The Parties recognize that certain non-scheduled routine maintenance will be conducted throughout the year, as required, for the purpose of inspection, cleaning and/or repair of power plant equipment. GENCO will attempt to schedule and implement such outages in the off peak periods. GENCO will inform LIPA when such maintenance is required. 2.5. Dependable Maximum Net Capability (DMNC) Testing. GENCO will perform capacity tests on its Generating Facilities to determine the DMNC rating, consistent with the "NYPP Methods and Procedure 2 - Uniform Method for Rating Generating Capability," as it may be revised or replaced. If the NYPP Methods and Procedure -2 is revised or replaced, the target level in the DMNC incentive will be modified as required to reflect these changes. GENCO will provide LIPA with sufficient advance notice of the capacity test dates and provide LIPA the opportunity to witness such tests. GENCO will also provide to LIPA the results of the DMNC tests for each individual generating unit. 2.6. DMNC Target. GENCO will use reasonable efforts, in accordance with Prudent Utility Practice to maintain a DMNC level of 3975 MW (to be revised to be equal to the average of annual DMNC values for the last five-year period prior to the Closing Date as described in Appendix F) during the Summer Operating Period. It is the intent of the Parties that the expense and capital budgets will be sufficient to provide GENCO a reasonable opportunity to maintain the DMNC target level. If LIPA should not approve an adequate budget it is recognized that the DMNC target may not be achieved. In such event, the incentive/disincentive provisions of the DMNC performance incentive shall equitably be adjusted consistent with Section 9.2. In addition, this value will be reduced to reflect any Generating Facility that has been Ramped Down, mothballed, retired, significantly derated, removed from service or incurs a long term outage, except that for a significant derating, removal from service or long term outage the reduction in the DMNC target will apply only to the extent that these events were not attributable to GENCO's failure to follow Prudent Utility Practice. 2.7. T&D System Access. LIPA will provide open access service to GENCO on its T&D System for Off System Sales to the extent that the required T&D capacity is available, priced at applicable FERC tariffs or other non-discriminatory terms and prices. - 10 - PART II- POWER SUPPLY PLANNING AND OPERATIONS ARTICLE 3- FUTURE RESOURCE PLANNING 3.1. Power Supply Planning. This article provides for the provision of information by GENCO to LIPA as requested by LIPA to conduct an Integrated Electric Resource Planning study, and does not obligate LIPA to perform such a study. 3.1.1. Integrated Electric Resource Planning (IERP). The Parties to this Agreement recognize that LIPA intends to perform a comprehensive analysis for meeting the future electric energy requirements of LIPA's Electricity Customers on a periodic basis with due consideration given for environmental issues. This analysis would evaluate all available resource options to meet the electric energy requirements of LIPA Electricity Customers. LIPA, in consultation with GENCO, may establish a schedule for conducting any IERP study. The IERP analysis is intended to be performed to determine the optimum mix of the Generating Facilities and purchased power in an effort to provide the least cost mix of electricity resources including demand side management (DSM) options for LIPA Electricity Customers while observing established reliability criteria. GENCO will contribute to any LIPA evaluation by providing information to LIPA regarding the operation of the Generating Facilities as requested. At the request of LIPA, GENCO shall: (a) Provide projected short and long term maintenance schedules and cost information; (b) Provide information on planned capacity improvements and capital additions on the Generating Facilities (including environmental compliance modifications); (c) Provide information and analysis regarding Fuel usage (type); (d) Provide any other information that may reasonably be required for the conduct of the IERP study. LIPA will pay all reasonable costs for providing this information which are not otherwise compensated by payments to GENCO under this Agreement. PART III - OTHER ITEMS ARTICLE 4 - GENERATING FACILITY SITES 4.1. Interference Compensation. If LIPA's construction or operation of new generating units at Generating Facility Sites materially interferes with either the physical operation of the Generating Facilities or with GENCO's environmental compliance, LIPA shall ensure that GENCO will be compensated for the adverse impact on GENCO of such interference. - 11 - 4.2. Generating Facilities. GENCO shall not sell or otherwise assign any interest in any of its generating units (as set forth on Appendix C) except for (i) liens securing bona fide debt or other encumbrances incurred in the ordinary course of business, (ii) capita] leases or (iii) sales or assignments made with LIPA's prior written consent, which consent shall be deemed to have been given in respect of any and all easements granted pursuant to either Section 5.3(d) of the Generation Purchase Right Agreement dated as of the date hereof by and between GENCO and LIPA or Paragraph 5 of the Grant of Future Rights attached as Schedule F to the Merger Agreement. 4.3. Transmission Requirements. LIPA will be responsible for all transmission reinforcements required in conformance with Prudent Utility Practice for any new generation, including any new interconnections and other T&D System requirements regardless of their location, sufficient to maintain the Delivery of Electricity from the Generating Facilities onto the T&D System. The additional costs charged to GENCO for such transmission reinforcements shall not be greater than if such costs were allocated to all of LIPA's Electricity Customers and transmission service customers on an average system basis. ARTICLE 5 - REGULATlON 5.1. Regulation. GENCO will seek all necessary regulatory approvals appropriate for the provision of the service to LIPA as described herein. LIPA agrees to provide all reasonable support needed to obtain any required regulatory approvals of this Agreement. In addition, each of LIPA and GENCO agree to provide all necessary information in its possession that is reasonably requested by the other Party for future regulatory filings. ARTICLE 6 - STORM RESTORATION 6.1. Storm Declaration. A storm restoration condition shall be deemed to exist when LIPA requests GENCO personnel to assist in restoring storm caused damage to the T&D System. LIPA shall promptly notify GENCO of a storm restoration condition. 6.2. Responsibility During Storm Condition. Personnel designated by GENCO (in its sole discretion) will be made available to perform storm restoration duties for LIPA upon LIPA's request, as contemplated above, provided that GENCO will follow the same storm restoration practice currently followed by GENCO to make GENCO employees available. LIPA will pay for the incremental costs incurred by GENCO in providing storm restoration services in accordance with this Agreement; personnel costs will be paid in accordance with GENCO's personnel salary scale (including any overtime premiums) consistent with the personnel salary cost basis used to establish fixed operation and maintenance costs in the Capacity Charge in accordance with this Agreement. LIPA will also coordinate and pay any incremental costs related to storm restoration training (e.g. car lease, equipment, meals, etc.). This cost will - 12 - be reimbursed by LIPA either through an adjustment in the Monthly Variable Charge as contemplated herein or through another mutually agreed-upon method. ARTICLE 7 - ENVIRONMENTAL CONSIDERATIONS 7.1. Environmental Compliance. GENCO shall comply in all material respects with all Applicable Laws including all applicable laws regulating or affecting any spill, discharge, or release of any Hazardous Waste into or upon any of its land, air, surface water, ground water, or improvements located thereon and shall take all action required (including any investigation, study, sampling and testing, cleanup, removal and remediation) by any Governmental Authority having jurisdiction to remedy any notice of violation or non-compliance issued by such entity, with regard to air emissions, water discharges, noise emissions, hazardous discharges, or any other environmental, health, or safety problems affecting the Generating Facilities. All costs, including those related to any legal or regulatory proceedings, related to such compliance will be reimbursed by LIPA through an adjustment in the Monthly Capacity Charge and Monthly Variable Charge as contemplated herein. GENCO's liability to LIPA for nonperformance of this Section 7.1 shall be limited to liabilities under Article 19, and its recoverability from LIPA for environmental compliance to the extent allowed under Article 8 and Appendix A shall be limited to the extent addressed in Article 19. ARTICLE 8 - PURCHASE PRICE AND PAYMENT 8.1. Price Components. Except as otherwise specifically provided in this Agreement, the prices LIPA will pay to GENCO for Electricity delivered pursuant to this Agreement will be those prices calculated as set forth in Appendix A and Appendix B. During the Term of this Agreement, LIPA will make monthly payments to GENCO consisting of an amount equal to: (i) the Monthly Capacity Charge, (ii) the Monthly Variable Charge, (iii) the Monthly Ancillary" Service Charge, (iv) the Monthly Capacity Payment Adjustment Charge and (v) the Monthly Variable Adjustment Charge. 8.1.1. Monthly Capacity Charge. The Monthly Capacity Charge is 1/12 of the annual Capacity Charge as set forth in Appendix A. The annual Capacity Charge will compensate GENCO for its fixed costs of generating Electricity from the Generating Facilities (including associated common costs) including: (a) return on investment, and depreciation for the undepreciated cost of the Generating Facilities, (b) completed capital additions approved in accordance with Article 9 including Allowance for Funds Used During Construction (AFUDC) (c) insurance, (d) income taxes (federal, state, local, net or gross), (e) property and all other taxes, (f) fixed operations and maintenance costs, including an allowance for scheduled major maintenance and overhauls, (g) research and development costs and (h) administration costs. Generation charges will not be increased as a result of any step-up in the book or tax basis of the assets. In establishing the depreciation schedule for the recovery of the costs of existing - 13 - plant and approved capital additions thereto, the Parties will commission an engineering and economic depreciation study which reflects the age, condition, and market circumstances which influence the remaining economic lives of the Generating Facilities. The results of such depreciation study will be taken into account in determining the proper depreciation schedule and resulting depreciation charges to be included in the filing of the FERC regulated Capacity Charge component of the formula rate described in this Article 8. The annual Capacity Charge will exclude demolition costs, environmental remediation costs related to demolition and site restoration costs in excess of amounts recovered in GENCO's retail rates applicable as of March 1997 and recovered as part of GENCO's depreciation charge, and charges for starts, fired hours of operation and fuel swaps as defined in Appendix B after meeting the threshold levels established in Appendix B. 8.1.2. Monthly Variable Charge. The Monthly Variable Charge will be based on the variable operation and maintenance costs as set forth in Appendix A, multiplied by the actual MWh of operation of the Generating Facilities. The variable operation and maintenance costs include those materials, supplies and maintenance costs, environmental fees or charges, and labor costs, if any, which vary directly with the amount of energy generated. Variable operation and maintenance costs do not include charges for fixed operation and maintenance costs nor charges for starts, fired hours of operation and fuel swaps defined in Appendix B after meeting threshold levels established in Appendix B. Fuel required to operate the Generating Facilities for the purpose of providing energy will be provided in accordance with the provisions of the Energy Management Agreement and, accordingly, there will be no charge for fuel. 8.1.3. Monthly Ancillary Service Charge. LIPA will pay for any costs incurred by GENCO in providing Ancillary Services to LIPA, if any such services are required by LIPA which are not otherwise compensated by LIPA through the Monthly Capacity Charge or the Monthly Variable Charge or otherwise, such charge defined as the "Monthly Ancillary Service Charge." Fuel, if any, required to operate the Generating Facilities for the purpose of providing Ancillary Services will be provided in accordance with the provisions of the Energy Management Agreement and, accordingly, there will be no charge for fuel. 8.1.4. Monthly Capacity Payment Adjustment Charge. The Monthly Capacity Payment Adjustment Charge will provide for the payment by LIPA to GENCO of non-variable related expenses net of insurance proceeds, that can not be planned for with any certainty and are outside the control of GENCO, including extraordinary uninsured damage from storms and other acts of God, catastrophic failure of one or more units of a Generating Facility, and environmental compliance (for events that were not planned for and not of a type covered by any contingency in the applicable budget), provided that all capital expenditures are subject to approval by LIPA as provided in Article 9.4. Incremental costs associated with the retirement of a Generating Facility, as set forth in Section 8.3, or through a Ramp-Down of a Generating Facility in accordance with Article 11 of this Agreement may also be included in the Monthly Capacity Payment Adjustment Clause. - 14 - 8.1.5. Monthly Variable Payment Adjustment Charge. The Monthly Variable Payment Adjustment Charge will provide for the payment of starts, fired hours of operation, and fuel swaps defined in Appendix B after meeting the threshold levels established in Appendix B. Charges incurred for starts, fired hours of operation and swaps after meeting the threshold levels will be billed in total to LIPA by GENCO immediately following the month incurred in accordance with Section 8.5. 8.1.6. NOx and SOx Emission Credit. GENCO shall apply to the Generating Facilities all NOx, SOx and other air emission credits owned by GENCO or attributable to the Generating Facilities, the cost of which to LIPA shall be included at cost without markup in the Monthly Capacity Charge to the extent such costs are fixed costs and in the Monthly Variable Charge to the extent such costs vary with levels of generation. Sixty-seven percent (67%) of any sale or other disposition of emission credits which are excess to the needs of the operation of the Generating Facilities shall be credited to the annual charges to LIPA under the Agreements. GENCO will receive thirty-three percent (33 %) of the net proceeds of any such sale or disposition of emission credits. Parent shall provide LIPA with notice of its intention to sell or otherwise dispose of emission credits in order to allow LIPA sufficient time to submit a bid for such credit, if it so chooses. 8.2. Power Plant Electric Use. It is recognized and agreed that the Generating Facilities require electricity for operating auxiliary systems. This electricity shall be provided by the specific generating units located at the appropriate Generating Facilities and/or from LIPA's T&D System. Any charges from LIPA to GENCO for this auxiliary power from LIPA's T&D System, will be charged to GENCO at non-discriminatory rates, and such charges will be added, without any markup thereto, to the Monthly Variable Charge. 8.3. Generating Facility Major Failure. LIPA and GENCO may mutually agree to cease operating any Generating Facility, due to a major failure of such Generating Facility that the Parties mutually agree is uneconomic to repair. Upon mutual agreement, the Parties may elect to either mothball or retire such a Generating Facility. In the event the Parties mutually agree to mothball such a Generating Facility, with or without preserving the operability of such Generating Facility, LIPA will continue to pay the associated Capacity Charge which will reflect any net cost reduction achieved from the mothballing of such Generating Facility. In the event the Parties mutually agree that a Generating Facility should be retired and decommissioned, LIPA will pay GENCO the remaining unrecovered net plant cost of such Generating Facility, including any unreimbursed approved capital expenditures that have been made and reasonably incurred demolition costs, site restoration costs and any other costs associated with retiring such Generating Facility net of site restoration costs recovered in rates together with accumulated interest on reserves carried by Long Island Lighting Company for such site restoration costs, if any, over the life of such Generating Facility. LIPA will have the - 15 - option to make such payment to GENCO immediately following the decision to retire such Generating Facility or agree to a payment schedule over the remaining term of the Agreement, including interest through an adjustment to the Monthly Capacity Payment Adjustment Clause. 8.4. Incentives/Disincentives. The incentive/disincentive payments contemplated by Appendix F in this Agreement will be calculated and billed separately from the charges established in Appendix A and B no less frequently than annually. 8.5. Payment. GENCO will submit a monthly invoice to LIPA for the Monthly Capacity Charge by the first (1st) Business Day of the month for capacity provided during the month, consistent with the provisions in Section 8.1. GENCO will also submit monthly invoices to LIPA for the Monthly Variable Charge, and any other charges that may be required, consistent with this Article 8, by the fifth (5th) Business Day following the month of service, consistent with the provisions in this Article. Payment of the Monthly Capacity Charge invoiced amounts shall be due and payable by LIPA on the later of the tenth (10th) Business Day of the month or ten (10) Business Days after LIPA receipt of the monthly invoice. Payment of the Monthly Variable Charge invoiced amounts and any other invoices shall be due and payable by LIPA on the later of the first Business Day following the nineteenth (19th) of the month or ten (10) Business Days of LIPA receipt of such invoices. All such payments shall be made in the form of immediately available funds by wire transfer to a bank or financial institution specified by GENCO or in such other form as may be reasonably requested by GENCO. The wired funds will be deemed timely paid if received by the close of business on or before the due date of such payment. 8.6 Late Payment. Any invoiced amount not paid by LIPA by the due date will bear interest at the Base Interest Rate. ARTICLE 9 - BUDGETS 9.1. Budget Preparation. 9.1.1. Initial Capacity and Variable Charge Determination. Not less than a mutually agreed upon number of days prior to (a) the Closing Date and (b) the commencement of each successive five year period thereafter during the Term of this Agreement, GENCO shall prepare and submit to LIPA for review and approval a proposed Five Year Budget Plan, which shall provide details on the fixed and variable costs of operating the GENCO Generating Facilities, as set forth in Sections 8.1.1 and 8.1.2 and as described by Appendix A. The initial such budget, upon approval by LIPA, shall establish the Monthly Capacity Charge and Monthly Variable Charge for the first year of the five year period, which forms the basis for adjustment for subsequent Contract Years in the five year period in accordance with Appendix A. The budget plan for the first Contract Year of the first Five Year Budget Plan will be based upon the - 16 - agreed upon disaggregated generation cost elements relating to the Generating Facilities (including associated common costs) and contained in the proposed 1997 rate year budget in the GENCO 1996 rate case filing with the New York State Public Service Commission, updated for known changes in facts and circumstances, adjusted to the First Contract Year and as set forth in Appendix A. Such budget shall also consider actual historical results prepared on a comparable disaggregated basis for 1996 and thereafter up to the date of adoption of such budget. For subsequent Contract Years the Monthly Capacity Charge and Monthly Variable Charge will be based upon the previous year as adjusted in accordance with indices and approved capital improvement budgets as set forth in Appendix A. 9.1.2. The Year Capital Improvement Budgets. GENCO shall annually prepare and submit to LIPA a rolling Five Year Capital Improvement Budget for incremental capital expenditures and associated rate adjustments for LIPA review and approval. Each Five Year Budget Plan shall consist of five individual Contract Year Budget Plans. 9.2. Budget Review. Not more than a mutually agreed upon number of days subsequent to LIPA receipt of the proposed Five Year Budget Plan and/or rolling Five Year Capital Improvement Budget from GENCO, LIPA shall provide GENCO with any requested changes, additions, deletions or revisions. The GENCO Representative and LIPA Representative will employ reasonable efforts to agree upon a final Five Year Capital Improvement Budget by a mutually agreed upon number of days before the commencement of the initial Contract Year and to approve the first year of the rolling Five Year Capital Improvement Budget a mutually agreed upon number of days prior to the commencement of each Contract Year. Such approved budget for the initial Contract Year (a "Contract Year Budget") shall be effective throughout the Contract Year, subject to modifications as provided in Section 9.4. It is the intent of the Parties that the amounts provided in the Five Year Budget Plan and rolling Five Year Capital Improvement Plan for operation and maintenance expenses and capital expenditures will be sufficient to provide GENCO (or its affiliate, as the case may be) no less of an opportunity to maintain the DMNC, Availability and Heat Rate target levels (as defined in Appendix F) than GENCO has at the execution of this Agreement, and to otherwise maintain the Generating Facilities in good working order, consistent with Prudent Utility Practices, provided that LIPA shall have the final right to determine whether GENCO should proceed with specific capital projects. In the event that LIPA does not approve amounts for operating and maintenance expenses and capital expenditures that provide GENCO (or its affiliate, as the case may be) with the same opportunity to maintain the DMNC, Availability and Heat Rate target levels (as defined in Appendix F) as GENCO has at the execution of this Agreement, such target levels shall be equitably adjusted. 9.3 Failure To Adopt Contract Year Budget. If the Parties are unable to reach agreement concerning all or any portion of the Contract Year Budget for the initial Contract Year of a Contract Year Budget Plan or the first year of the Five Year Capital Improvement Budget as contemplated in Section 9.2, those portions of the Contract Year Budget that are in dispute for - 17 - such Contract Year shall be resolved in a proceeding before the FERC. Those portions of the Contract Year Budget not in dispute shall become effective. 9.4. Capital Improvement Budget Performance. GENCO will provide to LIPA, on a quarterly basis, a report of actual total capital improvement costs versus the approved capital expenditures in the Five Year Capital Improvement Budget. GENCO will prepare a detailed explanation outlining variations of more than ten (10) percent and one million dollars ($1,000,000) from the Five Year Capital Improvement Budget. GENCO will promptly notify LIPA when an event occurs, or is anticipated to occur, which would result in any required unbudgeted capital expenditures. As soon as practical, GENCO will provide an explanation and estimate of such unforeseen incremental costs, as well as a proposal for modification of the applicable Monthly Capacity Charge to recover such costs. LIPA will review and respond to such explanation and Capacity Charge modification proposal within thirty (30) days after receipt. If the parties are unable to reach agreement, this dispute shall be resolved by a final and non-appealable order of FERC in a proceeding under the Federal Power Act. ARTICLE 10 - INCENTIVES/DISINCENTIVES 10.1. Incentives/Disincentives. Four performance incentives/disincentives are established under this Agreement: DMNC, Availability, Hat Rate, and Property Taxes. Each of these incentives/disincentives mechanisms are set forth in Appendix F. ARTICLE 11 - CAPACITY RAMP DOWN 11.1. Capacity Ramp Down Option. Beginning in Year Seven, LIPA may determine to reduce ("Ramp Down") the amount of capacity purchased from GENCO. In such an event, LIPA shall immediately reimburse GENCO for the Capacity Charges in the amount set forth below which would have been recovered from LIPA over the remaining portion of the original term of this Agreement. The Ramp Down will be an aggregate potential reduction amount of no greater than 1500 MW. The Ramp Down schedule is as follows: - 18 - ============== ========= ====================== ====================== Capacity Block Year* Units Approximate Summer Capacity DMNC ============== ========= ====================== ====================== 1 7-9 Far Rockaway 4 300 MW Glenwood 4 & 5 -------------- --------- ---------------------- ---------------------- 2 10-11 E.F.Barrett l & 2 380 MW -------------- --------- ---------------------- ---------------------- 3 12-13 Pt.Jefferson 3 & 4 380 MW -------------- --------- ---------------------- ---------------------- 4 14-15 Northport l 380 MW ============== ========= ====================== ====================== *Year Seven begins on the sixth anniversary of the Closing Date. If economic conditions change during the term of this Agreement, the order of the above Ramp Down schedule may be changed if mutually agreed upon by the Parties. The Ramp Down amount shall be for the full amount of the capacity in each agreed upon capacity block as set forth above. If LIPA exercises this option in years 7 through 10 of this Agreement, LIPA will immediately pay GENCO 100 percent of the present value, at the time the Ramp Down option is exercised, of all the related Capacity Charges, that it would have otherwise received for that capacity block of unit(s) which was ramped down, for the remainder of the term of this Agreement, adjusted for the removal of net salvage as used in the depreciation calculation. GENCO will be entitled to these payments regardless of the future disposition of the Generating Facilities. GENCO will have the responsibility for all costs for demolition, environmental remediation and site restoration. If LIPA exercises this option in subsequent years, the recovery percentage will be reduced for such capacity block(s) through the end of the term of this Agreement as follows: ========================= ======================== Year Option Exercised Fixed Cost Reduction ========================= ======================== 11 12.5% ------------------------- ------------------------ 12 25.0% ------------------------- ------------------------ 13 37.5% ------------------------- ------------------------ 14 50.0% ------------------------- ------------------------ 15 62.5% ========================= ======================== If LIPA exercises this option, GENCO will be entitled to the fixed cost reduced by the above percentages regardless of the future disposition of any released capacity. The present value will be determined using GENCO's weighted cost of capital used in the Capacity Charge to LIPA - 19 - GENCO may use any capacity released pursuant to this option to bid on new LIPA capacity requirements or on LIPA capacity requirements to replace other Ramp Down capacity. If GENCO wins such bid, it will be paid its bid price. If GENCO continues to operate the ramped down unit, GENCO will use reasonable efforts to market the released capacity. Allocation of profits from Off System Sales of capacity and energy from non-ramped down and ramped down units during the term of this Agreement shall be shared based on the following schedule: ============================ ===================== Non Ramped Down Capacity Ratio: LIPA/GENCO ---------------------------- --------------------- Years 1 to 15 67% / 33% ---------------------------- --------------------- Ramped Down Capacity ---------------------------- --------------------- Years 7 to 10 67% / 33% ---------------------------- --------------------- Year 11 60% / 40% ---------------------------- --------------------- Year 12 53% / 47% ---------------------------- --------------------- Year 13 46% / 54% ---------------------------- --------------------- Year 14 39% / 61% ---------------------------- --------------------- Year 15 33% / 67% ============================ ===================== The profits for any capacity sales from such Ramp Down capacity will be based on all costs required for such sale that have not been recovered by GENCO. Such recovery is understood to include any prepayment by LIPA of fixed O&M costs. If LIPA exercise of this option results in operational inefficiencies at Northport, the Capacity Charges will be adjusted to reflect demonstrable cost increases due to such inefficiencies. ARTICLE 12 - TERM and TERMINATION 12.1. Term. The Term of this Agreement shall commence on the Closing Date and, except as provided in Article 4 and as otherwise provided herein, shall remain in full force and effect for an initial term of fifteen (15) years from such Closing Date. At the end of the Term of this Agreement, LIPA may renew this Agreement, for all capacity upon which it has not exercised its Ramp Down option, under substantially the same terms and conditions as set forth herein, including but not limited to the continuation of a Ramp Down option. This Agreement (other than Article 4) shall terminate upon the purchase of the Generating Facilities by LIPA under the Generation Purchase Right Agreement attached as Exhibit D to the Merger Agreement. - 20 - 12.2. Termination For Cause by GENCO. GENCO shall have the right to terminate this Agreement for cause after an Event of Default determined in accordance with the provisions of this Section 12.2 shall have occurred. 12.2.1 Events of LIPA Default Defined. Each of the following shall constitute an Event of Default on the part of the LIPA for which GENCO may terminate this Agreement upon compliance with the notice and cure provisions set forth below: (1) Failure to Pay. The failure of LIPA to pay undisputed amounts owed to GENCO under this Agreement within 90 days of such amounts having become due. (2) Failure to Comply with Agreement. The failure or refusal by LIPA substantially to perform any material obligation under this Agreement unless such failure or refusal is excused by Force Majeure except that no such failure or refusal to pay or perform in clauses (1) and (2) of this Section 12.2(A) shall constitute an Event of Default giving GENCO the right to terminate this Agreement for cause under this Section unless: (a) GENCO has given prior written notice to LIPA stating that a specified failure or refusal to perform exists which will, unless corrected, constitute a material breach of this Agreement on the part of LIPA and which will, in its opinion, give GENCO a right to terminate this Agreement for cause under this Section unless such default is corrected within a reasonable period of time, and (b) LIPA has neither challenged in an appropriate forum GENCO's conclusion that such failure or refusal to perform has occurred or constitutes a material breach of this Agreement nor corrected or diligently taken steps to correct such default within a reasonable period of time but not more than 60 days from the date of the notice given pursuant to clause (a) of this subsection (but if LIPA shall have diligently taken steps to correct such default within a reasonable period of time, the same shall not constitute an Event of Default for as long as LIPA is continuing to take such steps to correct such default). 12.3. Termination For Cause by LIPA. LIPA shall have the right to terminate this Agreement for cause after an Event of Default determined in accordance with the provisions of this Section 12.3 shall have occurred. 12.3.1 Events of GENCO Default Defined. (1) Events of Default Not Requiring Cure Opportunity for Termination. Each of the following shall constitute an Event of Default on the part of GENCO for which LIPA may terminate this Agreement without any requirement of cure opportunity: (a) Change of Control of GENCO. Change of Control of GENCO or the Guarantor has occurred; provided, however, that the combination effectuated under the - 21 - Merger Agreement shall not constitute a Change of Control of GENCO for purposes of this provision. (b) Voluntary Bankruptcy. The written admission by GENCO or the Guarantor that it is bankrupt, or the filing by GENCO or the Guarantor of a voluntary petition under the Federal Bankruptcy Code, or the consent by GENCO or the Guarantor to the appointment by a court of a receiver or trustee for all or a substantial portion of its property or business, or the making by GENCO or the Guarantor of any arrangement with or for the benefit to its creditors involving an assignment to a trustee, receiver or similar fiduciary, regardless of how designated, of all or a substantial portion of GENCO's or the Guarantor's property or business. (c) Involuntary Bankruptcy. The final adjudication of GENCO or the Guarantor as bankrupt after the filing of an involuntary petition under the Federal Bankruptcy Code, but no such adjudication shall be regarded as final unless and until the same is no longer being contested by GENCO or the Guarantor nor until the order of the adjudication shall be regarded as final unless and until the same is no longer being contested by GENCO or the Guarantor nor until the order of the adjudication is no longer appealable. (d) Credit Enhancement. Failure of GENCO to supply, maintain, renew, extend or replace the credit enhancement required under Article 18 hereof in the event there is a Material Decline in the Guarantor's Credit Standing, as defined in Section 18.1.2. hereof. (e) Letter of Credit Draw. Failure of GENCO to supplement, replace or cause to be reinstated the letter of credit as described in Section 18.1.3. hereof within 30 days following draws equal to, in the aggregate, 50% of the face value thereof. (2) Events of Default Requiring Cure Opportunity for Termination. Each of the following shall constitute an Event of Default on the part of GENCO for which the LIPA may terminate this Agreement upon compliance with the notice and cure provisions set forth below: (a) Failure to Comply with Agreement. The failure or refusal by GENCO to substantially perform any material obligation under this Agreement except that no such failure or refusal shall constitute an Event of Default giving LIPA the right to terminate this Agreement for cause under this subsection unless: (i) LIPA has given prior written notice to GENCO or the Guarantor, as applicable, stating that a specified failure or refusal to perform exists which will, unless corrected, constitute a material breach - 22 - of this Agreement on the part of GENCO or the Guaranty on the part of the Guarantor and which will, in it opinion, give LIPA a right to terminate this Agreement for cause under this Section unless such default is corrected within a reasonable period of time, and (ii) GENCO or the Guarantor, as applicable, has neither challenged in an appropriate forum the LIPA conclusion that such failure or refusal to perform has occurred or constitutes a material breach of this Agreement nor corrected or diligently taken steps to correct such default within a reasonable period of time, but not more than 60 days, from receipt of the notice given pursuant to clause (i) of this subsection (but if GENCO or the Guarantor shall have diligently taken steps to correct such default within a reasonable period of time, the same shall not constitute an Event of Default for as long as GENCO or the Guarantor is continuing to take such steps to correct such default). 12.4. Procedure For Termination For Cause. (A) Two-Year Notice. If any Party shall have a right of termination for cause in accordance with either Section 12.2 or Section 12.3, the same may be exercised by notice of termination given to the Party in default at least two years prior to (or, in the case of a bankruptcy or insolvency default or a Change of Control, simultaneously with or, in the case of an Event of Default specified in clause (d) or (e) of Section 12.3.1 hereof, six months) the date of termination specified in such notice (the "Termination Date"). 12.5. Non-Binding Mediation; Arbitration. (a) Dispute Resolution. Any dispute arising out of or relating to this Agreement shall be resolved in accordance with the procedures specified in this Section, which shall constitute the sole and exclusive procedures for the resolution of such disputes. (b) Negotiation and Non-Binding Mediation. The parties agree to use their best efforts to settle promptly any disputes or claims arising out of or relating to this Agreement through negotiation conducted in good faith between executives having authority to reach such a settlement. Either party hereto may, by written notice to the other party, refer any such dispute or claim for advice or resolution by mediation by an Independent Engineer, financial advisor or other suitable mediator. The parties shall mutually agree on the selection of such mediator. If the parties are unable to agree, the panics shall each designate a qualified mediator who, together, shall choose the mediator for the particular dispute or claim. If the mediator is unable, within 30 days of such referral, to reach a determination as to the dispute that is acceptable to the parties hereto, the matter shall be referred to applicable Legal Proceedings. - 23 - All negotiations and mediation discussions pursuant to this paragraph shall be confidential subject to Applicable Law and shall be treated as compromise and settlement negotiations for purposes of Federal Rule of Evidence 408 and applicable state rules of evidence. (c) Arbitration. Any dispute arising out of or relating to this Agreement or the breach, termination, or validity thereof, except for a termination due to a Change in Control or due to a bankruptcy or insolvency or a failure to provide, renew, reinstate or replace the credit enhancement required pursuant to Section 18.1 or a dispute concerning the charging or establishment of rates under this Agreement which dispute has not been resolved by a negotiation or mediation as provided in subsection (B) hereof within 30 days from the date that either negotiations or mediation shall have been first requested, shall be settled by arbitration before three independent and impartial arbitrators (the "Arbitrators") in accordance with the then current rules of the American Arbitration Association, except to the extent such rules are inconsistent with any provision of this Agreement, in which case the provisions of this Agreement shall be followed, and except that the arbitrations under this Agreement shall not be administered by the American Arbitration Association. The Arbitrators shall be (a) independent of the parties and disinterested in the outcome of the dispute, provided that residents of Long Island shall not be deemed to be interested merely by virtue of their residence on Long Island, (b) attorneys, accountants, investment bankers, commercial bankers or engineers familiar with contracts governing the operation of electric utility assets, and (c) qualified in the subject area of the issue in dispute. The Arbitrators shall be chosen by the parties, with each party choosing one arbitrator and those arbitrators choosing the thin! Arbitrator. Judgment on the award rendered by the Arbitrators may be entered in any court in the State of New York having jurisdiction thereof. If either party refused to participate in - -- faith in the negotiations or mediation proceedings described in subsection 12.5(B) hereof, the other may initiate arbitration at any time after such refusal without waiting for the expiration of the applicable time period. Except as provided in subsection 12.5(D) hereof relating to provisional remedies, the Arbitrators shall decide all aspects of any dispute brought to them including attorney disqualification and the timeliness of the making of any claim. (d) Provisional Relief. Either party may, without prejudice to any negotiation, mediation, or arbitration procedures, proceed in any court to obtain provisional judicial relief if, in the such party's sole discretion, such action is necessary to avoid imminent irreparable harm, to provide uninterrupted electrical and other services, or to preserve the status quo pending the conclusion of the dispute procedures specified in this Section. (e) Awards. The Arbitrators shall have no authority to award punitive damages or any other damages aside from the prevailing party's actual and consequential damages plus interest at the Base Interest Rate from the date such damages were incurred. The Arbitrators shall not have the authority to make any ruling, finding, or award that does not conform to the terms and conditions of this Agreement. The Arbitrators may award reasonble attorneys' fees and costs of the arbitration. The Arbitrator's award shall be in writing and shall be set forth the factual and legal bases for the award. - 24 - (f) Information Exchange. The Arbitrators shall have the discretion to order a prehearing exchange of information by the parties, including, without limitation, the production of requested documents, the exchange of summaries of testimony of proposed witnesses, and the examination by disposition of parties. The parties hereby agree to produce all such information as ordered by the Arbitrators and shall certify that they have provided all applicable information and that such information is true, accurate and complete. (g) Site of Arbitration. The site of any Arbitration brought pursuant to this Agreement shall be either Mineola, New York or Hauppauge, New York. ARTICLE 13 - DESIGNATION OF REPRESENTATIVES 13.1. LIPA Representative. Within thirty (30) Business Days after the execution of this Agreement, LIPA shall select a Representative (the "LIPA Representative"). The LIPA Representative will act for and on behalf of LIPA on all matters concerning this Agreement for which LIPA has authorized such agent to act. LIPA will advise GENCO as to the scope of such authorization. In all such matters, LIPA shall be bound, to the extent permitted by Applicable Law by the written communications, directions, requests and decisions made by the LIPA Representative. LIPA shall promptly notify GENCO in writing of LIPA Representative selection and any subsequent replacement(s). 13.2. GENCO Representative. Within thirty (30) Business Days after the execution of this Agreement, GENCO will select a Representative (the "GENCO Representative") subject to LIPA approval. The GENCO Representative will act for and on behalf of GENCO in all matters concerning this Agreement for which GENCO has authorized such agent to act. In all such matters, GENCO shall be bound by the written communications, directions, requests and decisions made by GENCO Representative. GENCO will advise LIPA as to the scope of such authorization. GENCO shall promptly notify LIPA in writing of GENCO's Representative selection and any subsequent replacement(s). ARTICLE 14 - METERING 14.1. Electric Metering. 14.1.1. Electric Metering Equipment. If the existing meters are inadequate to meet the electricity measuring requirement set forth below, GENCO at its own expense (but subject to cost recovery provision of Article 8 and 9) shall procure, own, install, test, operate and maintain industry standard revenue meters and instrument transformers; shall install metering mounting equipment; shall install and maintain a dedicated datalink for telemetry purposes to measure electricity Delivered to LIPA by GENCO. The aforementioned equipment (the "Metering Equipment") shall be procured, tested, installed, operated and maintained by GENCO, or - 25 - GENCO's designee, in accordance with Prudent Utility Practice. LIPA shall not breach the integrity of the wiring or instrument transformers for any reason. LIPA, at its own expense, may own, install and maintain other meters and associated equipment for purposes of measuring Electricity Delivered from GENCO. ("LIPA's Metering Equipment"). 14.1.2 Testing of Metering Equipment. GENCO shall test the Metering Equipment for accuracy every two (2) years or at any time within thirty (30) days after a written request by LIPA if LIPA reasonably believes the metering measurement accuracy of the Metering Equipment is inaccurate by two (2) percent. At LIPA's option, such tests may be witnessed by a LIPA representative. Metering measurement accuracy between ninety eight (98) and one hundred and two (102) percent shall be deemed acceptable. In the event any Metering Equipment is found outside the acceptable limits of accuracy specified in the prior sentence, it shall be immediately repaired, calibrated or replaced. Upon completion of any examination, maintenance, repair, calibration or replacement of any Metering Equipment, such equipment shall be, sealed by GENCO. 14.1.3 Meter Reading. Meter readings shall be conducted every month or as otherwise mutually agreed by the Parties. 14.1.4 Metering Inaccuracies. When, as the result of a test pursuant to section 14.1.2, the Metering Equipment is found to be inaccurate by more than two (2) percent or the Metering Equipment is otherwise functioning improperly, the correct amount of Electricity Delivered to LIPA for the period during which such inaccurate measurements were made, shall be determined as follows: (a) GENCO and LIPA may mutually agree to use the readings of LIPA Metering Equipment, if any, to calculate the correct amount of Electricity Delivered. LIPA shall furnish the most recent test and calibration documentation for LIPA metering equipment. If LIPA's meters are utilized, an adjustment for transmission and transformation losses shall be made to such meter readings, as applicable; (b) If LIPA's Metering Equipment has not been installed, or if it is found to be unacceptable, then the Parties shall jointly prepare an estimate of the correct reading on the basis of available information, including the assumption that if the duration of the metering inaccuracy cannot be determined, such duration shall be deemed to have persisted for fifty percent (50%) of the time between the last meter reading and the discovery of the inaccuracy. 14.2. Gas Metering 14.2.1. Gas Metering Equipment. If the existing meters are inadequate to meet the gas measuring requirements set forth below, GENCO at its own expense (but subject to the cost recovery provision of Articles 8 & 9 shall procure, own, install, operate and maintain industry standard revenue grade meters; install, operate and maintain, at the Receipt Points, a dedicated - 26 - datalink for telemetery purposes to measure gas fuel delivered by GENCO or other gas suppliers. The aforementioned equipment (the "Gas Metering Equipment") shall be installed, operated and maintained by GENCO, or GENCO's designee, in accordance with prudent gas utility practice. LIPA shall not breach the integrity of the wiring or piping for any reason. LIPA, at its own expense, may own, install and maintain other meters and associated equipment for purposes of measuring gas Delivered from GENCO. ("LIPA's Gas Metering Equipment"). 14.2.2. Testing of Self Checking Gas Metering Equipment. GENCO shall test the Metering Equipment for accuracy at any time within thirty (30) days after a written request by LIPA, if LIPA reasonably believes the metering measurement accuracy of the Metering Equipment is inaccurate by two (2) percent. At LIPA's option, such tests shall be witnessed by LIPA representative. Metering measurement accuracy between ninety eight (98) and one hundred and two (102) percent shall be deemed acceptable. In the event any Metering Equipment is found outside the acceptable limits of accuracy specified in the prior sentence, it shall be immediately repaired, recalibrated or replaced. Upon completion of any examination, maintenance, repair, recalibration or replacement of any Metering Equipment, such equipment shall be, sealed by GENCO. 14.2.3. Testing of Non Self Checking Gas Metering Equipment. At LIPA expense, GENCO shall test the Metering Equipment for accuracy on a regular schedule that conforms with industry revenue metering practices, and which is prudent to maintain acceptable metering accuracy or at any time within thirty (30) days after a written request by LIPA, if LIPA reasonably believes the metering measurement accuracy of the Metering Equipment is inaccurate by two (2) percent. LIPA's option, such tests shall be witnessed by LIPA representative. Metering measurement accuracy between ninety eight (98) and one hundred and two (102) percent shall be deemed acceptable. In the event any Metering Equipment is found outside the acceptable limits of accuracy specified in the prior sentence, it shall be immediately repaired, recalibrated or replaced at the expense of LIPA. Upon completion of any examination, maintenance, repair, recalibration or replacement of any Metering Equipment, such equipment shall be, sealed by GENCO. 14.2.4. Gas Meter Reading. Meter readings shall be conducted every month, or as otherwise mutually agreed by the Parties. 14.2.5. Gas Metering Inaccuracies. When, as the result of a test pursuant to section 14.2.2 and/or 14.2.3, the Gas Metering Equipment is found to be inaccurate by more than two (2) percent or the Gas Metering Equipment is otherwise functioning improperly, the correct amount of Gas delivered to LIPA for the period during which such inaccurate measurements were made, shall be determined as follows: (a) GENCO and LIPA may mutually agree to use the readings of LIPA's Metering Equipment, if any, to calculate the correct amount of Gas Delivered. LIPA shall furnish the most recent test and calibration documentation for LIPA metering equipment. If - 27 - LIPA's meters are utilized, an adjustments for supercompressibility (following AGA standards) and base pressure should be made to such meter readings, as applicable. (b) If LIPA Metering Equipment has not been installed, or if it is found to be inaccurate, then the Parties shall jointly prepare an estimate of the correct reading on the basis of available information, including the assumption that if the duration of the metering inaccuracy cannot be determined, such duration shall be deemed to have persisted for fifty percent (50%) of the time between the last meter reading and the discovery of the inaccuracy. 14.3. Oil Fuel Measurement. GENCO will perform monthly Fuel oil tank gauging to determine the amount of No. 6 Fuel oil, No. 2 Fuel oil and kerosene in storage at each Generating Facility. The gauging will occur on a pre-determined date prior to the end of the month. Usage from the gauging date until the last calendar day of the month will be calculated based on the average monthly Heat Rate at each Generating Facility and the actual generation between the gauging date and the end of such month. This calculated amount will be subtracted from the oil in storage on the gauging day to determine the oil in storage on the last day of the month. Fuel oil deliveries during each month will be measured at the time of delivery. The difference between the oil in storage at the beginning and end of the month will be added to the oil deliveries received during the month to calculate the net oil consumed for the month, in accordance with the current methodology of calculating Generating Facility Fuel oil consumption. Changes in unit operation may necessitate mutually agreed to modifications to this procedure. ARTICLE 15 - REPORTS 15.1. Reports. Twenty Business Days following the end of each quarter, GENCO shall submit to LIPA a report summarizing the Electricity Delivered, Fuel burned, the status of maintenance on the Generating Facilities, the status of all construction projects, Contract Year Budget Plan performance and such other information as the Parties may mutually agree. 15.2. Other Information. (a) Upon LIPA reasonable request, GENCO shall submit to LIPA any other material information in GENCO's possession concerning the Generating Facilities. If such requested information is not in GENCO's possession, GENCO will obtain and prepare such information, to the extent possible, and charge LIPA for all additional reasonable costs incurred to obtain and prepare such information. (b) Prior to the Closing Date, GENCO shall provide to LIPA the following information, which information shall be certified by GENCO to be to the best of its knowledge, based on reasonably available information - 28 - (i) the historical fixed costs for each year from 1994 through 1996 associated with the Generating Facilities, broken down by the categories of costs set forth in Section 8.1.1(a) through (h); (ii) the historical costs of complying with all Government Approval applicable to the Generating Facilities. 15.3. Litigation; Permit Lapses. Promptly upon obtaining knowledge thereof, each Party shall submit to the other Party written notice of (and, upon request, copies of any relevant non-privileged documents in the Party's possession relating to): (i) any material litigation, claims, disputes or actions actually filed, or any material litigation, claims, disputes or actions which are threatened, concerning in each case this Agreement or the Generating Facilities; (ii) actual refusal to grant, renew or extend, or any action pending or any action filed with respect to, the granting, renewal or extension of any permit or any material threatened action regarding the same in this Agreement or the Generating Facilities; (iii) any dispute with any Governmental Authority relating to this Agreement or the Generating Facilities of GENCO or LIPA; and (iv) without regard to their materiality, all penalties or notices of violation issued by any Governmental Authority relating to this Agreement or the Generating Facilities. ARTICLE 16 - GENERAL SERVICE REQUIREMENTS 16.1. General Service Requirements. 16.1.1. Standard of Performance. In performing its obligations under this Agreement GENCO shall operate in accordance with Prudent Utility Practice and all Governmental Rules and shall seek to minimize costs in accordance with Prudent Utility Practice and Governmental Rules. 16.1.2. Limitation of Liability. GENCO liability for any failure to comply with Section 16.1.1 shall be limited to the performance incentives provided in Article 10, except as set fort in Article 19. 16.1.3. Accounting Controls. GENCO shall provide all accounting, bookkeeping, an administrative services in connection with the Electricity Costs, such accounting to be consistent with the Federal Energy Regulatory Commission Uniform System of Accounts and Generally Accepted Accounting Principles (GAAP) consistently applied. In areas of conflict, FERC, accounting principles apply. All books and records upon which any rates or charges under this Agreement are based shall be made available by GENCO for audit by LIPA. ARTICLE 17 - INSURANCE - 29 - GENCO shall maintain an insurance program with respect to the Generating. Facilities and its activities under this Agreement similar in all material respects to the program described in Appendix 4 - Insurance of the Management Services Agreement dated the date hereof between LIPA and the Energy Manager. ARTICLE 18 - CREDIT ENHANCEMENT 18.1 Credit Enhancement in Certain Circumstances. 18.1.1. Limitations. After the Closing Date, GENCO agrees that it will remain an affiliate of the Guarantor. 18.1.2. Material Decline in the Guarantor's Credit Standing. For purposes of this Section, a "Material Decline in the Guarantor's Credit Standing" shall be deemed to have occurred if (1) in the event that the Guarantor has long-term senior debt outstanding which has a credit rating by a Rating Service, such rating by a Rating Service is established or is reduced below investment grade level or (2) in the event the Guarantor does not have long-term senior debt outstanding which has a credit rating by a Rating Service, and the Guarantor has a credit rating by a Rating Service, such credit rating is established or reduced below investment grade level, or (3) in the event the Guarantor does not have long-term senior debt outstanding which has a credit rating by a Rating Service and the Guarantor does not have a credit rating by a Rating Service, in which event the Guarantor shall seek a credit rating for the Guaranty from a Rating Service, such rating is established or is reduced below investment grade level or if no rating is established. GENCO immediately shall notify LIPA of any Material Decline in the Guarantor's Credit Standing. 18.1.3. Credit Enhancement. If, at any time during the Term hereof, a Material Decline in the Guarantor's Credit Standing occurs, GENCO shall immediately notify LIPA's Representative thereof and, within 30 days after such occurrence, shall provide credit enhancement of its obligations hereunder at its sole cost and expense in the form either of (1) an unconditional guarantee of all of GENCO's obligations hereunder, the Manager's obligations under the Management Services Agreement, and the Energy Manager's obligations under the Energy Management Agreement provided by a corporation or financial institution whose long-term senior debt is or would be rated investment grade by a Rating Service or (2) an irrevocable letter of credit securing GENCO's obligations hereunder, the Manager's obligations under the Management Services Agreement, and the Energy Manager's obligations under the Energy Management Agreement in a face amount of $60,000,000 provided by a financial institution whose long-term senior debt is rated investment grade by a Rating Service; provided, however, that if any such letter of credit is drawn upon in the aggregate in an amount equal to 50% of the face value of such letter of credit, GENCO shall, within 30 days thereafter, supplement or replace such letter of credit with an additional letter of credit such that the total amount of such letter of credit then available equals $60 million. The amount of such letter of credit shall be - 30 - reduced by $30 million if the Energy Management Agreement has theretofore been or is thereafter terminated and by $26 million if the Management Services Agreement has theretofore been or is thereafter terminated, such obligation to continue until the expiration or termination of this Agreement, the Management Services Agreement and the Energy Management Agreement. ARTICLE 19 - ALLOCATION OF RISK OF CERTAIN COSTS AND LIABILITIES. Except to the extent due to LIPA Fault (as determined by either a final non-appealable order or judgment of a court of competent jurisdiction (including administrative tribunals) or a final non-appealable binding arbitration decision), GENCO shall be responsible and liable to LIPA for, and shall not be entitled to reimbursement or cost recovery under Article 8 or otherwise from LIPA for any Loss-and-Expense incurred by GENCO: (a) due to any gross negligence or willful misconduct by GENCO during the period commencing six months prior to the Closing Date to the extent GENCO knew or should have known of such gross negligence or willful misconduct and during the Term in carrying out its obligations hereunder, (b) due to any violation of or failure of compliance with Applicable Law by GENCO (except as provided below) during the period commencing six months prior to the Closing Date to the extent GENCO knew or should have known of such violation or failure of compliance and during the Term which materially and adversely affects (i) the condition or operations of the T&D System or the Generating Facilities, (ii) the financial condition of LIPA, (iii) the performance or ability of GENCO to perform its obligations under this Agreement, or (iv) the cost of providing electric service to the customers of the T&D System, provided, however, that GENCO shall not be responsible and liable to LIPA under this clause b) with respect to any violation of, failure of compliance with, or liability under, Environmental Laws (as defined in the Acquisition Agreement) for which LIPA or GENCO may be strictly liable - 31 - provided that GENCO acted in a manner consistent with Prudent Utility Practice. Notwithstanding the foregoing, GENCO shall in all events be liable for any fine or penalty arising by reason of any violation of or failure of compliance with Applicable Law for acts or omissions of GENCO not consistent with Prudent Utility Practice, (c) due to any criminal violation of Applicable Law by GENCO prior to, on or after the Closing Date, or (d) due to an event which would otherwise permit recovery of a cost under Section 8.1.4 (Monthly Capacity Payment Adjustment Charge) of an excess capital expenditure under Section 9.4, that is incurred by reason of actions or omissions of GENCO not consistent with Prudent Utility Practice. Any such action or omission identified in (a), (b), (c) or (d) shall be determined by either a final non-appealable order or judgment of a court or regulatory body of competent jurisdiction (including administrative tribunals) or a final non-appealable binding arbitration decision and shall be attributable to GENCO for purposes of the preceding sentence whether it is attributable to GENCO or to any officer, member, agent, employee or representative of GENCO or any Affiliate and any contractor, subcontractor of any tier. The provisions of this Article 19 are intended to modify GENCO's right to receive payments under Article 8 and Appendix A. ARTICLE 20 - PROPRIETARY INFORMATION 20.1. Request Not To Disclose. The parties hereto hereby acknowledge that GENCO has a proprietary interest in certain information that may be furnished pursuant to the provisions of this Agreement. GENCO acknowledges that LIPA may be required to disclose information upon request under Applicable Law. GENCO shall have the right to request LIPA in writing not to publicly disclose any information which GENCO believes to be proprietary and not subject to public disclosure under Applicable Law, any such request to be accompanied by an explanation of its reasons for such belief. Any information which is the subject of such a request shall be clearly marked on all pages, shall be bound, and shall be physically separate from all non-proprietary information. At GENCO's request, LIPA and its agents, consultants and employees (including its consulting engineer) given access to such information shall execute and comply with the terms of a confidentiality agreement in a mutually acceptable form, subject to Applicable Law. 20.2. LIPA's Non-Disclosure. In the event LIPA receives a request from the public for the disclosure of any information designated as proprietary by GENCO pursuant to Section 20.1, - 32 - LIPA (i) shall use reasonable efforts, consistent with applicable law, to provide notice to GENCO of the request prior to any disclosure, and (ii) shall use reasonable efforts, consistent with applicable law, to keep in confidence and not disclose such information unless it is entitled to do so pursuant to the provisions of Section 2O.3. GENCO shall indemnify, hold harmless and defend LIPA against costs incurred from the withholding from public disclosure of information designated as proprietary by GENCO or otherwise requested by GENCO to be withheld. 20.3. Permitted Disclosures. Notwithstanding any confidential or proprietary designation thereof by GENCO, LIPA may disclose the following information (i) information which is known to LIPA without any restriction as to disclosure or use at the time it is furnished, (ii) information which is or becomes generally available to the public without breach of any agreement, (iii) information which is received from a third party without limitation or restriction on such third party or LIPA at the time of disclosure, (iv) with regard to capacity that has not been ramped down, documentation of historical Generation Facilities' operations and costs, and all costs, assumptions and supporting data associated with the determination of the FERC approved contract rate for capacity and energy under this agreement, (v) information with respect to (a) Electricity sales to LIPA by time of day, month and year, to the extent available; (b) prices paid by LIPA to GENCO for capacity, energy and any Ancillary Services under this Agreement; and (c) power plant emission information and environmental compliance information and any information required to be provided to FERC to support rate filings with FERC to the extent such information directly relates to GENCO's provision of service to LIPA under this Agreement, and (vi) following notice to GENCO pursuant to Section 20.2, information which, in the opinion of counsel for LIPA, is required to be or may be disclosed under any Applicable Law, an order of a order of competent jurisdiction, or a lawful subpoena. ARTICLE 21 - MISCELLANEOUS PROVISIONS 21.1. Agreement. This Agreement consists of the terms and conditions set forth in the body hereof and the Appendices and other attachments hereto. This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof. In the event of a conflict, variation or inconsistency between or among the Appendices, other attachments and the terms and conditions set forth in the body hereof, the terms and conditions contained in the body hereof shall govern. 21.2. Relationship of the Parties. GENCO is deemed to be an independent contractor hereunder and shall not be deemed as a partner, joint venturer or affiliate of LIPA. 21.3. Assignment. This Agreement shall not be assignable by either party without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld or delayed except LIPA may assign its interest in this Agreement to another State agency if required by or as the result of State law. Notwithstanding the foregoing sentence, nothing herein shall prevent GENCO, without LIPA's consent, from selling, assigning or transferring a - 33 - pecuniary interest in any payment, revenues, proceeds, incentive, profits or income derived from this Agreement. Effective upon the Closing Date, LIPA may assign its rights, obligations and interests hereunder to Long Island Lighting Company (then a wholly owned subsidiary of IRA) and GENCO shall assign all of its rights, obligations and interests hereunder to the Guarantor or any affiliate thereof. 21.4. Cooperation in Financing. Each Party shall reasonably cooperate with the other Party during negotiations with any Financing Party and will promptly execute any reasonable amendment or addition to this Agreement required by any Financing Party, provided that neither Party shall be required to execute any amendment or addition it determines in its sole discretion to be disadvantageous in any respect. 21.5. Force Majeure. 21.5.1. Events Constituting Force Majeure. As used in this Agreement, Force Majeure means any act, event, or condition that causes delay in or failure of performance of obligations under this Agreement, or otherwise materially and adversely affects a party's ability to perform, if such act, event or condition (i) is beyond the reasonable control of the party relying thereon, (ii) is not the result of the willful misconduct or negligent act or omission of such party, and (iii) is not an act, event or condition, the risk or consequence of which such party expressly assumed under this Agreement, including but not limited to: (1) acts of God, accident, flood, sabotage, fire, epidemic, earthquake, or similar occurrence, act of public or foreign enemy, war and other hostilities, invasion, blockade, insurrection, rebellion, riot and disorder, strikes or labor disturbances, general arrest or restraint of government and people, civil disturbance or similar occurrence; (2) entry of an injunctive or restraining order or judgment of any Governmental Authority, if such order or judgment is not the result of the act, or failure to act, of a party or its subcontractors or suppliers; or (3) suspension, termination, interruption of, or failure to obtain any permit required or necessary for the construction, operation or maintenance of the Generating Facilities, provided such suspension, termination, interruption or failure is not the result of the action or inaction of a party relying thereon or its subcontractors or suppliers. Notwithstanding the foregoing, neither the failure of a subcontractor or supplier to perform its obligations to LIPA or GENCO, which failure is not itself caused by a Force Majeure event with respect to such subcontractor or supplier, nor financial difficulty suffered by LIPA or GENCO or any subcontractor, supplier or vendor in performing its obligations, shall be deemed a Force Majeure event. - 34 - 21.5.2. Event of Force Majeure. Except for the obligations of either party to make payments of amounts due to the other party, either party shall be excused from performance and shall not be considered to be in default in respect of any obligation under this Agreement to the extent that a failure of performance of such obligation shall be due to Force Majeure. If either party's ability to perform its obligations under this Agreement is affected by a Force Majeure, the party claiming such inability shall: (i) promptly notify the other party of' such Force Majeure and its cause and confirm the same in writing within five Business Days of discovery of the event or circumstances constituting such Force Majeure; (ii) immediately supply such available information about the event or circumstances constituting the Force Majeure and the cause thereof as is reasonably requested by the other party; and (iii) immediately initiate removal of the cause of the Force Majeure or, if immediate removal is not possible, to mitigate the effect thereof. 21.5.3. Scope. The suspension of performance due to a Force Majeure shall be of no greater scope and no longer duration than that which is necessary. The excused party shall use its reasonable best efforts to remedy its inability to perform. 21.6. Amendments. No amendments or modifications of this Agreement shall be valid unless evidenced in writing and signed by duly authorized representatives of both Parties. 21.7. No Waiver. It is understood and agreed that any delay, waiver or omission by GENCO or LIPA to exercise any right arising from any breach or default by GENCO or LIPA with respect to any of the terms, provisions, or covenants of this Agreement shall not be construed to be a waiver by GENCO or LIPA, as the case may be, of any subsequent breach or default of the same or other terms, provisions or covenants on the part of the other party. 21.8. Notice. Any written notice under this Agreement shall be deemed properly given if sent by registered or certified mail, return receipt requested, postage prepaid, or by nationally recognized overnight delivery service, signature required upon signed receipt, to the address specified below, unless otherwise provided for in this Agreement: - 35 - To LIPA: Long Island Power Authority 333 Earle Ovington Blvd. Uniondale, NY 11553 Attention: Executive Director To GENCO: Long Island Lighting Company Executive Offices 175 East Old Country Road Hicksville, NY 11801 Attention: President Either party may, by written notice to the other party, change the name or address of the person to receive notices pursuant to this Agreement. 21.9. Representations and Warranties. 21.9.1. GENCO Representations and Warranties. GENCO, as of the date of this Agreement, makes the following representations and warranties as the basis for its undertakings contained herein: (a) After the Closing Date, any assignee of GENCO pursuant to Section 21.3 hereof will be a wholly owned subsidiary of Guarantor duly organized, validly existing and in good standing under the laws of the State of New York, is qualified to do business under the laws of the State of New York, has the power and authority to own its properties, to carry on its business as it now is being conducted, and to enter into this Agreement and carry out the transactions contemplated hereby, and to perform and carry out all covenants and obligations on its part to be performed under and pursuant to this Agreement, and is duly authorized to execute and deliver this Agreement and consummate the transactions herein contemplated. (b) The execution and delivery of this Agreement, the consummation of the transactions contemplated herein and the fulfillment of and compliance with the provisions of this Agreement do not materially conflict with or constitute a material breach of or a material default under any of the terms, conditions or provisions of any law, any order of any court or other agency of government, the articles of incorporation or by-laws of GENCO, or outstanding trust indenture, deed of trust, mortgage, loan agreement, other evidence of indebtedness or any other agreement or instrument to which GENCO is a party or by which it or any of its property is bound or result in a material breach of or a material default under any of the foregoing, and this Agreement is the legal, valid and binding obligation of GENCO enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. -36- (c) As of the Closing Daze and throughout the Term of this Agreement, GENCO, will be in material compliance with, or will have acted in good faith and used all reasonable efforts to be in material compliance with, all laws, judicial and administrative orders, rules and regulations with respect to the ownership and operation of the Generating Facilities including but not limited to the following: all requirements to obtain and comply with the conditions of any applicable Governmental Rules, including, to the extent required, the filing of all applicable environmental impact analyses; and, if applicable and required by Environmental Law, the mitigation of all environmental impacts. (d) As of the date provided, all historical records supplied to LIPA with respect to the Dependable Maximum Net Capability, availability and Heat Rate of each Generating Facility are to GENCO's best knowledge accurate in all material respects. (e) To the best of GENCO's knowledge, all Governmental Approvals necessary for the full load operation of each Generating Facility with all types of fuel for which such Generating Facility is operated have been validly issued and are in full force and effect. GENCO knows of no pending action to cancel any such Governmental Approval. 21.9.2. LIPA Representations and Warranties. LIPA, as of the date of this Agreement, makes the following representations and warranties as the basis for its undertakings contained herein: (a) LIPA is a corporate municipal instrumentality and political sub-division of the State of New York, has the corporate power and authority to own its properties, to carry on its business as now being conducted, and to enter into this Agreement and the transactions contemplated herein and perform and carry out all covenants and obligations on its paint to be performed under and pursuant to this Agreement, and is duly authorized to execute and deliver this Agreement and consummate the transactions herein contemplated. (b) The execution and delivery of this Agreement, the consummation of the transactions contemplated herein and the fulfillment of and compliance with the provisions of this Agreement do not materially conflict with or constitute a material breach of or a material default under, any of the terms, conditions or provisions of any law, any other of any court or other agency of government, or any contractual limitation, corporate or partnership restriction or outstanding trust indenture, deed of trust, mortgage, loan agreement, other evidence of indebtedness or any other agreement or instrument to which LIPA is a party or by which it or any of its property is bound or result in a material breach of or a material default under any of the foregoing, and this Agreement is the legal, valid and binding obligation of LIPA enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. -37- (c) All corporate or other organization consents, authorizations, and approvals, and all other actions required for LIPA to execute, deliver and perform its obligations hereunder have been obtained or completed. 21.10. Counterparts. The Parties may execute this Agreement in counterparts, which shall, in the aggregate, when signed by both Parties constitute one and the same instrument; and thereafter, each counterpart shall be deemed an original instrument. 21.11. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of New York. Any action arising out of or relating to this Agreement shall be brought in New York State Court or Federal District Court. 21.12. Captions; Appendices. Tides or captions of the articles contained in this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend, describe or otherwise affect the scope or meaning of this Agreement or the intent of any provision hereof. 21.13. Non-Recourse. Except as otherwise agreed, neither party shall have any recourse against any parent, affiliate, or constituent of the other party, or the successors and assigns of such parent, affiliate or constituent (collectively, "Party Affiliates") and each party expressly waives its rights of recourse against, and releases from liability, the other party's Party Affiliates. Each party shall look solely to the other party, and the assets thereof, to effect recovery of such party's claims against the other party. 21.14. Severability. The invalidity or unenforceability of any provision of this Agreement shall be determined only by a court of competent jurisdiction, and the Parties hereby agree to negotiate an equitable adjustment to the invalid or unenforceable provisions with a view toward effecting the purposes of this Agreement; the validity or enforceability of the remaining provisions or portions or applications thereof, shall not be affected thereby. 21.15. Rules of Interpretation. The terms and provisions of this Agreement shall be interpreted and construed as follows: (a) words of the masculine gender shall include corresponding words of the feminine or neuter genders and vice versa; (b) the plural shall include the singular and vice versa; (c) unless the context indicates otherwise, all references herein to Articles, Sections, paragraphs, exhibits, schedules, and Appendices shall refer, respectively, to the Articles, Sections, paragraphs, exhibits, schedules and Appendices of this Agreement; (d) the words "includes" or "including" mean "including, but not limited to" and are not limiting; (e) any reference to an agreement, a contract or any other document means the same as it may be amended, modified, supplemented or replaced from time to time, unless otherwise noted; and (f) any reference to a Person includes such Person's successors and assigns. 21.16. Property Taxes. After the Contract Date, GENCO, in its sole discretion, may challenge any property tax assessment on its Generating Facilities or Generating Facility Sites -38- only if the assessment on any such challenged facilities is increased not in an appropriate proportion to the increase in value related to taxable capital additions affixed to the tax parcel between the last two tax status dates. If the tax attributable to the assessment on the Generating Facilities or Generating Facilities Sites is not included in the costs paid by LIPA or its Affiliates (e.g., gas facility located on Generating Facility Site) then GENCO, in its sole discretion, may pursue tax challenges on such assessments. This provision shall expire upon the termination of this Agreement. In the event GENCO challenges any tax assessments on its Generating Facilities, any tax refunds received by GENCO shall be shared 25%/75% between GENCO and LIPA, respectively. GENCO shall be responsible for all preparatory efforts and litigation-related costs pertaining to any such challenge, and such costs shall not be included in any charge under Article 8 or otherwise under this Agreement. This provision shall expire upon the termination of this Agreement, except that LIPA will continue to share 75% of tax refunds received after such termination to the extent that such refunds relate to property taxes for which LIPA has reimbursed GENCO under Section 8.1.1. 21.17. Binding Effect. This Agreement shall become binding and effective on the Closing Date and shall thereafter bind and inure to the benefit of the parties hereto and any successor or assignee acquiring an interest hereunder in compliance with the provisions of Section 21.3 hereof. - 39 - IN WITNESS WHEREOF, the Parties have executed this Agreement through their duly authorized officers as of the date set forth in the preamble to this Agreement. LONG ISLAND POWER AUTHORITY By: /s/ Richard M. Kessell --------------------------------- Name: Richard M. Kessell Title: Chairman By: /s/ Patrick Foye --------------------------------- Name: Patrick Foye Title: Deputy Chairman LONG ISLAND LIGHTING COMPANY By: /s/ Dr. William Castacosinos --------------------------------- Name: Dr. William Catacosinos Title: Chief Executive Officer - 40 - APPENDIX A Formula Rate Appendix A provides the detailed methodology for determining the Monthly Capacity Charge, Monthly Variable Charge, Monthly Ancillary Service Charge and Monthly Capacity Payment Adjustment Charge as set forth in Articles 8 and 9. This Appendix will be developed and agreed upon promptly after the date hereof and, in any event, prior to the Closing Date. A-1 APPENDIX B Monthly Variable Adjustment Charge This Appendix will be developed and agreed upon promptly after the date hereof and, in any event, prior to the Closing Date. Variable Rates for Generating Facilities Stare Up / Shut Down Wear and Tear Rates ================================================================================ Unit $/start (per unit) For starts above (per unit) ================================================================================ Steam Units - -------------------------------------------------------------------------------- Northport Units 1-4 - -------------------------------------------------------------------------------- 185 MW Unit-E. F. Barrett Units 1&2; Port Jefferson Units 3&4 - -------------------------------------------------------------------------------- 100 MW Unit - Glenwood Units 4&5; Far Rockaway Unit 4 - -------------------------------------------------------------------------------- Internal Combustion Units - -------------------------------------------------------------------------------- Wading River Units 1-3 - -------------------------------------------------------------------------------- E. F. Barrett 1-8 - -------------------------------------------------------------------------------- E. F. Barrett 9-12 - -------------------------------------------------------------------------------- Glenwood - -------------------------------------------------------------------------------- Northport - -------------------------------------------------------------------------------- Port Jefferson - -------------------------------------------------------------------------------- Southold - -------------------------------------------------------------------------------- Southhampton - -------------------------------------------------------------------------------- Glenwood 2 & 3 - -------------------------------------------------------------------------------- West Babylon - -------------------------------------------------------------------------------- Shoreham 1 ================================================================================ B-l Variable Rates (f) Internal Combustion Units for Fired Hours of Operation ================================================================================ Unit $/MWH For generation* (per Unit) above (per unit) ================================================================================ Glenwood 2 & 3 - -------------------------------------------------------------------------------- West Babylon - -------------------------------------------------------------------------------- Shoreham 1 - -------------------------------------------------------------------------------- Holtsville 1 - 10 - -------------------------------------------------------------------------------- Barrett 9 - 12 - -------------------------------------------------------------------------------- Barrett 1 - 8 - -------------------------------------------------------------------------------- Glenwood 1 - -------------------------------------------------------------------------------- Port Jefferson - -------------------------------------------------------------------------------- East Hampton - -------------------------------------------------------------------------------- Shoreham 2 - -------------------------------------------------------------------------------- Northport - -------------------------------------------------------------------------------- East Hampton Diesels - -------------------------------------------------------------------------------- Montauk Diesels - -------------------------------------------------------------------------------- Southhampton - -------------------------------------------------------------------------------- Southold - -------------------------------------------------------------------------------- Wading River 1-3 ================================================================================ * These MWhG may be revised if required due to environmental compliance. Steam Unit Fuel Swaps ================================================================================ Maximum per day per month per year Cost swaps above ================================================================================ Northport Unit - -------------------------------------------------------------------------------- 185 MW Unit ================================================================================ B-2 APPENDIX C - GENERATING UNITS This Appendix will be developed and agreed upon promptly after the date hereof and, in any event, prior to the Closing Date. ========================================== Unit Name Name Plate Rating (MW) ========================================== Steam Units - ------------------------------------------ Northport 1 375 - ------------------------------------------ Northport 2 375 - ------------------------------------------ Northport 3 375 - ------------------------------------------ Northport 4 375 - ------------------------------------------ Port Jefferson 3 175 - ------------------------------------------ Port Jefferson 4 175 - ------------------------------------------ Glenwood 4 100 - ------------------------------------------ Glenwood 5 100 - ------------------------------------------ E.F. Barrett 1 175 - ------------------------------------------ E.F. Barrett 2 175 - ------------------------------------------ Far Rockaway 4 100 ========================================== ========================================== Unit Name Name Plate Rating (MW) ========================================== Internal Combustion Units - ------------------------------------------ E.F. Barrett 1-8 144 - ------------------------------------------ E.F. Barrett 9-12 167 - ------------------------------------------ Holtsville 1-10 567 - ------------------------------------------ Wading River 1-3 239 - ------------------------------------------ Shoreham 1 53 - ------------------------------------------ Shoreham 2 19 - ------------------------------------------ Glenwood 1 16 - ------------------------------------------ Glenwood 2-3 110 - ------------------------------------------ East Hampton 1 6 - ------------------------------------------ East Hampton 2-4 21 - ------------------------------------------ Northport G-l 16 - ------------------------------------------ Port Jefferson G-l 16 - ------------------------------------------ W. Babylon 4 52 - ------------------------------------------ Southhold 1 14 - ------------------------------------------ So. Hampton 1 12 - ------------------------------------------ Montauk 2-4 6 ========================================== C-l APPENDIX D - DELIVERY POINTS This Appendix will contain all the interconnections points between each generating unit and the T&D System. These will be the same points as identified in Appendix 2 to the Management Service Agreement. D-1 APPENDIX E - MINIMUM LOADINGS, RAMP RATES, START-UP & SCHEDULED SHUTDOWN TIME This Appendix will be developed and agreed upon promptly after the date hereof and, in any event, prior to the Closing Date. Minimum Loadings: ================================================= Unit Minimum Loadings ================================================= - ------------------------------------------------- Northport - ------------------------------------------------- Port Jefferson - ------------------------------------------------- E. F. Barrett - ------------------------------------------------- Glenwood - ------------------------------------------------- Far Rockaway ================================================= Ramp Rates: ================================================= Unit Ramp Rates ================================================= Northport - ------------------------------------------------- Port Jefferson - ------------------------------------------------- E. F. Barrett - ------------------------------------------------- Glenwood - ------------------------------------------------- Far Rockaway ================================================= Start-Up Times: ================================================================================ Unit Cold > 90 hrs Warm Hot < 24 hrs ================================================================================ Northport - -------------------------------------------------------------------------------- Port Jefferson - -------------------------------------------------------------------------------- E. F. Barrett - -------------------------------------------------------------------------------- Glenwood - -------------------------------------------------------------------------------- Far Rockaway ================================================================================ E-1 Minimum Scheduled Shutdown ============================================== Unit Minimum Shutdown ============================================== Northport ---------------------------------------------- Port Jefferson ---------------------------------------------- E. F. Barrett ---------------------------------------------- Glenwood ---------------------------------------------- Far Rockaway ============================================== E-2 Internal Combustion Loadings These units can be placed in service at the load points (base or peak) listed in Appendix E. For variable maintenance costs, one hour operation at peak load is equivalent to three hours of operation at base load. ================================================================================ Unit Base Load (MW) (1) Peak Load (MW) (1) ================================================================================ Holtsville 1-5 (C1 eng.) - -------------------------------------------------------------------------------- Holtsville 6-10 (C1D eng.) - -------------------------------------------------------------------------------- Wading River 1-3 - -------------------------------------------------------------------------------- Southold - -------------------------------------------------------------------------------- Port Jefferson - -------------------------------------------------------------------------------- East Hampton G.T. - -------------------------------------------------------------------------------- East Hampton Diesels 2,3,4 - -------------------------------------------------------------------------------- Montauk Diesels 2,3,4 - -------------------------------------------------------------------------------- Southampton - -------------------------------------------------------------------------------- Shoreham 1 - -------------------------------------------------------------------------------- Shoreham 2 - -------------------------------------------------------------------------------- E.F. Barrett 1-8 - -------------------------------------------------------------------------------- E.F. Barrett 9-12 - -------------------------------------------------------------------------------- Glenwood 1 - -------------------------------------------------------------------------------- Glenwood 2,3 - -------------------------------------------------------------------------------- West Babylon - -------------------------------------------------------------------------------- Northport ================================================================================ Note: 1. At 80(degrees) E-3 APPENDIX F - PERFORMANCE INCENTIVES/DISINCENTIVES I. DMNC Incentive/Disincentives GENCO will use its best efforts to maintain its generating units such that during the six month Summer Operating Period (May through October) the total dependable maximum net capability ("Annual DMNC") as defined by the New York Power Pool (NYPP) Methods & Procedures - 2 (MP-2), meets or exceeds the predetermined level ("Target DMNC"). GENCO shall determine the Annual DMNC each year in accordance with the New York Power Pool Methods and Procedures -2 ("MP-2"). The MP-2 test will be conducted once between June 1 through September 15 for each unit. [LIPA shall have the right to witness such tests and/or review the test data and results. If the MP-2 is revised by the NYPP, the Parties agree to revise or replace this incentive/disincentive mechanism in a manner that reflects the intended purpose. The Annual DMNC and the Target DMNC ratings shall be considered only for the total system (the sum of all steam and internal combustion generating units under contract to (LIPA). The Target DMNC shall be computed as the simple average of the Annual DMNC values (as adjusted for the average temperature for the last five year period prior to the Closing Date) for the last five-year period prior to the Closing Date. The Target DMNC is based upon all of the existing GENCO steam and internal combustion units in service. The Target DMNC shall remain fixed unless (a) LIPA exercises its option to ramp down its GENCO capacity purchases, or (b) any GENCO unit is mothballed, retired, significantly derated, incurs a long-term outage, or is otherwise removed from service in whole, or in part, or (c) any capital improvement approved by LIPA that materially increases the DMNC of the Generating Facilities. Under these conditions, the Target DMNC shall be equitably adjusted based on the generating unit data for the original computation period with appropriate adjustments for the new conditions, except that for a significant derating, removal from service or long term outage the reduction in the DMNC target will apply only to the extent that these events were not attributable to GENCO's failure to follow Prudent Utility Practice. Should the Annual DMNC be in excess of the Target DMNC, LIPA shall make a payment to GENCO equal to $30,000 per MW above that Target DMNC. Should the Annual DMNC be less than 99% of the Target DMNC, GENCO shall make a payment to LIPA equal to $30,000 for each MW deficiency below 99% of the Target DMNC. There shall not be any incentives or disincentives payments for a year in which the Annual DMNC is between 99% and 100% of the Target DMNC. The maximum incentive/disincentives will be $1 million annually. In the event that LIPA does not approve amounts for operating and maintenance expenses and capital expenditure, that provide GENCO with the same opportunity to maintain the DMNC target levels as GENCO has at the execution of this Agreement, such target levels shall be equitably adjusted. F-1 Any DMNC incentive/disincentive payments will be determined after October 31, the end of the Summer Operating Period for each year and will be reflected in the first monthly invoice following the end of such Summer Operating Period. II. Availability Incentive/Disincentive GENCO will use its best efforts to maintain its generating units such that during the three month summer peak period (June through August) the availability of its steam and internal combustion units meets or exceeds the predetermined level ("Target Availability") as measured by the National Electric Reliability Council (NERC) - Generating Availability Data System (GADS) Availability Factor formula set forth as follows: AH AF=-- PH where: AH = Available Hours are the sum of in-service hours and reserve shutdown hours in the period. In-serwce hours are defined as those hours where the unit is in service and electrically connected to the system. Reserve shutdown hours are those hours whenever the unit is available to generate but is not electrically connected due to a lack of demand or the availability of lower cost power. PH = Period Hours are the total number of hours in the period. Unit availability is tracked and calculated by GENCO for submittal to NERC. All data collection, reporting and calculations are defined in the GADS Data Reporting Instructions. The average generation availability for the GENCO system (for the June through August period) shall be calculated annually ("Availability") as a weighted total of each units availability. The weighting is based on the Net Dependable Capacity (NDC), as submitted to NERC. The Availability Target for each summer period (June through August) shall be 97.5 percent of the simple average of the annual Availability values for the last five year period prior to the Closing Date. F-2 5 Year Average Availability = 96.5 percent (to be revised to reflect last five year period prior to the Closing Date) Target Availability = 97.5 percent of 5 Year Average Availability (to be revised to reflect last five year period prior to the Closing Date) .975 * 96.5% = 94.1% (Target Availability) As noted, the above target is based upon all of the existing GENCO steam and internal combustion units in service. The Target Availability shall remain fixed unless (a) LIPA exercises its option to Ramp Down GENCO's Generating Facilities, or (b) any of GENCO's Generating Facilities is mothballed, retired, significantly derated, removed from service, or incurs a long term outage for unforeseen reasons. In the event any changes are required the Target Availability will be adjusted appropriately. For each year the Availability shall be compared with the Target Availability to determine the amount of incentive or disincentive. Should the Availability exceed the Target Availability by 0.5 percent, LIPA shall provide an incentive payment to GENCO of $100,000. Such incentive payment shall increase by $100,000 for each 0.1 percent increase in the Availability. Should the Availability be less than the Target Availability by 0.5 percent, GENCO will incur a disincentive of $100,000. Such disincentive shall increase by $100,00 for each 0.1 percent decrease in the Availability. The maximum incentive/disincentive shall be $2 million annually. In the event that LIPA does not approve amounts for operating and maintenance expenses and capital expenditure, that provide GENCO with the same opportunity to maintain the Availability levels as GENCO has at the execution of this Agreement, such target levels shall be equitably adjusted. Any Availability incentive/disincentive payments will be determined after August 30 for each year and will be reflected in the first monthly invoice following August 30. F-3 III. Property Tax Incentive This incentive shall be as described in this Agreement in Section 21.16 Property Taxes. F-4 IV. Heat Rate Incentive/Disincentive GENCO will use its best efforts to maintain the efficiency of its generating units in order to reduce the fuel consumption for production of electric energy for LIPA. An incentive or disincentive shall be determined monthly based on a measure of the overall efficiency of GENCO's steam generating units, including steam units at the Northport, Barrett, Glenwood, Port Jefferson, and Far Rockaway power stations, in comparison with a predetermined standard as described herein. For purposes of this incentive plan, LIPA and GENCO have established a functional relationship between monthly net generation (MWhN) and monthly fuel burned, expressed in terms of millions of British thermal units ("MMBtu"), considering (i) the relationship between total net MWhN generated and average efficiency of the generating units; and (ii) the relative efficiency of generating units when burning natural gas or oil. This relationship (the "Btu Curve") is expressed by the following equation: MMBtu = 10.7106* MWhN + 173,252 Where: MMBtu = Target Btu MWhN = Steam Unit Net Generation The Btu Curve represents the average amount of fuel required to generate a given amount of monthly electricity (the "Target Btu") from GENCO's steam generating units. Each month the total net generation shall be used to establish the corresponding Target Btu based on the Btu Curve. Actual fuel used for generation shall be expressed in Gas Equivalent MMBtu by multiplying the MMBtu of oil consumption by 1.04 (the "Gas Conversion Factor") to account for differences in the average Unit Heat Rates when burning oil versus natural gas. Deviations in the Gas Equivalent MMBtu for the month in comparison to the Target Btu shall be shared as follows: (a) LIPA shall absorb the cost of fuel used for Gas Equivalent MMBtu between 100% and 101 % of the Target Btu; (b) LIPA shall receive the savings resulting in the cost of fuel used for Gas Equivalent MMBtu between 99% and 100% of the Target Btu; (c) LIPA and GENCO shall share equally in the cost or savings resulting from Gas Equivalent MMBtu in excess of 101% or less than 99%. No payments are contemplated under items (a) and (b) above. There shall be no incentive or disincentive in any month when the net generation from the GENCO steam Generating Facilities is less than 475,000 MWhN. For purposes of computing the incentives or disincentives, the cost of fuel shall be stated in dollars per Gas Equivalent MMBtu based on the cost of fuel actually burned for generation in each month (i.e. that month's weighted average fuel cost) including fuel cost incentive or disincentives as defined in the Energy Management Agreement, and adjustment for the Gas Conversion Factor, applicable to the fuel oil burned. The annual maximum incentive or disincentive shall be $1 million. F-5 The above BTU Curve equation is based upon all of the existing GENCO steam units in service. The BTU Curve shall remain fixed unless (a) LIPA exercises its options to Ramp Down GENCO's Generating Facilities, or (b) any of GENCO's Generating Facilities is mothballed, retired, significantly devated, removed form service, or incurs a long term outage for unforeseen reasons. If a significant change in the operation of GENCO's steam units occurs the Parties shall mutually agree on modifications to the incentive/disincentive mechanism In the event that LIPA does not approve amounts for operating and maintenance expenses and capital expenditure, that provide GENCO with the same opportunity to maintain the Heat Rate target levels as GENCO has at the execution of this Agreement, such target levels shall be equitably adjusted. Any incentive/disincentive payments will be determined after the end of each month and will be reflected in the first monthly invoice following the end of each month. F-6 EX-10.(C) 7 ENERGY MANAGEMENT AGREEMENT ================================================================================ ENERGY MANAGEMENT AGREEMENT between LONG ISLAND LIGHTING COMPANY and LONG ISLAND POWER AUTHORITY Dated as of June 26, 1997 ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE 1 - DEFINITIONS ................................................... 2 ARTICLE 2 - SCOPE OF ENERGY MANAGEMENT SERVICES ........................... 10 ARTICLE 3 - FUEL MANAGEMENT ............................................... 11 3.1. FUEL MANAGEMENT SERVICES .......................................... 11 3.2. FUEL MANAGEMENT COMPENSATION ...................................... 12 3.2.1. Fuel Management Fee ........................................ 12 3.2.2. Monthly Fuel Payment ....................................... 12 3.3. FUEL PURCHASE PERFORMANCE INCENTIVES/DISINCENTIVE PAYMENTS .......................................................... 13 3.4. PAYMENT ........................................................... 13 3.5. LATE PAYMENT ...................................................... 13 3.6. FUEL MANAGEMENT ................................................... 13 3.7. GENERAL FUEL SERVICE REQUIREMENTS ................................. 14 3.7.1. Minimization of Costs ...................................... 14 3.7.2. Accounting Controls ........................................ 14 ARTICLE 4 - OFF SYSTEM SALES .............................................. 15 ARTICLE 5 - SYSTEM POWER SUPPLY MANAGEMENT 5.1. LOWEST COST ELECTRICITY ........................................... 16 5.2. SPECIFIC ENERGY MANAGER RESPONSIBILITIES .......................... 16 5.3. SYSTEM POWER SUPPLY MANAGEMENT COMPENSATION ....................... 17 5.3.1 System Power Supply Management Fee ......................... 17 5.3.2 System Power Supply Performance Incentives/Disincentives ................................... 17 5.4. PAYMENT ........................................................... 17 (i) 5.5. LATE PAYMENT ...................................................... 18 ARTICLE 6 - GENERAL ....................................................... 19 6.1. STAFFING AND LABOR ISSUES ......................................... 19 6.2. ACCOUNT RECORDS; COLLECTION OF MONIES; AVAILABILITY OF ENERGY MANAGER .................................... 19 6.2.1. Account Records ............................................ 19 6.2.2 Collection of Monies ....................................... 19 6.2.3 Availability of Energy Manager ............................. 20 (A) Office Facilities ...................................... 20 (B) Availability of Representatives ........................ 20 (C) Emergency Telephone Number ............................. 20 6.3. COMPLIANCE WITH APPLICABLE LAW .................................... 20 6.4. INFORMATION ....................................................... 20 6.4.1. Information System ......................................... 20 6.4.2. Ownership of Information and Documentation ................. 20 6.5. BOOKS AND RECORDS ................................................. 21 6.6. FISCAL AFFAIRS, ACCOUNTING AND RECORD KEEPING ..................... 21 6.6.1. General .................................................... 21 6.6.2. Bank Deposits .............................................. 21 6.7. OTHER SERVICES 6.7.1. Bill Payments .............................................. 22 6.7.2 Review of System Supply Bills .............................. 22 6.7.3. Attendance at Meetings ..................................... 22 ARTICLE 7 - TERM; EVENTS OF DEFAULT 7.1. TERM .............................................................. 24 7.2. EVENTS OF DEFAULT BY THE ENERGY MANAGER ........................... 24 7.2.1. Events of Energy Manager Default Defined ................... 24 (1) Events of Default Not Requiring Cure Opportunity for Termination ............................ 24 (a) Change of Control of Energy Manager ............... 24 (b) Voluntary bankruptcy .............................. 24 (c) Involuntary Bankruptcy ............................ 24 (ii) (2) Events of Default Requiring Cure Opportunity ........... 25 (a) Failure to Pay or Credit .......................... 25 (b) Failure Otherwise to Comply with Agreement or Guaranty ........................ 25 7.3. EVENTS OF DEFAULT BY THE AUTHORITY ................................ 25 7.3.1. Events of Authority Default Defined ........................ 25 (1) Failure to Pay ........................................ 25 (2) Failure to Comply with Agreement ...................... 26 (3) Change of Control of Long Island Lighting Company ..... 26 7.4. PROCEDURE FOR TERMINATION FOR CAUSE ............................... 26 7.4.1. Thirty Day Notice .......................................... 26 7.4.2. Termination by Authority ................................... 26 (1) Access ................................................ 26 (2) Assumption of Responsibilities ........................ 27 7.5. CERTAIN OBLIGATIONS OF THE ENERGY MANAGER UPON TERMINATION OR EXPIRATION ......................................... 27 7.5.1. Obligations on Termination or Expiration ................... 27 7.5.2. Authority Payment of Certain Transition Costs .............. 28 7.6. NO WAIVERS ....................................................... 28 7.7. AUTHORITY EMERGENCY ASSUMPTION OF FUEL AND SYSTEM POWER SUPPLY MANAGEMENT SERVICES ........................... 28 7.8. WAIVER OF CERTAIN DEFENSES ........................................ 29 ARTICLE 8 - DESIGNATION OF REPRESENTATIVES 8.1. AUTHORITY REPRESENTATIVE .......................................... 30 8.2. ENERGY MANAGER REPRESENTATIVE ..................................... 30 ARTICLE 9 - ENERGY MANAGER'S REPORTING REQUIREMENTS 9.1. MONTHLY REPORTS ................................................... 31 9.2. ANNUAL REPORTS .................................................... 31 9.3. FUEL CONSUMPTION REPORTS .......................................... 31 9.4. LITIGATION; PERMIT LAPSES ......................................... 31 (iii) ARTICLE 10 - INSURANCE .................................................... 32 ARTICLE 11 - INDEMNIFICATION .............................................. 33 11.1. INDEMNIFICATION .................................................. 33 (A) Indemnification by the Energy Manager ........................ 33 (B) Indemnification by the Authority ............................. 34 ARTICLE 12 - NONDISCLOSURE ................................................ 36 12.1. PROPRIETARY INFORMATION .......................................... 36 (A) Energy Manager Request ....................................... 36 (B) Authority Non-Disclosure ..................................... 36 (C) Permitted Disclosures ........................................ 36 ARTICLE 13 - MISCELLANEOUS PROVISIONS 13.1. AGREEMENT ........................................................ 37 13.2. RELATIONSHIP OF THE PARTIES ...................................... 37 13.3. ASSIGNMENT AND TRANSFER .......................................... 37 13.4. APPROVAL OF SUBCONTRACTORS ....................................... 37 13.5. ACTIONS OF THE AUTHORITY IN ITS GOVERNMENTAL CAPACITY ......................................................... 38 13.6. NO THIRD PARTY BENEFICIARIES ..................................... 38 13.7. STATE LAW REQUIREMENTS ........................................... 38 13.8. DISPUTE RESOLUTION ............................................... 38 13.8.1 Dispute Resolution ........................................ 38 13.8.2 Negotiation and Non-Binding Mediation ..................... 38 13.8.3 Arbitration ............................................... 39 13.8.4 Provisional Relief ........................................ 39 13.8.5 Awards 13.8.6 Information Exchange ...................................... 40 13.8.7 Site of Arbitration ....................................... 40 13.8.8 Precondition to Litigation ................................ 40 13.8.9 Continuity of Service ..................................... 40 (iv) 13.9. AMENDMENTS ......................................................... 40 13.10. NOTICES ............................................................ 40 13.10.1 ............................................................ 40 13.10.2 ............................................................ 41 13.11. REPRESENTATIONS AND WARRANTIES ..................................... 41 13.11.1. Energy Manager Representations and Warranties ............ 41 13.11.2. Authority Representations and Warranties ................. 42 13.12. COUNTERPARTS ....................................................... 43 13.13. GOVERNING LAW ...................................................... 43 13.14. CAPTIONS; APPENDICES ............................................... 43 13.15. ENERGY MANAGER TO REMAIN AFFILIATE OF GUARANTOR; CREDIT ENHANCEMENT IN CERTAIN CIRCUMSTANCES ........................ 43 (A) Limitations ................................................... 13 (B) Material Decline in the Guarantor's Credit Standing ........... 43 (C) Credit Enhancement ............................................ 43 13.16. SEVERABILITY ....................................................... 44 13.17. RULES OF INTERPRETATION ............................................ 44 13.18. HEDGING POLICIES ................................................... 44 13.19 ENERGY PRICING INFORMATION SYSTEM .................................. 44 APPENDICES ---------- Appendix A Fuel purchase performance, incentive/disincentive Appendix B System power supply performance incentive/disincentive Appendix C Provisions Required by State Law (v) ENERGY MANAGEMENT AGREEMENT This ENERGY MANAGEMENT AGREEMENT ("Agreement") is entered into as of June 26, 1997 ("Contract Date") by and between LONG ISLAND LIGHTING COMPANY, a New York corporation ("Energy Manager"), and LONG ISLAND POWER AUTHORITY a corporate municipal instrumentality and political sub-division of the State of New York (the "Authority"). Each of the foregoing are sometimes referred to herein as a "Party" and collectively as the "Parties". WHEREAS, the Energy Manager currently manages the fuel supplies for the GENCO Generating Facilities (as defined herein), and the Authority desires the Energy Manager, acting as the Authority's agent, to purchase fuel supplies for use in the GENCO Generating Facilities. WHEREAS, the Energy Manager currently manages the System Power Supply (as defined herein), and the Authority desires the Energy Manager to continue to manage the System Power Supply on behalf of the Authority. WHEREAS, the Energy Manager and the Authority have set forth in this Agreement the terms and conditions for the management by the Energy Manager of fuel supplies used at the GENCO Generating Facilities to produce electric energy for delivery to the Authority and for management and administration of the System Power Supply on behalf of the Authority in a manner consistent with policies established by the Authority. WHEREAS, in accordance with the terms hereof, the Authority is to establish policies and procedures for the System Power Supply and the Manager is responsible for the implementation of those policies. NOW, THEREFORE, in consideration of the mutual promises set forth herein, the Parties agree as follows: -1- ARTICLE 1 - DEFINITIONS Unless otherwise required by the context in which any defined term appears, the following capitalized terms have the meanings specified in this Article 1. All terms used and not otherwise defined herein are defined in Appendix 1 to the Management Services Agreement, a copy of which is annexed hereto for reference purposes. "Ancillary Services" means the ancillary services required by NYPP/ISO from time to time to enable the NYPP/ISO to operate the transmission system in New York State in a secure and reliable manner. "Annual Settlement Statement" means the Annual Settlement Statement referred to in subsection 9.2 hereof. "Appendix" means an appendix to this Agreement, as the same may be amended or modified from time to time in accordance with the terms hereof. "Applicable Law" means any law, rule, regulation, requirement, guideline, ruling, ordinance or order of or any Legal Entitlement issued by, any Governmental Body and applicable from time to time to the performance of the obligations of the parties hereunder. "Authority" means the Long Island Power Authority and its subsidiaries, and its successors or assigns as permitted hereunder. "Authority Fault" means any breach, failure of compliance, or nonperformance by the Authority with its obligations hereunder or any negligent or willful misconduct by the Authority under this Agreement (whether or not attributable to any officer, trustee, member, agent, employee, representative, contractor, Subcontractor of any tier, or independent contractor of the Authority other than the Energy Manager and its Subcontractors) that materially and adversely affects the Energy Manager's performance or the Energy Manager's rights or obligations under this Agreement. "Authority Indemnified Parties" has the meaning specified in subsection 11.1(A) hereof. "Business Day" means any day other than a Saturday, Sunday or Legal Holiday (as defined herein). "Change of Control" means (i) the acquisition of beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "1934 Act")) of 35% or more of the outstanding shares of securities the holders of which are generally entitled to vote for the election of directors of the Energy Manager or the Guarantor, as the case may be (including -2- securities convertible into, or exchangeable for, such securities or rights to acquire such securities or securities convertible into, or exchangeable for such securities, "Voting Stock"), on a fully diluted basis, by any Person or group of Persons (within the meaning of Section 13 or 14 of the 1934 Act); (ii) any sale, transfer or other disposition of beneficial ownership of 35% or more of the outstanding shares of the Voting Stock, on a fully diluted basis, of the Energy Manager or the Guarantor, as the case may be; (iii) any merger, consolidation, combination or similar transaction of the Energy Manager or the Guarantor, as the case may be, with or into any other Person, whether or not the Energy Manager or the Guarantor, as the case may be, is the surviving entity in any such transaction; (iv) any sale, lease, assignment, transfer or other disposition of the beneficial ownership in 35% or more of the property, business or assets of the Energy Manager or the Guarantor, as the case may be; (v) a Person other than the current shareholders of the Energy Manager or the Guarantor, as the case may be, obtains, directly or indirectly, the power to direct or cause the direction of the management or policies of the Energy Manager or the Guarantor, as the case may be, whether through the ownership of capital stock, by contract or otherwise; (vi) during any period of 12 consecutive calendar months, when individuals who were directors of the Energy Manager or the Guarantor, as the case may be, on the first day of such period cease to constitute a majority of the board of directors of the Energy Manager or the Guarantor, as the case may be; or (vii) any liquidation, dissolution or winding up of the Energy Manager or the Guarantor, as the case may be. "City Gate" means a receipt point of natural gas at any point located at the New York Facilities at which LILCO may now have rights to receive natural gas. "Closing Date" has the meaning ascribed to that term in the Agreement and Plan of Exchange and Merger by and among BL Holding Corp., Long Island Lighting Company, the Authority, and LIPA Acquisition Corp., dated as of June 26, 1997. "Code" means the Internal Revenue Code of 1986, as amended. "Commencing of Discharge Date" means the date that the unloading or delivery of Fuel begins at a Generating Facility. "Contract Date" means the date of this Agreement, as set forth on page 1 hereof. "Contract Year", except as the Authority shall otherwise propose subject to the approval of the Energy Manager which approval shall not be unreasonably withheld, means the calendar year commencing on January 1 in any year and ending on December 31 of that year; provided, however, that the first Contract Year shall commence on the Closing Date and shall end on December 31 of that year, and the last Contract Year shall commence on January 1 prior to the date this Agreement expires or is terminated, whichever is appropriate, and shall end on the last day of the Term of this Agreement or the effective date of any termination, whichever is appropriate. Any computation made on the basis of a Contract Year shall be adjusted on a pro rata basis to take into account any Contract Year of less than 365/366 days. -3- "Dispatch" shall mean Authority's adjustment and control (which may be coordinated by NYPP/ISO) of the net electrical energy output of any component of the System Power Supply for the purpose of regulating the amount of Electricity delivered. "Dth" shall mean dekatherm. "Electricity" means the electrical energy (real and reactive) and capacity available from the System Power Supply. "Electricity Customers" means the retail and wholesale customers of the Authority located in the Service Area. "Energy Manager" means the Long Island Lighting Company and its successors or assigns expressly permitted pursuant to Section 13.3. "Energy Manager Fault" means any breach, failure of compliance, or nonperformance by the Energy Manager with its obligations hereunder or any negligence or willful misconduct by the Energy Manager under this Agreement (whether or not attributable to any officer, member, agent, employee, representative, contractor, Subcontractor of any tier, or independent contractor of the Energy Manager or any Affiliate of the Energy Manager). "Energy Manager Indemnified Parties" has the meaning specified in subsection 11.1(B) hereof. "Existing Power Supply Agreements" means the power supply agreements which exist between LILCO and other parties for the purchase of capacity and/or energy which are in effect as of the Contract Date and which were, either in existence as of March 19, 1997 or which are entered into in accordance with the provisions of Section 6.1(p) of the Acquisition Agreement on or prior to the Closing Date. "FERC" shall mean the Federal Energy Regulatory Commission. "Firm Gas Supply" means a type of natural gas supply delivered or transported to a City Gate which may not be interrupted except for "force majeure" events. Such gas may be interrupted on the gas distribution system serving LILCO's existing gas service area whenever its continued delivery would adversely affect the reliability of the gas distribution system serving LILCO's existing gas service area. "Fuel" means the natural gas, oil, kerosene or other fossil fuel used for operating the GENCO Generating Facilities. "Fuel Management Fee" means the Fuel Management Fee payable under Section 3.2.1. -4- "Fuel Purchase Performance Incentive/Disincentive" means the incentive payment to or disincentive payment from Energy Manager calculated in accordance with Appendix A hereto. "Fuel Services" means those services required to be furnished and done for and relating to the delivery of Fuel to the GENCO Generating Facilities by the Energy Manager pursuant to this Agreement subsequent to the Closing Date. A reference to "Fuel Services" shall mean "any part and all of the Fuel Services" unless the context otherwise requires. "Gas Balancing" means the service of the type currently provided by LILCO whenever the aggregate daily gas taken by GENCO for use in the GENCO Generating Facilities varies from the daily nominated quantity. When this occurs, Energy Manager will cause certain assets currently owned or contracted for by LILCO to be used to either provide additional quantities of gas required by GENCO or take back any excess quantities of gas not required by GENCO. "GENCO" means Long Island Lighting Company and its successors and assigns permitted under the Power Supply Agreement. "GENCO Generating Facilities" means the electric generating facilities owned by GENCO and under contract at any time with the Authority under the Power Supply Agreement. A list of the generating units to be owned by GENCO as of the Closing Date is contained in Appendix C to the Power Supply Agreement. "Governmental Body" means any federal, State or local legislative, executive, judicial or other governmental board, agency, authority, commission, administration, court or other body, or any official thereof having jurisdiction with respect to any matter which is a subject of this Agreement other than the Authority. "Guarantor" means BL Holding Corp. and its successors and assigns permitted under the Guaranty Agreement. "Guaranty Agreement" or "Guaranty" means the Guaranty Agreement to be entered into prior to the Closing Date from the Guarantor to the Authority substantially in the form provided in Exhibit E to the Acquisition Agreement, as the same may be amended from time to time in accordance therewith. "Incremental Fuel Cost" means the additional actual fuel cost incurred to produce an additional amount of Electricity at the GENCO Generating Facilities, so as to enable the sale of available excess energy. "Interruptible Gas Supplies" means gas supplies that will be interrupted whenever the supplier recalls supplies pursuant to a negotiated supply contract and/or the interstate pipeline -5- interrupts the transportation of such gas supply pursuant to its FERC approved tariff. Such gas supplies may also be interrupted for force majeure events. "Legal Holiday" is defined as New Year's Day, Martin Luther King Jr.'s Birthday, Lincoln's Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veteran's Day, Thanksgiving Day, Day After Thanksgiving, Christmas Eve, Christmas Day and New Year's Eve, or such other days as the Parties may mutually agree from time to time. "LILCO" as of the date hereof, means Long Island Lighting Company and, as of the Closing Date, shall mean the entity or entities owning and operating the gas distribution system and related facilities and interests in gas transmission facilities currently owned and operated by Long Island Lighting Company. "Local Transportation Charge" is defined as the gas transportation rate set forth herein that will be charged to the Authority for the use of LILCO's gas assets to deliver gas to the GENCO Generating Facilities. "Management Services Agreement" means the Management Services Agreement dated June 26, 1997, between the Authority and Long Island Lighting Company, as the same may be amended in accordance with its terms. "Fuel Management Fee" has the meaning ascribed to that term in Section 3.2.1. "Monthly Fuel Payment" has the meaning ascribed to that term in Section 3.2.2. "Monthly System Power Supply Management Fee" has the meaning ascribed to that term in Section 5.3.1. "New York Facilities" ("NYF") is defined as the system of gas mains severally owned and operated by LILCO, The Brooklyn Union Gas Company and Consolidated Edison Co. of New York pursuant to the NYF Agreement. Among other things, the NYF Agreement provides for the firm delivery of gas (directly or by displacement) from the City Gate delivery points of the four interstate pipelines currently delivering gas to the NYF to the transmission systems of each of the companies. The rights of the respective parties to firm transport on the NYF system are specified in the NYF Agreement. "NYF Agreement" means the New York Facilities Agreement entered into as of the first day of January, 1994 by and between The Brooklyn Union Gas Company, Consolidated Edison Company of New York, Inc. and LILCO, as the same may be amended in accordance with its terms. "New York Power Pool" or "NYPP" means the member system currently comprising of Consolidated Edison Company of New York, Inc., Central Hudson Gas and -6- Electric Company, Long Island Lighting Company, Orange and Rockland Utilities, Rochester Gas and Electric Company, New York State Electric and Gas Corporation, Niagara Mohawk Power Corporation, and the Power Authority of the State of New York, as such organization or membership may change from time to time. "NYPP/ISO" means the Independent System Operator ("ISO") into which the NYPP is proposed to be restructured to the extent approved by FERC. In the event this restructuring occurs, the principal reliability, security and dispatch functions of the NYPP will be performed by the ISO. "Off-System Sales" means the sale of electric capacity and/or energy to wholesale or retail customers located outside the Service Area. "Person" means, unless otherwise specified, any individual person, corporation, firms, companies, trusts, business trusts, legal entities, general partnership, limited partnership, joint venture, joint-stock company, limited liability company, unincorpoprated organization, government or other or political subdivision hereof or other entity, including a Governmental Body. "Prime Rate" means the rate announced by Citibank, N.A. from time to time at its principal office as its prime lending rate for domestic commercial loans, the Prime Rate to change when and as such prime lending rate changes. "Power Supply Agreement or PSA" means the agreement dated June 26, 1997, between Authority and GENCO for the purchase of electric capacity and energy. "Prudent Utility Practice" at a particular time means any of the practices, methods, and acts (including but not limited to the practices, methods and acts engaged in or approved by a significant portion of the electrical utility industry prior hereto), which, in the exercise of reasonable judgment in light of the facts and the characteristics of the T&D System, the Service Area, System Power Supply (and, insofar as the delivery of Fuel Service may require, the gas distribution and transmission system serving LILCO's existing gas service area and prevailing regulations or regulatory policies applicable to such gas distribution and transmission system), known at the time the decision was made, would have been expected to accomplish the desired result at the lowest reasonable cost consistent with reliability, safety and expedition and good customer relations. Prudent Utility Practice is not intended to be limited to the optimum practice, method or act, to the exclusion of all others, but rather to be a spectrum of possible practices, methods or acts. "Service Area" means the counties of Suffolk and Nassau and that portion of the County of Queens constituting LILCO's electric franchise area as of the effective date of the Act. "Service Area" does not include the Villages of Freeport, Rockville Centre and Greenport. -7- "Subcontract" means an agreement between the Energy Manager and a Subcontractor, or between two Subcontractors, as applicable. "Subcontractor" means every person (other than employees of the Energy Manager) employed or engaged by the Energy Manager or any person directly or indirectly in privity with the Energy Manager (including every sub-subcontractor of whatever tier) for any portion of the services or the materials, supplies, or equipment to be provided by the Energy Manager hereunder. "System Emergency" shall mean any abnormal system condition that requires automatic or immediate, manual action to prevent or limit loss of transmission facilities or generation resources that could adversely affect the reliability of an electric system. "System Interruptible Gas Supply" means a type of gas supply which will be interrupted whenever its continued delivery would adversely impact the delivery of gas to the gas customers served by the gas transmission or distribution system which is currently owned by LILCO; furthermore, if Energy Manager is using non-LILCO assets to provide natural gas to GENCO, such gas will only be interrupted on LILCO's gas distribution system whenever its continued delivery would adversely impact the reliability of such gas distribution system. If GENCO is using gas provided from LILCO assets, GENCO will be interrupted before LILCO's interruptible gas customers consistent with current practices. Such gas supplies may also be interrupted for force majeure events. "System Policies and Procedures" means the policies and procedures adopted from time to time by the Authority with respect to the T&D System and the System Power Supply in accordance with Applicable Law and Prudent Utility Practice. "System Power Supply" means the electrical capacity and energy from all power supply sources owned by or under contract to the Authority, including, but not limited to, the Existing Power Supply Agreements, the Power Supply Agreement, the Authority's rights and interests with respect to the Nine Mile Point 2 power plant, the Authority's interest in any future generating facilities, spot market capacity and energy purchases made by the Energy Manager on behalf of the Authority, and any load control programs or energy efficiency measure adopted by the Authority. "System Power Supply Management Fee" means the System Power Supply Management Fee payable in accordance under Section 5.3.1. "System Power Supply Performance Incentive/Disincentive" means the "System Power Supply Performance Incentive/Disincentive under Section 5.3.2. "System Power Supply Services" means those services required to be furnished and done for and relating to the administration and management of System Power Supply pursuant to this Agreement subsequent to the Closing Date. A reference to "System Power -8- Supply Services" shall mean "any part and all of the System Power Supply Services" unless the context otherwise requires. "System Pre-Emergency" shall mean a condition which reasonably could be expected, if permitted to continue, to contribute to a System Emergency or to a degraded operating condition and includes the Alert, Warning, Major Emergency, and Restoration conditions described in NYPP Operating Procedure 1 - "Operating of the Bulk Power System", as it may be revised or replaced. "T&D System" means the electric transmission and distribution system located in the Service Area which provides the means for transmitting and distributing Electricity. "Term" has the meaning ascribed to that term in Article 7. "Termination Date" has the meaning ascribed to that term in Section 7.4. -9- ARTICLE 2 - SCOPE OF ENERGY MANAGEMENT SERVICES As hereinafter described, Energy Manager shall be responsible for (a) fuel procurement, delivery, storage, and management for GENCO Generating Facilities to meet the energy generation requirements of the Electricity Customers, (b) the dispatch of all System Power Supply available to the Authority to meet total capacity and energy requirements of the Electricity Customers and Off-System Sales, (c) the purchase, on behalf of the Authority, of all capacity and energy to meet the needs of the Electricity Customers and (d) the sale, on behalf of the Authority, of Electricity owned by, or under contract to, the Authority which is not otherwise required to meet the needs of the Electricity Customers. All such responsibilities shall be discharged in a manner consistent with Prudent Utility Practice, the System Policies and Procedures and New York State Public Service Commission policies and procedures pertaining to retail gas customer service. In discharging all such functions, Energy Manager shall use best-efforts to obtain the least-cost fuel and least-cost capacity and energy for the benefit of the Electricity Customers. Energy Manager agrees to establish policies and procedures satisfactory to the Authority designed to assure that Energy Manager's responsibilities are performed without consideration of the ownership or economic return to the Energy Manager or its Affiliates, except for the incentive provisions of this Agreement, and comply with such policies and procedures. In no event will Energy Manager take title to Electricity being purchased or sold under this Agreement. -10- ARTICLE 3 - FUEL MANAGEMENT 3.1. FUEL MANAGEMENT SERVICES. Energy Manager shall manage all aspects of the Fuel supply for the GENCO Generating Facilities including determinations regarding the type of Fuel used for operating the GENCO Generating Facilities and the source of such Fuel supply taking into account the purchase of alternate sources of Electricity in lieu of Electricity from the GENCO Generating Facilities when economic. Authority will compensate Energy Manager for such Fuel management services, including a Fuel Purchase Performance Incentive/ Disincentive Payment, in accordance with the terms of this Agreement. In this respect, Energy Manager shall, among other things: 1) Acquire required gas supplies which includes a mix of Interruptible and Firm Gas Supplies as deemed appropriate; 2) Acquire required fuel oil supplies in accordance with generating unit specific requirements as determined by GENCO which include a mix of residual oil, No. 2 oil and kerosene as deemed appropriate; 3) Negotiate, execute and administer Fuel supply contacts with one or more 4) Obtain and schedule transportation for all Fuel deliveries, including daily nomination and dispatch; 5) Arrange for the displacement of gas across LILCO's gas distribution system and the New York Facilities to facilitate deliveries to each GENCO Generating Facility; and 6) Arrange for the delivery, receipt, fuel analysis, handling, storage, local and on site transportation and use of Fuel. Unless otherwise arranged and agreed to between Authority and Energy Manager, all gas supplies to be used at the GENCO Generating Facilities will be Interruptible Gas Supplies or short term Firm Gas Supplies with contracts extending no longer than one month from the date entered into, all of which are System Interruptible Gas Supplies. Energy Manager will arrange for the most cost-effective Fuel for use at the existing GENCO Generating Facilities subject to Energy Manager's existing rate obligations to the gas customers of the current gas service area of Long Island Lighting Company. Energy Manager will arrange for Gas Balancing services to be provided associated with use of gas at the GENCO Generating Facilities. Energy Manager will provide these services from existing assets of the Energy Manager or its affiliates. The Energy Manager will not contract for additional firm assets (including storage, pipeline capacity or swing gas supply) specifically for use in the GENCO Generating Facilities unless the Authority and Energy Manager agree to the contract Such Interruptible Gas Supplies will be -11- provided only as long as it is available for use, in the GENCO Generating Facilities. The price of such gas to be paid for by Authority will include a Local Transportation Charge of 19 cents/Dth for a period of eleven and one half (11 1/2) years from the Closing Date. Thereafter the Local Transportation Charge included will be a charge imposed under non-discriminatory tariffs or otherwise be determined on a non-discriminatory basis. 3.2. FUEL MANAGEMENT COMPENSATION. Except as otherwise provided in this Agreement, the payments Authority will make to Energy Manager pursuant to this Agreement will be calculated as set forth below. During the term of this Agreement, Authority will make monthly payments to Energy Manager consisting of an amount equal to the sum of: (i) the Monthly Fuel Management Fee, plus (ii) the Monthly Fuel Payment, plus or minus (iii) the Fuel Purchase Performance Incentive/Penalty. 3.2.1. Fuel Management Fee. Energy Manager shall be paid an annual Fuel Management Fee, in consideration for Energy Manager's performance of the Fuel Services contemplated herein. The amount of such Fuel Management Fee shall be agreed upon by the parties not later than the Closing Date and shall reflect a fee of $750,000 and an allowance for certain costs. These costs included in the Fuel Management Fee shall be comprised of an appropriate allocation of compensation paid to employees and expenses of the Energy Manager, an appropriate allocation of such costs of employees and expenses of the Energy Manager's parent or affiliates to the extent such employees provide service pursuant to this Agreement and an appropriate allocation of depreciation and return on the undepreciated balance of Energy Manager and its parent or affiliates owned assets. The cost component of the initial Fuel Management Fee, once established and approved by Authority, will be indexed in the same manner as the Direct Cost Budget under the Management Services Agreement until the termination of the Management Services Agreement and thereafter subject to mutually agreeable adjustments. Authority shall pay the Fuel Management Fee to Energy Manager in twelve equal monthly installments, payable in accordance with the provisions of Section 3.4. 3.2.2. Monthly Fuel Payment. Authority will, in accordance with the provisions of Section 3.4, pay the total monthly cost of all Fuel for use in the GENCO Generating Facilities that are under contract to Authority pursuant to the Power Supply Agreement, including but not limited to any current or future fuel related taxes or other fuel related fees or costs reasonably incurred by Energy Manager. This cost will be based upon (a) the actual variable cost of gas delivered to the delivery points for such fuel plus (i) any incremental Firm Gas Supply costs which are incurred based on use of Firm Gas Supplies in the operation of the GENCO Generating Facilities, (ii) any costs Energy Manager incurs based on non-use of gas it has otherwise contracted to purchase for use in the operation of the GENCO Generating Facilities, and (iii) the Local Transportation Charge and (b) the delivered cost of oil for use in GENCO's Generating Facilities. -12- 3.3. FUEL PURCHASE PERFORMANCE INCENTIVES/DISINCENTIVE PAYMENTS. Energy Manager shall receive a Fuel Purchase Performance Incentive/Disincentive Payment calculated in accordance with Appendix A hereto. Such Fuel Purchase Performance Incentive/Disincentive Payment will be calculated at the end of each month, with the results reflected in the following month's invoice submitted in accordance with the provisions of Section 3.4. The total Fuel Purchase Performance Incentive/Disincentive Payment shall not exceed $5.0 million on an annual basis. 3.4. PAYMENT. Energy Manager will submit monthly invoices to Authority for the Monthly Fuel Management Fee and the Fuel Purchase Performance Incentive/Disincentive Payment by the tenth (10th) Business Day following the month of service, consistent with the provisions in this Article 3. Payment of all invoiced amounts shall be due and payable by Authority within fifteen (15) Business Days of Authority receiving such invoices. Prior to the Closing Date, the parties will establish a mutually satisfactory billing arrangement for the Monthly Fuel Payment designed to minimize and compensate, as appropriate, for carrying costs and to reflect billing procedures contained in Fuel contracts entered into by Energy Manager. All such payments shall be made in the form of immediately available funds by wire transfer to a bank or financial institution specified by Energy Manager or in such other form as may be reasonably requested by Energy Manager. The wired funds will be deemed timely if received by the close of business on or before the due date of such payment. 3.5. LATE PAYMENT. Any invoiced amount not paid by Authority by the due date will be subject to interest computed from the date payment was payable hereunder at the rate equal to the lesser of (i) the maximum rate of interest per monthly billing period permitted by Applicable Law and (ii) (a) for interest accruing during the first six months or less after the date on which such payment was payable hereunder, 6 month LIBOR, and (b) for interest accruing more than six months after the date on which a payment was payable hereunder, the Prime Rate plus 1.00% in each case, as 6 month LIBOR or the Prime Rate was reported in the Wall Street Journal for each day. The parties agree that such interest rate will apply to payments under this Agreement in lieu of any different rate that would otherwise apply generally to late payments by the Authority. 3.6. FUEL MEASUREMENT Installation, maintenance and operation of all Fuel metering and telemetering equipment shall be undertaken by GENCO in accordance with the Power Supply Agreement. Energy Manager shall cooperate with Authority in Authority's verification of the accuracy of all measurements of Fuel made by GENCO and Authority shall have access to all records of Energy Manager necessary for such purpose. -13- 3.7. GENERAL FUEL SERVICE REQUIREMENTS. 3.7.1. Minimization of Cots. In providing the Fuel, Energy Manager shall use best efforts to minimize Fuel costs for the GENCO Generating Facilities, such efforts being consistent with (i) all applicable insurance policies, (ii) all applicable prudent industry practices and standards, including Prudent Utility Practice, (iii) all applicable operating and contract constraints for Fuel delivery, (iv) Energy Manager's collective bargaining agreements and (v) Applicable Law. 3.7.2. Accounting Controls. Energy Manager on a quarterly basis shall provide, or cause to be provided, all accounting, bookkeeping, and administrative services in connection with the Fuel costs, such accounting to be consistent with the FERC Uniform System of Accounts and Generally Accepted Accounting Principles consistently applied. In areas of conflict, FERC accounting principles shall control. All records relating to such services shall be subject to review and audit in accordance with Section 6.2. -14- ARTICLE 4 - OFF SYSTEM SALES Energy Manager shall use best efforts to market to Off-System Sales customers, on Authority's behalf, Electricity from the System Power Supply that is not otherwise needed by the Electricity Customers in a manner which will reduce the net cost of Electricity provided to the Electricity Customers. Energy Manager shall receive 33 percent of the revenue net of incremental costs from Off-System Sales of Electricity from the System Power Supply and the Authority shall receive 67 percent of the revenue net of incremental costs from these Off-System Sales of Electricity from the System Power Supply. The incremental costs for such Off-System Sales will be based upon the incremental cost of energy for such Electricity sales including any other costs or charges (including applicable taxes) incurred to produce and deliver the Electricity and/or Ancillary Services for sale by Energy Manager. The incremental costs associated with capacity sales shall include the cost of replacement capacity incurred as a result of the sale, if any, and any other costs or charges related to the sale, including startup, no-load operation, transmission, and applicable taxes. Amounts due to Energy Manager under this Article 4 shall be billed by Energy Manager and shall be paid by the Authority in accordance with the billing and payment provisions of Section 5.4. Notwithstanding any of the above, the Energy Manager will only attempt to sell excess Electricity to the extent that, in GENCO's judgment, such Electricity sales do not jeopardize any of GENCO's tax-exempt debt and to the extent that, in the Authority's judgment, such Electricity sales do not jeopardize the tax-exempt status of any of the Authority's debt. Each party shall furnish the other an appropriately detailed description of the constraints imposed on such sales prior to the Closing Date and shall update such description from time to time to reflect any applicable changes in law or regulation. -15- ARTICLE 5 - SYSTEM POWER SUPPLY MANAGEMENT 5.1. LOWEST COST ELECTRICITY. In connection with the purchase and management of the System Power Supply, on Authority's behalf, the Energy Manager shall use best efforts to provide the lowest cost Electricity to the T&D System and the Electricity Customers, given (i) the transmission and distribution limitations unique to the T&D System; (ii) the terms of the Existing Power Supply Agreements; (iii) availability of power through the New York Power Pool or its successor; (iv) regulatory and reliability council requirements, including, but not limited to system safety and reliability; and (v) System Policies and Procedures, including environmental policies contained therein. 5.2. SPECIFIC ENERGY MANAGER RESPONSIBILITIES. In implementing its System Power Supply responsibilities, the Energy Manager will, subject to the transmission, contractual and reliability constraints referred to in Section 5.1 above: (i) schedule deliveries of and Dispatch energy from the System Power Supply; (ii) arrange for the Authority's purchase of Electricity to the extent the System Power Supply is insufficient to meet the requirements of the T&D System; (iii) continually monitor the market for the Authority's sale and purchase of wholesale Electricity and purchase Electricity, on the Authority's behalf, on the wholesale market to displace System Power Supply if such purchases, including the cost of transmission services to deliver such Electricity, will reduce total power supply costs; (iv) sell Electricity on Authority's behalf from the System Power Supply that is surplus to the requirements of the T&D System whenever such sales, including consideration of any incremental cost of Transmission for delivery of such sales, are advantageous to the Authority; (v) arrange for such additional transmission services and capacity as shall be necessary for the purchase or sale of Electricity by the Authority; and (vi) with the prior written consent of Authority, subcontract with power marketers or brokers, or similar entities, to assist in the acquisition of Electricity and the marketing and sale of excess Electricity. All contracts for the purchase or sale of Electricity will be entered into by the Authority or by the Energy Manager as agent for the Authority. No contract for the purchase or sale of Electricity for a term in excess of three months shall be entered into without the prior written consent of the Authority. -16- 5.3. SYSTEM POWER SUPPLY MANAGEMENT COMPENSATION. Except as otherwise provided in this Agreement, the payments Authority will make to Energy Manager pursuant to this Agreement with respect to System Power Supply Services other than Off-System Sales will be calculated as set forth below. During the term of this Agreement, Authority will make monthly payments to Energy Manager consisting of an amount equal to the sum of: (i) the System Power Supply Management Fee, plus or minus (ii) the System Power Supply Performance Incentive/Disincentive. 5.3.1 System Power Supply Management Fee. Energy Manager shall be paid an annual System Power Supply Management Fee, in consideration for Energy Manager's performance of the System Power Supply management services contemplated herein. The amount of such System Power Supply Management Fee shall be agreed upon by the parties not later than the Closing Date and shall reflect a fee of $750,000 and an allowance for certain costs. These costs included in the System Power Supply Management Fee shall be comprised of an appropriate allocation of compensation paid to employees and expenses of the Energy Manager plus, an appropriate allocation of such costs of employees and expenses of the Energy Manager's parent or affiliates to the extent such employees provide service pursuant to this Agreement and an appropriate allocation of depreciation and return on the undepreciated balance of Energy Manager and its parent or affiliates owned assets. The cost component of initial System Power Supply Management Fee once established and approved by Authority, will be indexed during the Term of this Agreement in the same manner as the Direct Cost Budget under the Management Services Agreement. Authority shall pay the System Power Supply Management Fee to Energy Manager in twelve equal monthly installments, payable in accordance with the provisions of Section 5.4. 5.3.2 System Power Supply Performance Incentives/Disincentives. Energy Manager shall receive a System Power Supply Performance Incentive/Disincentive calculated in accordance with Appendix B hereto. Such System Power Supply Incentive/Disincentive will be calculated at the end of each month, with the results reflected in the following month's invoice submitted in accordance with the provisions of Section 5.4. The total System Power Supply Performance Incentive/Disincentive shall not exceed $2 million on an annual basis. 5.4. PAYMENT. Energy Manager will submit monthly invoices to Authority for the Monthly System Power Supply Management Fee and the System Power Supply Performance Incentive/Disincentive Payments and Off-System Sales compensation (as provided for in Article 4) by the tenth (10th) Business Day following the month of service, consistent with the provisions in this Article 5 and Article 4. Such invoices shall show separately amounts payable under Articles 4 and 5. Payment of all invoiced amounts shall be due and payable by Authority within fifteen (15) Business Days of Authority receiving such invoices. All such payments shall be made in the form of immediately available funds by wire transfer to a bank or financial institution specified by Energy Manager. The wired funds -17- will be deemed timely paid if received by the close of business on or before the due date of such payment. 5.5. LATE PAYMENT. Any invoiced amount not paid by Authority under this Article by the due date will be subject to interest computed from the date payment was due at the rate equal to the lesser of (i) the maximum rate of interest per monthly billing period permitted by Applicable Law and (ii) (a) for interest accruing during the first six months or less after the date on which such payment was payable hereunder, 6 month LIBOR, and (b) for interest accruing more than six months after the date on which a payment was payable hereunder, the Prime Rate plus 1.00% in each case, as 6 month LIBOR or the Prime Rate was reported in the Wall Street Journal for each day. The parties agree that such interest rate will apply to payments under this Agreement in lieu of any different rate that would otherwise apply generally to late payments by the Authority. -18- ARTICLE 6 - GENERAL 6.1. STAFFING AND LABOR ISSUES. The Energy Manager shall employ and supervise Energy Manager's employees in sufficient numbers and possessing sufficient skills to perform the services required of the Energy Manager under this Agreement consistent with Prudent Utility Practice. The Energy Manager shall provide proper training for the Energy Manager's employees in the performance of their work under this Agreement. The Energy Manager shall assure that the Energy Manager's employees are qualified to perform their work and the services contemplated by this Agreement in accordance with Prudent Utility Practice, and the Energy Manager shall give due consideration to any comments of the Authority with respect to the performance of specific employees. At all times, the Energy Manager shall comply with Prudent Utility Practice and Applicable Law with respect to the Energy Manager's employees and with respect to the Energy Manager's obligations under this Agreement. 6.2. ACCOUNT RECORDS; COLLECTION OF MONIES; AVAILABILITY OF ENERGY MANAGER. 6.2.1. Account Records. The Energy Manager shall maintain such records as the Authority reasonably requests setting forth in accurate and reasonable detail the information relating to the purchase and sale of Fuel and Electricity hereunder requested by the Authority. At a minimum, the Energy Manager shall maintain the records in a manner such that data by various supplier and purchaser classifications can readily be reported on a monthly basis, for the fiscal year to date and for the most recent twelve month period. The Energy Manager shall retain any records that it is required to maintain pursuant to this subparagraph for the term of this Agreement and shall deliver them to the Authority upon the Authority's request. 6.2.2 Collection of Monies. The Energy Manager shall use best efforts to collect on a timely basis (1) all amounts due the Authority for Off-System Sales, and (2) any other monies owed to the Authority in connection with System Power Supply and other matters within the purview of the Energy Manager. The Energy Manager shall provide current and historical billing information concerning Fuel and System Power Supply to the Authority monthly in such form as reasonably requested by the Authority. All such monies collected by the Energy Manager or any Subcontractor thereto shall be the property of the Authority and shall be deposited by the Energy Manager daily into such accounts and in the manner as the Authority may from time to time designate. In collecting such monies, the Energy Manager and any Subcontractor shall act solely as an agent for the Authority and shall have no right or claim to such moneys and, without limiting the generality of the foregoing, shall have no right to assert a claim of set-off, recoupment, abatement, counterclaim or deduction for any amounts which may be owed to the Energy Manager hereunder or with respect to any other matter in dispute hereunder or otherwise. The Energy Manager is unconditionally and absolutely obligated to pay or deposit such moneys as directed by the Authority. -19- 6.2.3 Availability of Energy Manager. (A) Office Facilities. The Energy Manager shall maintain at all times during the Term hereof an office within Nassau or Suffolk County. (B) Availability of Representatives. Representatives of the Energy Manager shall be available at the Energy Manager's office during office hours for communication with the Authority or with suppliers of Fuel and System Power Supply. (C) Emergency Telephone Number. The Energy Manager shall maintain an emergency telephone number(s) for use during other than normal business hours and shall, to the extent directed by the Authority make such numbers available to suppliers of System Power Supply, the New York Power Pool or successor organization, and the Manager. 6.3. COMPLIANCE WITH APPLICABLE LAW. The Energy Manager shall perform all of its obligations hereunder in accordance with Applicable Law. In the event that the Energy Manager fails at any time to comply with Applicable Law, then the Energy Manager shall immediately remedy such failure at its cost and expense and bear all Loss-and-Expense, of either party and pay any resulting damages, fines, assessments or other charges resulting therefrom to the extent provided in Section 6.8 hereof. Any such damage, fine, assessment or other charge paid by the Energy Manager due to a violation of Applicable Law for which Authority is responsible under Section 6.8 shall be reimbursed to the Energy Manager. 6.4. INFORMATION. 6.4.1. Information System. The Energy Manager shall on and after the Closing Date establish and maintain an information system to provide storage and real time retrieval for Authority review and copying of operating data relating to (i) cost and quantities of Fuel Supply and Power Purchases, (ii) revenues from and quantities of Off-System Sales and (iii) the performance by the Energy Manager of its obligations hereunder, including, but not limited to, all information necessary to verify calculations made pursuant to this Agreement. 6.4.2. Ownership of Information and Documentation. The Authority will have sole ownership of information related to the purchase of Fuel and the operation and management of the System Power Supply (the "Fuel and System Power Supply Operations Data"). The Energy Manager may not use any Fuel and System Power Supply Operations Data for non-Authority related purposes without the Authority's prior written permission. Such permission, if granted, will be granted on a nondiscriminatory basis. To the extent Fuel and System Power Supply Operations Data is available from other sources, neither the Energy Manager nor its Affiliates shall be precluded from using in its business such data obtained from other sources. -20- 6.5. BOOKS AND RECORDS. The Energy Manager shall prepare and maintain proper, accurate and complete books, records and accounts regarding Fuel and System Power Supply to the extent necessary (1) to enable the Authority to prepare the Authority's financial statements in accordance with generally accepted accounting principles, (2) to verify data with respect to any operations or transactions in which the Authority has a financial or other material interest hereunder, (3) to prepare periodic performance reports and statements relating to purchase of Fuel and System Power Supply, which shall be submitted by the Energy Manager to the Authority and (4) to enable the Authority to administer any fuel adjustment clause or similar provision applicable to Electricity sales. The Energy Manager shall, upon notice and demand from the Authority, produce for examination and copying at the Energy Manager's office, by representatives of the Authority, all books of account, bills, vouchers, invoices, personnel rate sheets, cost estimates and bid computations and analyses, Subcontracts, purchase orders, time books, daily job diaries and reports, correspondence, and any other documents showing all acts and transactions in connection with or relating to or arising by reason of this Agreement, any Subcontract or any transactions in which the Authority has or may have a financial or other material interest hereunder, and shall produce such operation books and records for examination and copying in connection with the costs for which the Authority may be responsible hereunder. The Energy Manager shall keep the relevant portions of the books, records and accounts maintained with respect to each Contract Year until at least the seventh anniversary of the last day of each such Contract Year (the third anniversary for tape recordings of transactions) and provide copies thereof to the Authority at its reasonable request to the extent necessary to allow the Authority to determine to its reasonable satisfaction the propriety of any request for payment or charge hereunder. The Energy Manager shall have the right to destroy such books and records if it provides copies thereof at its expense upon Authority request following 60 days' written notice to the Authority of the Energy Manager's intention to destroy such books and records. The provisions of this subsection 6.5 shall survive the termination of this Agreement. 6.6. FISCAL AFFAIRS, ACCOUNTING AND RECORD KEEPING. 6.6.1. General. The Energy Manager shall maintain possession of equipment, materials and supplies, maps, plans and specifications, and Fuel and System Power Supply billing records during the term of this Agreement and shall duly account to the Authority therefor. 6.6.2. Bank Deposits. All cash held by the Energy Manager for the account of the Authority and all cash collected by the Energy Manager for the account of the Authority after the Closing Date shall be deposited on each Business Day in bank accounts in such bank or banks as the .Authority may direct and upon such terms and conditions as may be specified by the Authority. -21- 6.7. OTHER SERVICES 6.7.1. Bill Payments. The Energy Manager shall timely pay all bills related to Fuel which are proper and appropriate and which it has authority to pay and shall assume that, to the extent within the Energy Manager's control, no liens are filed against a portion of the assets or revenues of the Authority. In the event that the Energy Manager fails to pay any such bill on a timely basis, the Authority shall have the right, but not the obligation, to pay such bill and deduct the amount of such payment, plus all costs and expenses incurred by the Authority in connection therewith and an administration fee of $50, from the next payment due from the Authority to the Energy Manager hereunder. 6.7.2. Review of System Power Supply Bills. The Energy Manager shall review all purchased power bills in a timely manner and forward those which are proper and appropriate to the Authority for payment. 6.7.3. Attendance at Meetings. The Energy Manager Representative shall attend meetings of the Authority, with suppliers of the Authority and others as reasonably requested by the Authority. SECTION 6.8. ALLOCATION OF RISK OF CERTAIN COSTS AND LIABILITIES. Except to the extent due to Authority Fault (as determined by either a final non- appealable order or judgment of a court of competent jurisdiction (including administrative tribunals) or a final non-appealable binding arbitration decision), the Energy Manager shall be responsible and liable to the Authority for, and shall not be entitled to reimbursement from the Authority for any Loss-and-Expense incurred by the Energy Manager or the Authority, (a) due to any gross negligence or willful misconduct by the Energy Manager during the period commencing six months prior to the Closing Date to the extent LILCO knew or should have known of such gross negligence or willful misconduct and during the Term in carrying out its obligations hereunder, (b) due to any violation of or failure of compliance with Applicable Law the Energy Manager (except as provided below) during the period commencing six months prior to the Closing Date to the extent LILCO knew or should have known of such violation or failure of compliance during the Term which materially and adversely affects (i) the condition or operations of the T&D System or the System Power Supply, (ii) the financial condition of the Authority, -22- (iii) the performance or ability of the Energy Manager to perform its obligations under this Agreement, or (iv) the cost of providing electric service to the customers of the T&D System, provided, however, that Energy Manager shall not be responsible and liable to the Authority under this clause (b) with respect to any violation of, failure of compliance with, or liability under, Environmental Laws (as defined in the Acquisition Agreement) for which the Authority or the Energy Manager may be strictly liable provided that Energy Manager (or for actions prior to the closing date, LILCO) acted in a manner consistent with Prudent Utility Practice. Notwithstanding the foregoing, Energy Manager shall in all events be liable for any fine or penalty arising by reason of any violation of or failure of compliance with Applicable Law for acts or omissions of the Energy Manager not consistent with Prudent Utility Practice. (c) due to any criminal violation of Applicable Law by the Energy Manager (or for actions prior to the Closing Date, LILCO), or (d) due to an event which would otherwise permit recovery of cost incurred hereunder which would otherwise be recoverable hereunder, that is incurred by reason of actions or omissions of the Manager not consistent with Prudent Utility Practice. Any action or omission identified in (a), (b), (c) or (d) shall be determined by either a final non-appealable order or judgment of a court of competent jurisdiction (including administrative tribunals) or a final non-appealable binding arbitration decision and shall be attributable to the Manager for purposes of the preceding sentence whether it is attributable to the Manager or to any officer, member, agent, employee or representative of the Manager or any Affiliate and any contractor, Subcontractor of any tier. -23- ARTICLE 7 - TERM; EVENTS OF DEFAULT 7.1. TERM. The Term of this Agreement shall commence on the Closing Date and, except as otherwise provided herein, shall remain in full force and effect for an initial term of (i) fifteen (15) years from such Closing Date with respect to the Fuel Services and (ii) eight (8) years from such Closing Date with respect to System Power Supply Services. 7.2. EVENTS OF DEFAULT BY THE ENERGY MANAGER. 7.2.1. Events of Energy Manager Default Defined. (1) Events of Default Not Requiring Cure Opportunity for Termination. The following constitute Events of Default on the part of the Energy Manager for which the Authority may terminate this Agreement without any requirement of cure opportunity: (a) Change of Control of Energy Manager. Change of Control of the Energy Manager, the Parent or the Guarantor has occurred; provided, however, that the combination effectuated under the BU/LILCO Agreement or Acquisition Agreement shall not constitute a Change of Control of the Energy Manager for purposes of this provision. (b) Voluntary Bankruptcy. The written admission by the Energy Manager or the Guarantor that it is bankrupt, or the filing by the Energy Manager or the Guarantor of a voluntary petition under the Federal Bankruptcy Code, or the consent by the Energy Manager, the Parent or the Guarantor to the appointment by a court of a receiver or trustee for all or a substantial portion of its property or business, or the making by the Energy Manager, the Parent or the Guarantor of any arrangement with or for the benefit of its creditors involving an assignment to a trustee, receiver or similar fiduciary, regardless of how designated, of all or a substantial portion of the Energy Manager's or the Guarantor's property or business. (c) Involuntary Bankruptcy: The final adjudication of the Energy Manager, the Parent or the Guarantor as a bankrupt after the filing of an involuntary petition under the Federal Bankruptcy Code, but no such adjudication shall be regarded as final unless and until the same is no longer being contested by the Energy Manager, the Parent or the Guarantor nor until the order of the adjudication shall be regarded as final unless and until the same is no longer being contested by the Energy Manager or the Guarantor nor until the order of the adjudication is no longer appealable. (d) Credit Enhancement. Failure of the Energy Manager to supply, maintain, renew, extend or replace the credit enhancement required under subsection 13.15(C) hereof within the time specified therein in the event there is a Material Decline in the Guarantor's Credit Standing, as defined in Section 13.15 hereof. -24- (e) Letter of Credit Draw. Failure of the Energy Manager to supplement, replace or cause to be reinstated the letter of credit as described in Section 13.15 hereof within 30 days following draws equal to, in the aggregate, 50% of the face value thereof. (2) Events of Default Requiring Cure Opportunity for Termination. Each of the following shall constitute an Event of Default on the part of the Energy Manager for which the Authority may terminate this Agreement upon compliance with the notice and cure provisions set forth below: (a) Failure to Pay or Credit. The failure of the Energy Manager to pay or credit undisputed amounts it owes to the Authority under this Agreement within 90 days following the due date for such payment or credit; and (b) Failure Otherwise to Comply with Agreement or Guaranty. The failure or refusal by the Energy Manager to perform any material obligation under this Agreement (other than those obligations contained in subsection 7.2.14(2)(a) above), or the failure of the Guarantor to comply with any of its obligations under the Guaranty unless such failure or refusal is excused by an Uncontrollable Circumstance or Authority Fault except that no such failure or refusal specified in clause (b) of this Section 7.2.1(2) shall constitute an Event of Default giving the Authority the right to terminate this Agreement for cause under this subsection unless: (i) The Authority has given prior written notice to the Energy Manager or the Guarantor, as applicable, stating that a specified failure or refusal to perform exists which will, unless corrected, constitute a material breach of this Agreement on the part of the Energy Manager or the Guaranty on the part of the Guarantor and which will, in its opinion, give the Authority a right to terminate this Agreement for cause under this Section unless such default is corrected within a reasonable period of time, and (ii) The Energy Manager or the Guarantor, as applicable, has neither challenged in an appropriate forum the Authority's conclusion that such failure or refusal to perform has occurred or constitutes a material breach of this Agreement nor corrected or diligently taken steps to correct such default within a reasonable period of time, but not more than 60 days, from receipt of the notice given pursuant to clause (i) of this subsection (but if the Energy Manager or the Guarantor shall have diligently taken steps to correct such default within a reasonable period of time, the same shall not constitute an Event of Default for as long as the Energy Manager or the Guarantor is continuing to take such steps to correct such default). -25- 7.3. EVENTS OF DEFAULT BY THE AUTHORITY. 7.3.1. Events of Authority Default Defined. Each of the following shall constitute an Event of Default on the part of the Authority for which the Energy Manager may terminate this Agreement upon compliance with the notice and cure provisions set forth below: (1) Failure to Pay. The failure of the Authority to pay undisputed amounts owed to the Energy Manager under this Agreement within 90 days following the due date for such payment. (2) Failure to Comply with Agreement. The failure or refusal by the Authority to perform any material obligation under this Agreement unless such failure or refusal is excused by an Uncontrollable Circumstance or Energy Manager Fault; except that no such failure or refusal to pay or perform shall constitute an Event of Default giving the Energy Manager the right to terminate this Agreement for cause under this Section unless: (a) The Energy Manager has given prior written notice to the Authority stating that a specified failure or refusal to perform exists which will, unless corrected, constitute a material breach of this Agreement on the part of the Authority and which will, in its opinion, give the Energy Manager a right to terminate this Agreement for cause under this Section unless such default is corrected within a reasonable period of time, and (b) The Authority has either challenged in an appropriate forum the Energy Manager's conclusion that such failure or refusal to perform has occurred or constitutes a material breach of this Agreement nor corrected or diligently taken steps to correct such default within a reasonable period of time but not more than 60 days from the date of the notice given pursuant to clause (a) of this subsection (but if the Authority shall have diligently taken steps to correct such default within a reasonable period of time, the same shall not constitute an Event of Default for as long as the Authority is continuing to take such steps to correct such default). (3) Change of Control of Long Island Lighting Company. A Change of Control of Long Island Lighting Company (after acquisition by the Authority) which results in ownership control of LILCO by other than a state public benefit corporation, authority, political subdivision or other instrumentality of the State or any political subdivision thereof. 7.4. PROCEDURE FOR TERMINATION FOR CAUSE. 7.4.1. Thirty Day Notice. If any party shall have a right of termination for cause in accordance with Section 7.3, the same may be exercised by notice of termination -26- given to the party in default at least thirty days prior to (or, in the case of a bankruptcy or insolvency default or a Change of Control, simultaneously with) the date of termination specified in such notice (the "Termination Date"). 7.4.2. Termination by Authority. (1) Access. In the event an Event of Default of the Energy Manager occurs and the Authority issues a termination notice described in 7.4.1 hereof or the Energy Manager is terminated in accordance with Section 7.2 hereof, from the date of such issuance until the Termination Date, the Authority shall have unrestricted access to all information, data and records concerning the Fuel and Energy Supply Services in order to monitor the performance of the Energy Manager and to ensure that the Energy Manager complies with the provisions of this Agreement during such time period (the "Termination Notice Period"). (2) Assumption of Responsibilities. At the Authority's sole option, the Authority may elect at any time during the Termination Notice Period to direct the Energy Manager and its employees in the day-to-day performance of the Energy Manager's obligations under this Agreement. If the Authority so elects, the Authority shall reimburse the Energy Manager for its resulting Cost Substantiated incremental costs incurred in the performances of services hereunder, and the Energy Manager shall no longer be eligible to receive any performance incentives nor be responsible for the payment of performance disincentives under this Agreement; provided that the Energy Manager shall be entitled to receive any such performance incentives and shall be responsible for any such performance disincentives for the period preceding such assumption of day-to-day operations. 7.5. CERTAIN OBLIGATIONS OF THE ENERGY MANAGER UPON TERMINATION OR EXPIRATION. 7.5.1. Obligations on Termination or Expiration. Upon a termination of the Energy Manager's right to perform this Agreement or the expiration of this Agreement in accordance with the terms hereof, the Energy Manager shall cooperate in the smooth transition to the new manager and, without limiting the generality of the foregoing, shall: (1) transfer all records, supplier lists and account information, operations and training manuals for all Fuel and System Power Supply Services and, to the extent permitted by law, personnel information to the new fuel and energy supply manager; (2) stop the Fuel and System Power Supply Services on the date or dates and to the extent specified by the Authority, provided that in so doing the Energy Manager shall cooperate and coordinate with the Authority and any successor fuel and energy supply manager so as to permit Authority to maintain an uninterrupted Fuel supply and System Power Supply; -27- (3) promptly deliver to the Consulting Engineer or the successor fuel and energy supply manager, as the Authority shall direct, copies of all Fuel and Electricity supply contracts, together with a statement of: (a) the fuel and/or energy purchased and not yet delivered pursuant to each agreement; (b) the expected delivery date of all such items; (c) the total cost of each agreement and the terms of payment; and (d) the estimated cost of cancelling and/or assigning each agreement, (4) advise the Authority promptly of any special circumstances which might limit or prohibit cancellation of any contract or subcontract; (5) as the Authority directs, terminate or assign to the new energy manager or the Authority all contracts or subcontracts entered into or utilized by the Energy Manager in performance of this Energy Management Agreement (including, but not limited to, any contracts for gas pipeline capacity (or portions thereof in the case of contracts entered into for multiple purposes) entered into to serve the GENCO Generating Facilities) and make no additional contracts or subcontracts hereunder without the prior written approval of the Authority; (6) furnish to the Authority all information in the possession of Manager and any subcontractor on how Energy Manager or subcontractor obtained Fuel and System Power Supply during the term of this Agreement that would be helpful to Authority (or any successor manager) in performing these services in the future; (7) notify the Authority promptly in writing of any Legal Proceedings against the Energy Manager by any contractor or subcontractor relating to the termination of the Fuel and Energy Supply Services (or any Subcontracts); (8) take such other actions, and execute such other documents, as may be necessary to effectuate and confirm the foregoing matters, or as may be otherwise necessary or desirable to minimize the Authority's costs, and take no action which will increase any amount payable to the Authority under this Agreement. 7.5.2. Authority Payment of Certain Transition Costs. The Authority shall reimburse the Energy Manager within 60 days of the date of the Energy Manager's invoice for all mutually agreeable costs incurred by the Energy Manager in satisfying the requirements of Section 7.5.1, subject to Cost Substantiation. -28- 7.6. NO WAIVERS. No action of the Authority or Energy Manager pursuant to this Agreement (including, but not limited to, any investigation or payment), and no failure to act, shall constitute a waiver by either party of the other party's compliance with any term or provision of this Agreement. No course of dealing or delay by the Authority or Energy Manager in exercising any right, power or remedy under this Agreement shall operate as a waiver thereof or otherwise prejudice such party's rights, powers and remedies. No single or partial exercise of (or failure to exercise) any right, power or remedy of the Authority or Energy Manager under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 7.7. AUTHORITY EMERGENCY ASSUMPTION OF FUEL AND SYSTEM POWER SUPPLY MANAGEMENT SERVICES. Should the Energy Manager, due to Uncontrollable Circumstances or any other reason whatsoever, fail, refuse or be unable to provide any or all Fuel and System Power Supply Services contemplated hereby and the Authority or any Governmental Body finds that such failure endangers or menaces the public health, safety or welfare, then, in any of those events and to the extent of such failure, the Authority shall have the right, upon notice to the Energy Manager, during the period of such emergency, to perform the services which the Energy Manager would otherwise be obligated to perform hereunder. The Energy Manager agrees that in such event it will fully cooperate with the Authority to effect such a temporary assumption. The Energy Manager agrees that, in such event, the Authority may take and use any or all of the operating assets of the Energy Manager necessary for the above-mentioned purposes without paying the Energy Manager or any other person any additional charges or compensation whatsoever for such possession and use; provided, however, that if such emergency is due to Uncontrollable Circumstances, the Authority shall reimburse the Energy Manager for its Cost-Substantiated costs incurred due to such a transfer of the operating assets. The parties acknowledge that if the Authority assumes the Fuel and System Power Supply services in accordance with this Section 7.7, any applicable cure period provided for in this Agreement for the Energy Manager's benefit shall be tolled until such time as the Energy Manager resumes performance of its obligations hereunder. The Authority may use the Energy Manager's employees and the Energy Manager shall make its employees available for such purposes. It is further agreed that the Authority may at any time, at its discretion, relinquish its performance of the Fuel Services and System Power Supply Services thereupon demand that the Energy Manager resume such services as provided in the Agreement. It is specifically understood and agreed that the Authority's exercise of its rights under this Section: (1) does not constitute a taking of private property for which payment must be made other than as specifically provided for in this Section; (2) shall not create any liability on the part of the Authority to the Energy Manager; and (3) that the indemnity provisions of Article 11 hereof covering the Authority and the Energy Manager are meant to include circumstances arising under this Section. The Authority's right to perform the services anticipated to be performed by the Energy Manager hereunder shall terminate at the time when such services can, in the judgment of the Authority, be resumed by the Energy Manager. 7.8. WAIVER OF CERTAIN DEFENSES The Energy Manager acknowledges that it is solely responsible for the day-to-day management of Fuel Services and -29- System Power Supply Services and agrees that, unless otherwise permitted pursuant to the provisions of this Agreement with respect to the occurrence of Uncontrollable Circumstances, and without limiting such provisions, it shall not assert (i) impossibility or impracticability of performance, (ii) the existence, non-existence, occurrence or non-occurrence of any foreseen or unforeseen fact, event or contingency that may be a basic assumption of the Energy Manager, (ii) commercial frustration of purposes or (iii) contract of adhesion, as a defense against any claim by the Authority against the Energy Manager. -30- ARTICLE 8 - DESIGNATION OF REPRESENTATIVES 8.1. AUTHORITY REPRESENTATIVE. Not later than 30 days after the execution and delivery of this Agreement, Authority shall select a Representative (the "Authority Representative"). The Authority Representative, subject to any necessary approvals, is authorized to act for and on behalf of Authority concerning this Agreement. In all such matters, Authority shall be bound, to the extent authorized, by the written communications, directions, requests and decisions made by the Authority Representative. Authority shall promptly notify Energy Manager in writing of Authority's Representative selection and any subsequent replacement(s). 8.2. ENERGY MANAGER REPRESENTATIVE. Not later than 30 days after the execution and delivery of this Agreement, Energy Manager will select a Representative (the "Energy Manager Representative") who shall be authorized to act for and on behalf of Energy Manager in all matters concerning this Agreement. In all such matters, Energy Manager shall be bound by the written communications, directions, requests and decisions made by the Energy Manager Representative. Energy Manager shall promptly notify Authority in writing of Energy Manager's Representative selection and any subsequent replacanent(s). The Energy Manager Representative shall have appropriate experience with respect to the supervision and management of services of the type contemplated by this Agreement and who shall be responsible for the day to day supervision of the Energy Manager's performance of this Agreement. The Energy Manager shall inform the Authority of the identity of the person serving from time to time as Energy Manager Representative, and of the telephone and beeper numbers or other means by which such person and his or her designee may be contacted at all times. Recognizing the need for an amicable working relationship between the Authority and the Energy Manager, the Authority shall have the right to approve the appointment of the Energy Manager Representative and any successors thereto, such approval not to be unreasonably withheld. The Energy Manager Representative or a pre-approved designee shall attend monthly meetings, following Authority receipt and review of the monthly reports delivered pursuant to Section 9.1 hereof, with the Authority to discuss such matters as the Authority deems appropriate. -31- ARTICLE 9 - ENERGY MANAGER'S REPORTING REQUIREMENTS 9.1. MONTHLY REPORTS. The Energy Manager shall provide the Authority and the Consulting Engineer with monthly reports no later than 20 days after the [ ] of each month, including such data relating to the Fuel Services and System Power Supply Services as may reasonably be requested to be furnished by the Authority. 9.2. ANNUAL REPORTS. The Energy Manager shall furnish the Authority and, the Consulting Engineer, within 60 days after the end of each Contract Year an Annual Settlement Statement together with annual summary of the statistical data provided in monthly reports, certified by the Energy Manager, as well as such other data relating to the services provided hereunder as may be reasonably requested to be furnished by the Authority. The Annual Settlement Statement shall also include an accounting of any incentives or penalties accrued during the applicable Contract Year along with appropriate supporting documentation. The Authority or its designees shall have an opportunity to review such accounting prior to payment and shall have access to the Energy Manager's books and records in order to confirm such accounting prior to payment. Such review will be performed within 90 days of receipt the Animal Settlement Statement. 93. FUEL CONSUMPTION REPORTS. Fifteen (15) Business Days following the end of each month, Energy Manager shall submit to Authority a [ ] summarizing the Fuel burned during that month and such other information as the parties may mutually agree. 9.4. LITIGATION; PERMIT LAPSES. Promptly upon obtaining knowledge thereof, each Party shall submit to the other Party written notice of (and, upon request, copies of any relevant non-privileged documents in the Party's possession relating to): (i) any [ ] litigation, claims, disputes or actions actually filed, or any material litigation, claims, disputes or actions which are threatened, concerning in each case, the Fuel Services or Power Supply Services or the Authority's obligations relating thereto; (ii) any actual refusal to grant, [ ] or extend, or any action pending or any action filed with respect to, the granting, renewal extension of any permit or any material threatened action regarding the same; (iii) any dispute with any Governmental Body relating to the Fuel Services or Power Supply Services or [ ] Authority's obligations relating thereto of Energy Manager or Authority; and (iv) without regard to their materiality, all penalties or notices of violation issued by any Governmental [ ] relating to Fuel Services or Power Supply Services or the Authority's obligations relating thereto. -32- ARTICLE 10 - INSURANCE Energy Manager shall maintain with financially responsible insurance companies insurance in such amounts and against such risks and losses as are customary for companies engaged in the business of providing services or undertaking activities similar to the Fuel Services and System Power Supply Services to be provided hereunder. -33- ARTICLE 11 - INDEMNIFICATION 11.1. INDEMNIFICATION. (A) Indemnification by the Energy Manager. The Energy Manager agrees that, to the extent permitted by law, it will protect, indemnify and hold harmless the Authority and its respective representatives, trustees, officers, employees and subcontractors (as applicable in the circumstances), (the "Authority Indemnified Parties") from and against (and pay the full amount of) any Loss-and-Expense, and will defend the Authority Indemnified Parties in any suit, including appeals, for personal injury to, or death of, any person, or loss or damage to property arising out of any matter for which Energy Manager is responsible under Section 6.8. The Energy Manager shall not, however, be required to reimburse or indemnify any Authority Indemnified Party for any Loss-and-Expense to the extent any such Loss-and-Expense is due to (a) any matter for which the Authority has responsibilities under Section 6.8 hereof, (b) the negligence or other wrongful conduct of any Authority Indemnified Party, (c) any Uncontrollable Circumstance, (d) any act or omission of any Authority Indemnified Party judicially determined to be responsible for or contributing to the Loss-and-Expense, or (e) any matter for which the risk has been specifically allocated to the Authority hereunder. An Authority Indemnified Party shall promptly notify the Energy Manager of the assertion of any claim against it for which it is entitled to be indemnified hereunder, shall give the Energy Manager the opportunity to defend such claim, and shall not settle the claim without the approval of the Energy Manager. The Energy Manager shall be entitled to control the handling of any such claim and to defend or settle any such claim, in its sole discretion, with counsel of its own choosing that is reasonably acceptable to the Authority Indemnified Parties; provided, however, that, in the case of any such settlement, the Energy Manager shall obtain written release of all liability of the Authority Indemnified Parties, in form and substance reasonably acceptable to the Authority Indemnified Parties. Notwithstanding the foregoing, each Authority Indemnified Party shall have the right to employ its own separate counsel in connection with, and to participate in (but, except as provided below, not control) the defense of, such claim, but the fees and expenses of such counsel incurred after notice to the Energy Manager of its assumption of the defense thereof shall be at the expense of such Authority Indemnified Party unless: (i) the employment of counsel by such Authority Indemnified Party has been authorized by the Energy Manager; (ii) counsel to such Authority Indemnified Party shall have reasonably concluded that there may be a conflict on any significant issue between the Energy Manager and such Authority Indemnified Parry in the conduct of the defense of such claim; or (iii) the Energy Manager shall not in fact have employed counsel reasonably acceptable to the Authority Indemnified Party to assume the defense such claim within twenty (20) days following the receipt by the Energy -34- Manager of the notice from the Authority Indemnified Party regarding the assertion of the applicable claim, in each of which cases the fees and expenses of counsel for such Authority Indemnified Party shall be at the expense of the Energy Manager; provided, however, that, with respect to clauses (ii) and (iii) of this sentence, the Energy Manager shall not be obligated to pay the fees and expenses of more than one law firm, plus local counsel if necessary in each relevant jurisdiction, for all such Authority Indemnified Parties with respect to any claims arising out of the same events or facts or the same series of events or facts. The Energy Manager shall not be entitled, without the consent of such Authority Indemnified Party, to assume or control the defense of any a claim as to which counsel to such Authority Indemnified Party shall have reasonably made the conclusion that there may be a conflict on any significant issue between the Energy Manager and such Authority Indemnified Party in the conduct of the defense of such claim as set forth in clause (ii) above, provided that the foregoing limitation shall apply only with respect to those issues for which there may be such a conflict. These indemnification provisions are for the protection of the Authority Indemnified Parties only and shall not establish, of themselves, any liability to third parties. The provisions of this subsection 11.1(A) shall survive termination of this Agreement. (B) Indemnification by the Authority. The Authority agrees that to the extent permitted by law, it will protect, indemnify and hold harmless the Energy Manager and its Affiliates and their respective officers, directors, Subcontractors (as applicable in the circumstances) and employees (the "Energy Manager Indemnified Parties") from and against (and pay the full amount of) all Loss-and-Expense, and will defend the Energy Manager Indemnified Parties in any suit, including appeals, for personal injury to, or death of, any person, or loss or damage to property arising out of any matter for which the Authority is responsible under Section 6.8 hereof. The Authority shall not, however, be required to reimburse or indemnify any Energy Manager Indemnified Party for any Loss-and-Expense to the extent any such Loss-and-Expense is due to (a) any matter for which the Energy Manager is responsible under Section 6.8 hereof, (b) the negligence or other wrongful conduct of any Energy Manager Indemnified Party, (c) any Uncontrollable Circumstance, (d) any act or omission of any Energy Manager Indemnified Party judicially determined to be responsible for or contributing to the Loss-and-Expense, (e) any matter for which the risk has been specifically allocated to the Energy Manager hereunder. A Energy Manager Indemnified Party shall promptly notify the Authority of the assertion of any claim against it for which it is entitled to be indemnified hereunder, shall give the Authority the opportunity to defend such claim, and shall not settle the claim without the approval of the Authority. The Authority shall be entitled to control the handling of any such claim and to defend or settle any such claim, in its sole discretion, with counsel of its own choosing that is reasonably acceptable to the Energy Manager Indemnified Parry; provided, however, that, in the case of any such settlement, the Authority shall obtain written release of all liability of the Energy Manager Indemnified Party, in form and substance reasonably acceptable to the Energy Manager Indemnified Party. Notwithstanding the foregoing, each Manager Indemnified Party shall have the right to employ its own separate counsel in connection with, and to participate in (but, except as provided below, not control) the -35- defense of, such claim, but the fees and expenses of such counsel incurred after notice to the Authority of its assumption of the defense thereof shall be at the expense of such Energy Manager Indemnified Party unless: (i) the employment of counsel by such Energy Manager Indemnified Party has been authorized by the Authority; (ii) counsel to such Energy Manager Indemnified Party shall have reasonably concluded that there may be a conflict on any significant issue between the Authority and such Energy Manager Indemnified Party in the conduct of the defense of such claim; or (iii) the Authority shall not in fact have employed counsel reasonably acceptable to the Authority Indemnified Party to assume the defense of such claim within twenty (20) days following the receipt by the Authority of the notice from the Energy Manager Indemnified Party regarding the assertion of the applicable claim, in each of which cases the fees and expenses of counsel for such Energy Manager Indemnified Party shall be at the expense of the Authority; provided, however, that, with respect to clauses (ii) and (iii) of this sentence, the Authority shall not be obligated to pay the fees and expenses of more than one law firm, plus local counsel if necessary in each relevant jurisdiction, for all such Energy Manager Indemnified Parties with respect to any claims arising out of the same events or facts or the same series of events or facts. The Authority shall not be entitled, without the consent of such Energy Manager Indemnified Party, to assume or control the defense of any claim as to which counsel to such Energy Manager Indemnified Party shall have reasonably made the conclusion that there may be a conflict on any significant issue between the Authority and such Manager Indemnified Party in the conduct of the defense of such claim as set forth in clause (ii) above, provided that the foregoing limitation shall apply only with respect to those issues for which there may be such a conflict. These indemnification provisions are for the protection of the Energy Manager Indemnified Parties only and shall not establish, of themselves, any liability to third parties. The provisions of this Section 11.1$) shall survive termination of this Agreement. -36- ARTICLE 12 - NONDISCLOSURE 12.1. PROPRIETARY INFORMATION. (A) Energy Manager Request. The parties hereto hereby acknowledge that the Energy Manager has a proprietary interest in certain information that may be furnished pursuant to the provisions of this Agreement. The Energy Manager acknowledges that the Authority may be required to disclose information upon request under Applicable Law. The Energy Manager shall have the right to request the Authority in writing not to publicly disclose any information which the Energy Manager believes to be proprietary and not subject to public disclosure under Applicable Law, any such request to be accompanied by an explanation of its reasons for such belief. Any information which is the subject of such a request shall be clearly marked on all pages, shall be bound, and shall be physically separate from all non-proprietary information. At the Energy Manager's request, the Authority and its agents, consultants and employees (including the Consulting Engineer) given access to such information shall execute and comply with the terms of a confidentiality agreement in a mutually acceptable form, subject to Applicable Law. (B) Authority Non-Disclosure. In the event the Authority receives a request from the public for the disclosure of any information designated as proprietary by the Energy Manager pursuant to subsection (A) of this Section, the Authority (1) shall use reasonable efforts, consistent with Applicable Law, to provide notice to the Energy Manager of the request prior to any disclosure, and (2) shall use reasonable efforts, consistent with Applicable Law, to keep in confidence and not disclose such information unless it is entitled to do so pursuant to the provisions of subsection (c) of this Section. The Energy Manager shall indemnify, hold harmless and defend the Authority against all Loss-and-Expense incurred from the withholding from public disclosure of information designated as proprietary by the Energy Manager or otherwise requested by the Energy Manager to be withheld. (C) Permitted Disclosures. Notwithstanding any confidential or proprietary designation thereof by the Energy Manager, the Authority may disclose any information, (1) which is known to the Authority without any restriction as to disclosure or use at the time it is furnished, (2) which is or becomes generally available to the public without breach of any agreement, (3) which is received from a third party without limitation or restriction on such third party or the Authority at the time of disclosure, (4) information with respect to (a) Electricity purchases by LIPA by time of day, month and year, to the extent available; and (b) prices paid by LIPA for capacity, energy and any Ancillary Services contracted for under this Agreement; or (5) following notice to the Energy Manager pursuant to subsection (B) of this Section, information which, in the opinion of counsel for the Authority, is required to be or may be disclosed under any Applicable Law, an order of a court of competent jurisdiction, or a lawful subpoena. -37- ARTICLE 13 - MISCELLANEOUS PROVISIONS 13.1. AGREEMENT. This Agreement consists of the terms and conditions set forth in the body hereof and the Appendices and other attachments hereto. This Agreement contains the entire agreement between the Parties with respect to the subject matter hereof. In the event of a conflict, variation or inconsistency between or among the Appendices, other attachments and the terms and conditions set forth in the body hereof, the terms and conditions contained in the body hereof shall govern. 13.2. RELATIONSHIP OF THE PARTIES. Except as otherwise expressly provided herein, neither party to this Agreement shall have any responsibility whatsoever with respect to services provided or contractual obligations assumed by the other party hereto, and nothing in this Agreement shall be deemed to constitute either party a partner, agent or legal representative of the other party or to create any fiduciary relationship between the parties. 13.3. ASSIGNMENT AND TRANSFER. This Agreement may be assigned by either party hereto only with the prior written consent of the other party, except that without the consent of the other party (1) the Authority may make such assignments, create such security interests in its rights hereunder and pledge such monies receivable hereunder as may be required in connection with issuance of Revenue Bonds; (2) the Authority may assign its rights, obligations and interests hereunder, or transfer such rights and obligations by operation of law, to any other governmental entity or to a subsidiary of the Authority provided that the successor entity gives reasonable assurances to the Energy Manager that it will fulfill the Authority's obligations hereunder; and (3) the Energy Manager may assign its rights, obligations and interests hereunder to the Parent or any Affiliate thereof, provided, however, that with respect to clause (3) immediately above, the Energy Manager may not, without the consent of the Authority, make any assignment or other transfer to any person of its rights and obligations under this Agreement unless the Guaranty is and remains in full force and effect and unless the Guarantor or a majority-owned direct or indirect subsidiary of the Guarantor shall have control of and responsibility for the obligations of the Energy Manager hereunder. Effective upon the Closing Date, the Authority may assign its rights, obligations and interests hereunder to Long Island Lighting Company (then a wholly-owned subsidiary of the Authority) and the Energy Manager shall assign all of its rights, obligations and interests hereunder to the Parent or any Affiliate thereof pursuant to clause 3 above. 13.4. APPROVAL OF SUBCONTRACTORS. The Authority shall have the right to approve all Subcontractors engaged to perform any services to be provided hereunder. Prior to the beginning of each Contract Year, Energy Manager shall propose a list of preapproved Subcontractors for the Authority's review and approval, which shall specify the proposed categories of potential work under contracts for each such proposed Sub-contractor. The Energy Manager also shall furnish the Authority written notice of its intention to engage such Subcontractors, together with all information requested to the extent reasonably available to the Energy Manager pertaining to the proposed Subcontractor and subcontract pertaining to -38- the demonstrated responsibility of the proposed Subcontractor in the following areas: (1) any conflicts of interest, (2) any record of felony criminal convictions or pending felony criminal investigations, (3) any final judicial or administrative finding or adjudication of illegal employment discrimination, and (4) any final judicial or administrative finding or adjudication of non-performance in contracts with the Authority or the State. In its sole discretion, Authority may approve any proposed Subcontractor for such Contract Year or for a designated shorter period or for a specific subcontract. If a Subcontractor is approved for a Contract Year or shorter period, such Subcontractor shall be deemed to be approved for the specified categories of potential work for the duration of such Contract Year or shorter period unless the Authority otherwise notifies the Manager. The approval or withholding thereof by the Authority of any proposed Subcontractor shall not create any liability of the Authority to the Energy Manager, such Subcoractor, third parties or otherwise. 13.5. ACTIONS OF THE AUTHORITY IN ITS GOVERNMENTAL CAPACITY. Nothing in this Agreement shall be interpreted as limiting the rights and obligations of the Authority in its governmental or regulatory capacity, or as limiting the right of the Energy Manager to bring any legal action against the Authority, not based on this Agreement, arising out of any act or omission of the Authority in its governmental or regulatory capacity. 13.6. NO THIRD PARTY BENEFICIARIES. Unless specifically set forth herein, neither party to this Agreement shall have any obligation to any third party other than Indemnified Parties as a result of the agreements contained herein. 13.7. STATE LAW REQUIREMENTS. All contracts entered into by the Authority are required under State law to contain certain terms and conditions, as set forth in Appendix C hereto and the provisions of such Appendix C are hereby deemed incorporated in this Agreement at this place. To the extent of any conflict between any other provision of this Agreement and Appendix C, Appendix C shall control. The Energy Manager shall comply with such terms and conditions during the Term of this Agreement. 13.8. DISPUTE RESOLUTION. 13.8.1 Dispute Resolution. Any dispute arising out of or relating to this Agreement shall be resolved in accordance with the procedures specified in this Section, which shall constitute the sole and exclusive procedures for the resolution of such disputes. 13.8.2 Negotiation and Non-Binding Mediation. The Parties agree to use their best efforts to settle promptly any disputes or claims arising out of or relating to this Agreement through negotiation conducted in good faith between executives having authority to reach such a settlement. Either party hereto may, by written notice to the other party, refer any such dispute or claim for advice or resolution by mediation by an Independent Engineer, financial advisor or other suitable mediator. The parties shall -39- mutually agree on the selection of such mediator. If the parties are unable to agree, the parties shall each designate a qualified mediator who, together, shall choose the mediator for the particular disputes or claim. If the mediator is unable, within 30 days of such referral, to reach a determination as to the dispute that is acceptable to the parties hereto, the matter shall be referred to applicable Legal Proceedings. All negotiations and mediation discussions pursuant to this paragraph shall be confidential subject to Applicable Law and shall be treated as compromise and settlement negotiations for purposes of Federal Rule of Evidence 408 and applicable state rules of evidence. 13.8.3 Arbitration. Any dispute arising out of or relating to this Agreement or the breach, termination, or validity thereof, for a termination to except Change of Control or due to a bankruptcy or insolvency or failure to provide, renew, reinstate or replace the credit enhancement required pursuant to Section 13.15 which dispute has not been resolved by a negotiation or mediation as provided in subsection 13.8.2 hereof within 30 days from the date that either negotiations or mediation shall have been first requested, shall be settled by arbitration before three independent and impartial arbitrators (the "Arbitrators") in accordance with the then current rules of the American Arbitration Association, except to the extent such rules are inconsistent with any provision of this Agreement, in which case the provisions of this Agreement shall be followed, and except that the arbitrations under this Agreement shall in be administered by the American Arbitration Association. The Arbitrators shall be (a) independent of the parties and disinterested in the outcome of the dispute, provided that residents of Long Island shall not be deemed to be interested merely by virtue of their residence on Long Island, (b) attorneys, accountants investment bankers, commercial bankers or engineers familiar with contracts governing the operation of electric utility assets, and (c) qualified in the subject area of the issue in dispute. The Arbitrators shall be chosen by the parties, with each party choosing one arbitrator and those Arbitrators choosing the third Arbitrator. Judgment on the award rendered by the Arbitrators may be entered in any court in the State of New York having jurisdiction thereof. If either party refused to participate in good faith in the negotiations or mediation proceedings described in subsection 13.8.2 hereof, the other may initiate arbitration at any time after such refusal without waiting for the expiration of the applicable time period. Except as provided in subsection 13.8.4 hereof relating to provisional remedies, the Arbitrators shall decide all aspects of any dispute brought to them including attorney disqualification and the timeliness of the making of any claim. 13.8.4 Provisional Relief. Either parry may, without prejudice to any negotiation, mediation, or arbitration procedures, proceed in any court to obtain provisional judicial relief if, in such party's sole discretion, such action is necessary to avoid imminent irreparable harm, to provide uninterrupted electrical and other services, or to preserve the status quo pending the conclusion of the dispute procedures specified in this Section. -40- 13.8.5 Awards. The Arbitrators shall have no authority to award punitive damages or any other damages aside from the prevailing party's actual and consequential damages plus interest at the Base Interest Rate from the date such damages were incurred. The Arbitrators shall not have the authority to make any ruling, finding, or award that does not conform to the terms and conditions of this Agreement. The Arbitrators may award reasonable attorneys' fees and costs of the arbitration. The Arbitrators' award shall be in writing and shall set forth the factual and legal bases for the award. 13.8.6 Information Exchange. The Arbitrators shall have the discretion to order a pre-hearing exchange of information by the parties, including, without limitation, the production of requested documents, the exchange of summaries of testimony of proposed witnesses, and the examination by disposition of parties. The parties hereby agree to produce all such information as ordered by the Arbitrators and shall certify that they have provided all applicable information and that such information was true, accurate and complete. 13.8.7 Site of Arbitration. The site of any Arbitration brought pursuant to this Agreement shall be either Mineola, New York or Hauppauge, New York. 13.8.8 Precondition to Litigation. Except for claims for temporary injunctive relief from a court of competent jurisdiction as described above, neither party shall bring any action at law or in equity to enforce, interpret, or remedy any breach of his Agreement without first complying with the provisions of this Article 13. 13.8.9 Continuity of Service. Unless otherwise agreed to in writing or prohibited by Applicable Law, the Parties shall continue to provide service, honor commitments under this Agreement, and continue to make payments in accordance with this Agreement during the course of dispute resolution pursuant to Section 13.8 of this Agreement and during the pendency of any action at law or in equity or any arbitration proceeding relating hereto. 13.9. AMENDMENTS. No amendments or modifications of this Agreement shall be valid unless evidenced in writing and signed by duly authorized representatives of both Parties. -41- 13.10. NOTICES. 13.10.1 Notice Addresses. Any written notice under this Agreement shall be deemed properly given if sent by registered or certified mail return receipt requested, postage prepaid, or by nationally recognized overnight delivery service or signature required upon signed receipt to the address specified below, unless otherwise provided for in this Agreement: To the Authority: LONG ISLAND POWER AUTHORITY 333 Earle Ovington Boulevard Uniondale, NY 11553 Attn: Executive Director With a copy to CHAIRMAN, LONG ISLAND POWER AUTHORITY 333 Earle Ovington Boulevard Uniondale, NY 11553 To Energy Manager: LONG ISLAND LIGHTING COMPANY 175 East Old Country Road Hicksville, New York 11801 Attn: Chief Executive Officer 13.10.2. Either Party may, by written notice to the other Party, change the name or address of the person to receive notices pursuant to this Agreement. 13.11. REPRESENTATIONS AND WARRANTIES. 13.11.1. Energy Manager Representations and Warranties. Energy Manager, as of the date of this Agreement, makes the following representations and warranties as the basis for its undertakings contained herein: (a) Energy Manager is duly organized, validly existing and in good standing under the laws of the State of New York, is qualified to do business under the laws of the State of New York, has the power and authority to own its properties, to carry on its business as it now is being conducted and to enter into this Agreement and carry out the transactions contemplated hereby, and to perform and carry out all covenants and obligations on its part to be performed under and pursuant to this Agreement, and is duly authorized to execute and deliver this Agreement and consummate the transactions herein contemplated. (b) The execution and delivery of this Agreement, the consummation of the transactions contemplated herein and the fulfillment of and compliance with the provisions of this Agreement do not materially conflict with or constitute a -42- material breach of or a material default under any of the terms, conditions or provisions of any law, any order of any court or other agency of government, the certificate of incorporation of Energy Manager or any contractual limitation, partnership restriction or outstanding trust indenture, deed of trust, mortgage, loan agreement, other evidence of indebtedness or any other agreement or instrument to which Energy Manager is a Party or by which it or any of its property is bound or result in a material breach of or a material default under any of the foregoing and this Agreement is the legal, valid and binding obligation of Energy Manager enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. (c) As of the Closing Date and throughout the Term of this Agreement, Energy Manager will be in material compliance with, or will have acted in good faith and used all reasonable efforts to be in material compliance with, all laws, judicial and administrative orders, rules and regulations with respect to the ownership and operation of its facilities and the performance of its obligations hereunder including but not limited to the following: all requirements to obtain and comply with the conditions of Applicable Law. 13.11.2. Authority Representations and Warranties. Authority, as of the date of this Agreement, makes the following representations and warranties as the basis for its undertakings contained herein: (a) Authority is a corporate municipal instrumentality and political subdivision of the State of New York, has the corporate power and authority to own its properties, to carry on its business as now being conducted, and to enter into this Agreement and the transactions contemplated herein and perform and carry out all covenants and obligations on its part to be performed under and pursuant to this Agreement, and is duly authorized to execute and deliver this Agreement and consummate the transactions herein contemplated. (b) The execution and delivery of this Agreement, the consummation of the transactions contemplated herein and the fulfillment of and compliance with the provisions of this Agreement do not materially conflict with or constitute a material breach of or a material default under, any of the terms, conditions or provisions of any law, any order of any court or other agency of government, or any contractual limitation, corporate or partnership restriction or outstanding trust indenture, deed of trust, mortgage, loan agreement, other evidence of indebtedness or any other agreement or instrument to which Authority is a party or by which it or any of its property is bound or result in a material breach of or a material default under any of the foregoing and this Agreement is the legal, valid and binding obligation of Authority enforceable in accordance with its -43- terms, subject, as to enforcement, to bankruptcy, insolvency, reorganization and laws of general applicability relating to or affecting creditors' rights and to general equity principles. (c) All corporate or other organization consents, authorizations, and approvals, and all other actions required for Authority to execute, deliver and perform its obligations hereunder have been obtained or completed. 13.12. COUNTERPARTS. The Parties may execute this Agreement in counterparts, which shall, in the aggregate, when signed by both Parties constitute one and the same instrument; and, thereafter, each counterpart shall be deemed an original instrument. 13.13. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of New York, without regard to any applicable principles of conflict of law. Any action arising out of or relating to this Agreement shall be brought in New York State Court. 13.14. CAPTIONS; APPENDICES. Tides or captions of the articles contained in this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend, describe or otherwise affect the scope or meaning of this Agreement or the intent of any provision hereof. 13.15. ENERGY MANAGER TO REMAIN AFFILIATE OF GUARANTOR; CREDIT ENHANCEMENT IN CERTAIN CIRCUMSTANCES. (A) Limitations. The Energy Manager agrees that at the Closing that it will become and thereafter it will remain an Affiliate of the Guarantor. (B) Material Decline in the Guarantor's Credit Standing. For purposes of this Section, a "Material Decline in the Guarantor's Credit Standing" shall be deemed to have occurred if (1) in the event that the Guarantor has long-term senior debt outstanding which has a credit rating by a Rating Service, such rating by a Rating Service is established or is reduced below investment grade level or (2) in the event the Guarantor does not have long-term senior debt outstanding which has a credit rating by a Rating Service and the Guarantor has a credit rating by a Rating Service, such credit rating is established or reduced below investment grade level, or (3) in the event the Guarantor does not have long-term senior debt outstanding which has a credit rating by a Rating Service and the Guarantor does not have a credit rating by a Rating Service, in which event the Guarantor shall seek a credit rating for the Guaranty from a Rating Service, such rating is established or is reduced below investment grade level or if no rating is established. (C) Credit Enhancement. If, at any time during the Term hereof, a Material Decline in the Guarantor's Credit Standing occurs, the Energy Manager shall immediately notify the Authority thereof and, within 30 days after such occurrence, shall provide credit enhancement of its obligations hereunder, GENCO's obligations under the Power Supply -44- Agreement and the Manager's obligations under the Management Services Agreement at its sole cost and expense in the form either of (1) any unconditional guarantee of all of the Energy Manager's obligations hereunder, GENCO's obligations under the Power Supply Agreement and the Manager's obligations under the Management Services Agreement provided by a corporation or financial institution whose long-term senior debt is or would be rated investment grade by a Rating Service or (2) an irrevocable letter of credit in form and substance satisfactory to the Authority securing the Energy Manager's obligations hereunder, GENCO's obligations under the Power Supply Agreement and the Manager's obligations under the Management Services Agreement in a face amount of $60,000,000 provided by a financial institution whose long-term senior debt is rated investment grade by a Rating Service provided that if any such letter of credit is drawn upon in the aggregate in an amount equal to 50% of the face value of such letter of credit, the Manager shall, within 30 days thereafter, supplement or replace such letter of credit with an additional letter of credit such that the total amount of such letter of credit then available equal $60 million. The amount of such letter of credit shall be reduced by $26 million if the Management Services Agreement has theretofore been or is thereafter terminated and by $4 million if the Power Supply Agreement has theretofore been or is thereafter terminated, such obligation to continue until the expiration or termination of this Energy Management Agreement, the Power Supply Agreement and the Management Services Agreement. The Energy Manager immediately shall notify the Authority of any Material Decline in the Guarantor's Credit Standing. 13.16. SEVERABILITY. The invalidity or unenforceability of any provision of this Agreement shall be determined only by a court of competent jurisdiction, and the Parties hereby agree to negotiate an equitable adjustment to the invalid or unenforceable provision with a view toward effecting the purposes of this Agreement; the validity or enforceability of the remaining provisions or portions or applications thereof, shall not be affected thereby. 13.17. RULES OF INTERPRETATION. The terms and provisions of this Agreement shall be interpreted and construed as follows: (a) words of the masculine gender shall include corresponding words of the feminine or neuter genders and vice versa; (b) the plural shall include the singular and vice versa; (c) unless the context indicates otherwise, all references herein to Articles, Sections, paragraphs, exhibits, schedules, and Appendices shall refer, respectively, to the Articles, Sections, paragraphs, exhibits, schedules and Appendices of this Agreement; (d) the words "includes" or "including" mean "including, but not limited to" and are not limiting; (e) any reference to an agreement, a contract or any other document means the same as it may be amended, modified, supplemented or replaced from time to time, unless otherwise noted; (f) any reference to a Person includes such Person's successors and assigns; and (g) "ensure" shall not be construed as a guarantee, but shall imply only a duty to use reasonable effort and care, consistent with Prudent Utility Practice. 13.18. HEDGING POLICIES. The Energy Manager will not engage in any hedging activities relating to the Fuel Services or System Power Supply Services without express approval from the Boards of Directors of Energy Manager and its Parent and without notifying -45- and consulting with the Authority at least 60 days prior to implementing such activities. In the event that approval for the use of hedging activities is implemented, the incentive/disincentive program will be reexamined by the parties to determine the appropriateness of the inclusion or exclusion of the related costs, gain or losses and appropriate mutually agreeable revisions thereto will be made. 13.19 ENERGY PRICING INFORMATION SYSTEM. Within 9 months after Contract Date, Energy Manager shall recommend to Authority a plan, including function, equipment, information to be supplied, procedures, and cost, for a methodology and system to provide real-time and suitable historic information on capacity and energy pricing and amounts purchased. Such methodology and system shall be developed in a manner which provides data necessary for prospective suppliers of capacity and energy to determine the market for sale of capacity and energy to the Authority and shall be subject to approval by the Authority. To the extent approved by the Authority, such system shall be installed and operated at the expense of the Authority, subject to Cost Substantiation. 13.20 BINDING EFFECT. This Agreement shall become binding and effective on the Closing Date and shall thereafter bind and inure to the benefit of the parties hereto and any successor or assignee acquiring an interest hereunder in compliance with the provisions of Section 13.3 hereof. IN WITNESS WHEREOF, the Parties have executed this Agreement through their duly authorized officers as of the date set forth in the preamble to this Agreement. LONG ISLAND POWER AUTHORITY By: /s/ RICHARD M. KESSEL --------------------------------- Name: Richard M. Kessel Title: Chairman By: /s/ PATRICK FOYE --------------------------------- Name: Patrick Foye Title: Deputy Chairman LONG ISLAND LIGHTING COMPANY By: /s/ DR. WILLIAM J. CATACOSINOS --------------------------------- Name: Dr. William J. Catacosinos Title: Chief Executive Officer -46- APPENDIX A FUEL PURCHASE PERFORMANCE, INCENTIVE/DISINCENTIVE The Authority and the Energy Manager shall share in savings realized or additional costs incurred when comparing the actual costs of monthly natural gas and oil purchases for generation with the respective natural gas and oil target indices described herein. The amount of incentive or disincentive will be determined monthly on a transaction by transaction basis. The maximum net annual incentive or disincentive shall be limited to the provisions of Section 3.3 of the Energy Management Agreement. All units of fuel shall be converted to millions of British thermal units - dry ("MMBtu") for purposes of these calculations. 1. NATURAL GAS PURCHASES 1.1 Benchmark Gas Index Price An index shall be computed and expressed in dollars per MMBtu (the "Index Price") for each monthly purchase arrangement for the three categories as described below. The three categories are intended to incorporate all gas purchases for generation without exception. There shall be no allowance for losses and unaccounted-for gas between the City Gate and the billing meters at each generating station. For this purpose, the term "Bid Week" is defined to mean for the week in the prior month during which gas prices are established for the current month. a. The Index Price for gas purchases made after Bid Week for a duration of less than one month ("Swing Gas Purchases") shall be based on the delivery area and pipeline specific Daily Midpoint index published by Gas Daily for the first business day of gas flow under the transaction (e.g., "Others - Transco, Zone 6" index). b. The Index Price for gas purchases made prior to or during Bid-Week with a duration of one month or less ("Monthly Gas Purchases") shall be derived separately for each pipeline source as the equally weighted average of (i) the Gas Daily Price Guide Monthly Contract Index or City Gate Prices Average of the high and low Bid Week posting for a specific pipeline and region, as appropriate; and (ii) the price for a specific pipeline and region, as appropriate, published in Inside FERC Gas Market Report as of the first day of the month. c. The Index Price for gas purchases with a term greater than one month ("Long-Term Gas Purchases") shall be determined for each such contract for Long-Term Gas Purchases as the index for Swing Gas Purchase or Monthly Gas Purchases, as described above plus an adjustment to reflect the premium paid for long-term supply (the "Long-Term Adjustment"). The Long-Term Adjustment shall be computed annually as the difference between the weighted average cost per MMBtu of Long-Term Purchases and the weighted average cost of all other supplies. If the historical data for Long-Term Gas Purchases for electric generation is inadequate, average costs for all other long-term purchase contracts by the Energy Manager may be substituted. Appropriate transportation costs will be added to each index so determined. 1.2 Calculation of Incentive/Disincentive for Gas Purchases A benchmark price shall be computed for each purchase (the "Gas Index Benchmark") equal to 102% of the Index Price determined in Section 1.1 of this Appendix. The "Actual Gas Cost" shall be computed for each purchase transaction as the average cost per MMBtu of all costs associated with such transactions, including commodity and demand charges, and excluding any a penalties and fines incurred by Energy Manager. Should the Actual Gas Cost be less than the Gas Index Benchmark the Authority and the Energy Manager shall share the savings equally. Should the Actual Gas Cost exceed the Gas Index Benchmark the Authority and the Energy Manager shall share such excess cost equally. For each month the amount of incentive or disincentive associated with each purchase transaction shall be computed as the product of the resulting incentive or disincentive cost per unit and the actual volume of gas purchased. 2. OIL PURCHASES The target price for oil purchases expressed as dollars per MMBtu (the `Oil Index Benchmark") shall be computed each month for each type of oil purchase for each purchase transaction. 2.1 Residual Oil Purchases The Oil Index Benchmark for residual oil purchases shall be computed as the weighted avenge of applicable residual oil spot postings as described below, and shall be determined separately for (nominal) 1.0% sulfur, 0.7% sulfur and 0.3% sulfur No. 6 residual fuel oil ("Residual Oil Purchase") depending on which type of oil is delivered for each delivery based on the date on which each delivery commences (the "Commencement of Discharge Date). All index prices for each delivery shall be computed as the average of the spot postings for the Commencement of Discharge Date, the two days prior to such date, and the two days following such date (the "Residual Oil Index Period"). 2 a. Forty percent of the International Heavy Fuel Oil Prices, Delivered New York Spot, Cargoes 1.0% sulphur LP, or 0.7% sulphur LP, or 0.3% HP, price as posted in Bloomberg Petroflash at 5:00 PM Eastern Time for each day of the Residual Oil Index Period. b. Forty percent of the average of Cargoes, DEL NYH 1.0% sulphur LP, or 0.7% sulphur LP, or 0.3% sulphur HP low/high prices as posted in Argus US Products in Houston, at 5:00 PM Central Time, for each of day of the Residual Oil Index Period. c. Twenty percent of the average New York Cargo, No. 6 1% sulphur LP, or 0.7% sulphur LP, or 0.3% sulphur HP low/high prices as posted in Platt's Oilgram U.S. Marketscan price report at 5:00 PM Eastern Time for each day of the Residual Oil Index Period. In computing the Oil Index Benchmark the above indices will be increased to include the actual transportation charge to each GENCO Generating Facility as appropriate. 2.2 No. 2 Oil - Barge Delivery For No. 2 oil purchases, the Oil Index Benchmark shall be equal to the average of the three spot postings, as defined below, for each of the following days (the "Daily Averages"): the Commencement of Discharge Date; the day before such date, and the day after such date (the "No. 2 Oil Barge Index Period"). The following postings for spot barge No. 2 oil ("Spot Postings") will be used to determine the daily average for each of the referenced days: a. The low "New York Barge No. 2" price as published in Platt's Oilgram U.S. Marketscan price report at 5:00 PM Eastern Time for each day of the No. 2 Oil Index Period. b. The "New York Heating/Gas Oil: 0.2% Sulphur" price as published in Bloomberg Petroflash. At 5:00 PM Eastern Time for each day of the No. 2 Oil Index Period. C. The low "DEL NYH No. 2" price as posted in Argus US Products in Houston, at 5:00 PM Central Time, for each of day of the No. 2 Oil Index Period. In computing the Oil Index Benchmark the above indices will be increased to include appropriate handling, terminalling, storage, and transportation charges to each GENCO Generating Facility. 3 2.3 No. 2 Oil - Truck Delivery For No. 2 oil purchases the target index shall be equal to the average of "low" or "average" price, as appropriate, for each supplier of fuel oil, for Newark, NJ **OPIS/Tape Gross Distillate Prices* Hi Sul No. 2" as published in Oil Price Information Service at the close of business Eastern Time on the Commencement of Discharge Date, the day before such date and the date after such date (the "No. 2 Oil Truck Index Period"). The above target index will be modified to include appropriate handling, terminalling, storage, and transportation charges to each GENCO Generating Facility. 2.4 Kerosene - Barge Delivery For kerosene purchases, the target index shall be equal to the average of the New York Barge LS Jet Low Price as published in Platt's Oilgram U.S. Marketscan price report at 5:00 PM Eastern Time effective for the Commencement of Discharge Date, the day before such date, and the day after such date (the "Kerosene Index Period"). In computing the Oil Index Benchmark the above indices will be modified to include appropriate handling, terminalling, storage, and transportation charges to each GENCO Generating Facility. 2.5 Calculation of Incentive/Disincentive for Oil Purchases The "Actual Oil Cost" shall be computed for each purchase transaction as the average cost per MMBtu of all costs associated with such transaction. Should the Actual Oil Cost be less than the corresponding Oil Index Benchmark, LIPA and the Energy Manager shall share the savings equally. Should the Actual Oil Cost exceed the Oil Index Benchmark, the Authority and the Energy Manager shall share such excess cost equally. For each month the amount of incentive or disincentive associated with each purchase transaction shall be computed as the product of the resulting incentive or disincentive cost per unit and the actual volume of oil purchased. The net amount of incentive or disincentive payment will not exceed $5 million on an annual basis. 4 3. SUBSTITUTION OF INDICES In the event that any of the posted indices referenced herein cease to be published, their basis of determination materially changes or new, more appropriate indices are published, the parties may agree to substitute a mutually agreeable index. 5 APPENDIX B SYSTEM POWER SUPPLY PERFORMANCE INCENTIVE/DISINCENTIVE Recognizing that incentives for favorable fuel prices, and GENCO generating unit efficiencies are provided as part of this or other agreements, the power supply cost incentive/disincentive shall be based on the actual cost of off-system power purchases, excluding purchases under long-term contracts in effect on the Closing Date, in comparison to an indexed cost as described herein. Each month, an indexed cost of purchased power shall be computed for on-peak and off-peak purchases for each week during the month in the amount equal to the sum of (i) the product of the quantities for each week in the month of on-peak purchases and the corresponding Prices of Spot Electricity - East New York, Weekly Index (on-peak) published weekly in Power Markets Week; (ii) the product of the quantities for each week in the month of off-peak purchases and the corresponding Prices of Spot Electricity - East New York, midpoint of the Weekly Range (off-peak), published weekly in Power Markets Week and (iii) the product of total on-peak and off-peak purchases and a Basis Differential computed for a 12-month period prior to the Commencement Date (the "Target Purchase Cost"). The Basis Differential shall be computed (pound) as the difference between the weighted average per cost MWh of purchase indexed as described above, excluding the Basis Differential component, and the actual cost of purchases per MWh. The parties agree that in the event that any index ceases to be published, or there is a substantial change in the manner in which the index is established, another mutually agreeable index shall be substituted, and/or the Basis/Differential shall be recomputed, as appropriate. For each month, if the Actual Purchase Cost is less than the Target Purchase Cost, the Authority shall pay Energy Manager 33% of the savings. Should the Actual Purchase Cost exceed 101 % of the Target Purchase Cost, Energy Manager shall incur a penalty equal to 33% of such excess cost. In any other event, the Authority shall reimburse Energy Manager for the Actual Purchase Cost with no adjustment for incentive or penalty amounts. The net amount of incentive or penalty will not exceed $2 million on an annual basis. 1 APPENDIX C PROVISIONS REQUIRED BY STATE LAW 1.1 ENERGY MANAGER TO COMPLY WITH LEGAL REQUIREMENTS. The Manager in performing its obligations under this Agreement, shall comply with all applicable laws and regulations. All provisions required by such laws and regulations to be included in this Agreement shall be deemed to be included in this Agreement with the same effect as if set forth in full. 1.2 ENERGY MANAGER TO OBTAIN PERMITS. ETC. Except as otherwise instructed in writing by the Authority, the Energy Manager shall obtain and comply with all legally required licenses, consents, approvals, orders, authorizations, permits, restrictions, declarations, and filings required to be obtained by the Authority or the Energy Manager in connection with this Agreement. 1.3 WORKERS' COMPENSATION INSURANCE. The Energy Manager agrees that: (a) It will secure Workers' Compensation and Disability Insurance and keep insured during the life of this Agreement such employees as are required to be insured by the provisions of Chapter 41 of the Laws of 1914, as amended, known as the Worker's Compensation Law; and (b) This Agreement shall be voidable at the election of the Authority and of no effect unless the Energy Manager complies with the requirement in paragraph (a) of this Section. 1.4 NO ASSIGNMENT WITHOUT CONSENT. The Energy Manager agrees that: (a) It is prohibited from assigning, transferring, or otherwise disposing of this Agreement, or of its rights or interests therein, or its power to execute such Agreement to any person, company, partnership, or corporation, without the previous written consent of the Authority. Assignments of this Agreement expressly referred to in clause (3) of the first sentence of Section 13.3 of this Agreement have been so consented to. (b) If the prohibition contained in paragraph (a) above is violated, the Authority may revoke and annul this Agreement and the Authority shall be relieved from any and all liability and obligations hereunder to the Energy Manager and to the person, company, partnership, or corporation to whom such assignment, transfer, or other disposal shall have been made, and the Energy Manager and such assignee or transferee shall forfeit and lose all the money theretofore earned under this Agreement. 1.5 NON-DISCRIMINATION. (a) The Energy Manager shall not discriminate against employees or applicants for employment because of race, creed, color, national origin, sex, age, disability, or marital status, and will undertake or continue existing programs of affirmative 1 action to ensure that minority group persons and women are afforded equal opportunity without discrimination. Such programs shall include, but not be limited to, recruitment, employment, job assignment, promotion, upgrading, demotion, transfer, layoff, termination, rates of pay or other forms of compensation, and selection for training and retraining, including apprenticeship and on-the-job training. (b) At the request of the Authority, the Energy Manager shall request each employment agency, labor union, or authorized representative of workers with which it has a collective bargaining or other agreement or understanding and which is involved in the performance of this Agreement to furnish a written statement that such employment agency, labor union, or representative shall not discriminate because of race, creed, color, national origin, sex, age, disability, or marital status and that such union or representative will cooperate in the implementation of the Energy Manager's obligations hereunder. (c) The Energy Manager shall state, in all solicitations or advertisements for employees placed by or on behalf of the Energy Manager in the performance of this Agreement, that all qualified applicants will be afforded equal employment opportunity without discrimination because of race, creed, color, national origin, sex, age, disability, or marital status. The Energy Manager shall submit an equal employment opportunity policy statement to the Authority which shall contain, but not be limited to, the provisions (a) through (c) of this (As required by NYCRR ss.142. 1(d)(2) and (3)). (d) The Energy Manager will include provisions (a) through (c) of this section in every subcontract or purchase order in such a manner that such provisions will be binding upon each subcontractor or vendor as to its work in connection with this Agreement. (e) The Energy Manager shall furnish to the Authority such information and reports regarding its compliance with the above requirements as the Authority may from time to time request. (f) The provisions of this section shall not be binding upon the Energy Manager or any subcontractor in the performance of work or the provision of services or any other activity that is unrelated, separate or distinct from this Agreement, as expressed by its terms. (g) The requirements of this section do not apply to any employment outside the State of New York or application for employment outside the State of New York or solicitations or advertisements therefor, or to any existing programs of affirmative action regarding employment outside the State of New York. (h) Any disputes regarding this section shall be resolved as provided in Section 316 of the New York State Executive Law. 2 1.6 INTERNATIONAL BOYCOTT PROHIBITION. The Energy Manager expressly agrees and certifies that neither the Energy Manager nor any person, firm, partnership, or corporation which is substantially owned by or affiliated with the Energy Manager has participated, is participating, or will participate in an international boycott in violation of the provisions of the United States Export Administration Act of 1969, as amended, or the Export Administration Act of 1979, as amended, or the regulations of the United States Department of Commerce promulgated thereunder. The Energy Manager understands that such agreement and certification constitutes a material term of this Agreement. 1.7 FAILURE OR REFUSAL TO TESTIFY. Upon the refusal of any person, including any member, officer, or director of the Energy Manager, when called before a grand jury, head of state department, temporary state commission or other state agency, the organized crime task force in the department of law, head of a city department, or other city agency, which is empowered to compel the attendance of witnesses and examine them under oath, to testify in an investigation concerning any transaction or contract had with the state, any political subdivision thereof or of a public authority, to sign a waiver of immunity against subsequent criminal prosecution or to answer any relevant question concerning such transaction or contract: (a) such person, and any firm, partnership, or corporation of which he or she is a member, partner, director, or officer (including, if applicable, the Energy Manager), shall be disqualified from thereafter selling to or submitting bids to or receiving awards from or entering into any contract with any public authority or official thereof, for goods, work, or services, for a period of five years after such refusal, or until a disqualification shall be removed pursuant to law; and (b) any and all contracts made with any public authority or official thereof, since July 1, 1959 (including if applicable, this Agreement), by such person and by any firm, partnership or corporation of which he is a member, partner, director, or officer (including, if applicable, the Energy Manager), may be canceled or terminated by the public authority without incurring any penalty or damages on account of such cancellation or termination, but any monies owing by the public authority for goods delivered or work done prior to the cancellation or termination shall be paid. 1.8 MINORITY AND WOMEN-OWNED BUSINESS ENTERPRISE PROCEDURES (a) DECLARATION OF POLICY AND STATEMENT OF GOALS. It is the policy of the Authority to provide Minority and Women-Owned Business Enterprises ("M/WBEs") the greatest practicable opportunity to participate in the Authority's contracting activity for the procurement of goods and services. To effectuate this policy, the Energy Manager shall comply with the provisions of this section and the provisions of Article 15-A of the New York State Executive Law. The Energy Manager will use its best efforts to achieve the below-stated MAYBE Goals set for the Agreement, and will cooperate in any efforts of the Authority, or any 3 government agency which may have jurisdiction, to monitor and assist the Energy Manager's compliance with the Authority's M/WBE policy. Minority-Owned Business Enterprise (MBE) Subcontracting Goal *% Women-Owned Business Enterprise (WBE) Subcontracting Goal *% (b) DEFINITIONS. (1) "CERTIFICATION" The process conducted by the Director of the Division of Minority and Women's Business Development in the Department of Economic Development to verify that a business enterprise qualifies for New York State Minority or Women-Owned Business Enterprise status. To initiate the certification process, contact one of the offices listed below. ALBANY OFFICE: (518) 474-6342 State Capitol, 2nd Floor Albany, New York 12224 NEW YORK CITY OFFICE 2 World Trade Center, 58th Floor New York, New York 10047 (2) CERTIFIED BUSINESS. A business enterprise which has been approved by the Director for status as a MBE or WBE subsequent to verification that the business enterprise is owned, operated, and controlled by Minority Group Members, or women. (3) "CONTRACT SCOPE OF WORK". For purposes of this section, this means: (i) Specific tasks required by the Agreement; (ii) Services or products which must be provided to perform specific tasks required by this Agreement; and (iii) Components of any overhead costs billed to the Authority pursuant to this Agreement. (4) "DAY". A calendar state business day unless otherwise specified. - ---------- * To be specified at time of adoption of initial Annual T&D Budget. 4 (5) "DIRECTOR". The Director of the Division of Minority and Women's Business Development in the Department of Economic Development. (6) "DIRECTORY". The Directory of Certified Businesses, prepared by the Director. (7) "GOAL". A percentage of participation, which is not a set aside or quota, that represents a target toward which the Energy Manager must aim in expending good faith efforts to subcontract with or otherwise ensure the commercial involvement of minority and women-owned businesses on this Agreement. (8) "OFFICE" or "OFFICE OF MINORITY AND WOMEN'S BUSINESS DEVELOPMENT". Office in the New York State Department of Economic Development created by Article 15-A of the Executive Law. (9) MINORITY GROUP MEMBER. A United States citizen or permanent resident alien who is and can demonstrate membership in one of the following groups: (i) Black persons having origins in any of the Black African racial groups; (ii) Hispanic persons of Mexican, Puerto Rican, Dominican, Cuban, Central or South American descent of either Indian or Hispanic Origin, regardless of race; (iii) Native American or Alaskan native persons having origins in any of the original peoples of North America, (iv) Asian and Pacific Islander persons having origins in any of the Far East countries, South East Asia, the Indian subcontinent or the Pacific Islands; (v) Other groups which the Office may determine to be eligible for M/WBE status. (10) MINORITY-OWNED BUSINESS ENTERPRISE. A business enterprise, including a sole proprietorship, partnership or corporation that is: (i) At least fifty-one percent owned by one or more Minority Group Members; (ii) An enterprise in which such minority ownership is real, substantial and continuing; 5 (iii) An enterprise in which such minority ownership has, and exercises the authority to control independently, the day-to-day business decisions of the enterprise for at least one year; and (iv) An enterprise authorized to do business in New York State and is independently owned and operated. (11) "SUBCONTRACT". An agreement in which a portion of the Energy Manager's obligation under this Agreement is undertaken or assumed. (12) "WOMEN-OWNED BUSINESS ENTERPRISE". A business enterprise, including a sole proprietorship, partnership or corporation that is: (i) At least fifty-one percent owned by one or more United States citizens or permanent resident aliens who are women; (ii) An enterprise in which the ownership interest of such women is real, substantial and continuing; (iii) An enterprise in which such women ownership has, and exercises the authority to control independently, the day-to-day business decisions of the enterprise for at least one year; and (iv) An enterprise authorized to do business in New York State and is independently owned and operated. (c) REQUIREMENTS. (1) The Energy Manager shall search for, assess the capabilities of and generally deal with potential M\WBE subcontractors in a fair and responsive manner, allowing them the 4 opportunity to participate in the Contract Scope of Work. (2) The Energy Manager will designate, and make known to the Authority an MAYBE Officer who will have the responsibility for and authority to effectively administer the MAYBE Program. (3) The Energy Manager shall submit its Preliminary Subcontracting Plan on a preliminary subcontracting plan form, which shall identify the Certified Businesses it will utilize to meet its M/WBE Contract Goals. Approval of any such firm is solely within the discretion of the Authority. The Energy Manager will also designate an M/WBE Officer who will have the responsibility for, and authority to, effectively administer these procedures. If the Energy Manager believes it may be unable to meet the Goals, the reasons shall be submitted in writing with the form. 6 (4) The Energy Manager may inspect the current New York State Certification Directory of Minority and Women Owned Businesses, prepared for use by state agencies and contractors in complying with Executive Law Article 15-A, (the Directory) at the Authority's office. In addition, printed or electronic copies of the Directory may be purchased from the Office of Minority and Women's Business Development. (5) Firms certified as both MBE and WBE may count toward either the MBE or WBE Goal on a single contract, but not both, regardless of whether either Goal is thus exceeded. The Energy Manager must choose the Goal to which the participation value is to be applied in the preliminary Subcontracting Plan. (6) Within 10 days following the adoption of the initial Annual T&D Budget and in any event no later than 60 days prior to the anticipated Closing Date, the Energy Manager shall submit a complete Utilization Plan, which shall include identification of the M/WBEs which the Energy Manager intends to use; the dollar amount of business with each such M/WBE; the Contract Scope of Work which the Energy Manager intends to have performed by such M/WBEs; and the commencement and end dares of such performance. The Authority will review the plan and, within 20 days of its receipt, issue a written acceptance of the plan or comments on deficiencies in the plan. (7) The Authority shall consider a partial or total waiver of Goal requirements only upon the submission of a written request for a waiver following the Energy Manager's unsuccessful good faith efforts at compliance. Such waiver request may be made simultaneously with the submission of the Utilization Plan. (8) The Energy Manager shall include in each Subcontract, in such a manner that the provisions will be binding upon each subcontractor, all of the provisions herein including those requiring subcontractors to make a good faith effort to solicit participation by M/WBEs. (9) The Energy Manager shall keep records, canceled checks and documents for at least one (1) year following completion of this Agreement. These records, and canceled checks, documents or copies thereof will be made available at reasonable times upon written request by the Authority or any other authorized governmental entity. (10) The Energy Manager shall submit monthly compliance reports regarding its M/WBE utilization activity on a Compliance Report Form acceptable to the Authority. Reports are due on the first business day of each month, beginning 30 days after the Closing Date. (11) The Authority will conduct compliance reviews for determination of the Energy Manager's performance relative to meaning the specified MAYBE Goal which may include review and inspection of documents pertaining to the Energy Manager's efforts towards meeting the Goals and on-site interviews with personnel of Energy Manager and 7 its subcontractors. The Energy Manager will fully cooperate to assist the Authority in this endeavor. (12) The Energy Manager shall not use the requirements of this section to discriminate against any qualified company or group of companies. (d) CONDITIONS FOR SATISFYING MAYBE GOALS. MAYBE participation will be counted toward the total Contract M/WBE Goals subject to the following conditions: (1) If the Energy Manager is unable to meet the Goals with Certified Businesses by making all of the good faith efforts defined herein, the Energy Manager shall actively solicit uncertified M/WBEs to satisfy the Goals. Uncertified firms will be required to submit an application for certification (to the Office of Minority and Women's Business Development) and will be counted as contributing towards the contract Goals only after they have been certified. (2) The Energy Manager must keep records of efforts to utilize certified M/WBE's including (i) The firm's name, address and telephone number. (ii) A description of the information provided to the M/WBE. (iii) A written explanation of why an agreement with the M/WBE was not obtained. (3) Price alone will not be an acceptable basis for rejecting M/WBE bids if any of the bids are reasonable. (4) Geographical limitation in the MAYBE search is not an acceptable reason for not meeting the M/WBE goal when traditionally non-local firms have been generally utilized. (5) the Authority reserves the right to reject any firm as counting toward meeting the Energy Manager's MAYBE goal if, in the opinion of the Authority, the facts as to that firm's business and technical organization and practices justify the rejection. (e) ENERGY MANAGER'S GOOD-FAITH EFFORTS. To satisfy the MAYBE participation requirements, the Energy Manager agrees to make the following good-faith efforts in a timely manner: (1) Submission of a completed, acceptable Utilization Plan as described herein. (2) Advertising in appropriate general circulation, trade and minority and women-oriented publications. 8 (3) Written solicitations made in a timely manner of certified minority and women-owned business enterprises listed in the Directory. (4) Attendance at meetings, if any, scheduled by the Authority with certified M/WBEs capable of performing the Contract Scope of Work. (5) Written notification to M/WBE trade associations located within the region where the Contract Scope of Work will be performed. (6) Structuring the Contract Scope of Work for purposes of subcontracting with certified M/WBEs. (7) Where certified M/WBEs have expressed an interest to the Energy Manager in performing work that the Energy Manager normally performs with its own sources and the Contract Scope of Work has not been fully performed, the Energy Manager shall consider subcontracting such work or portions of it to meet the MAYBE Goals. 1.9. COMMENCEMENT OF ACTIONS ON STATE PUBLIC WORKS CONTRACTS. The time within which an action on this Agreement against the Energy Manager must be commenced shall be computed from the date of completion of the physical work. The Energy Manager may notify the Authority in writing, that such physical work has been completed by specifying a completion date, which date shall be no more than thirty days previous to the date of such notice, in which case the completion date set forth in such notice shall be deemed to be the date of completion of the physical work unless the Authority, within thirty days of receipt of such notice, notifies the Energy Manager in writing of its disagreement. In the event that the Energy Manager fails to send the notice provided for herein or the Authority disagrees in the manner provided herein, the date of completion of the physical work shall be determined in any other manner provided by law. 9 EX-10.(D) 8 GENERATION PURCHASE RIGHT AGREEMENT =============================================================================== GENERATION PURCHASE RIGHT AGREEMENT by and between LONG ISLAND LIGHTING COMPANY, AS SELLER, AND LONG ISLAND POWER AUTHORITY, AS BUYER, Dated as of June 26, 1997 =============================================================================== TABLE OF CONTENTS ----------------- Page ---- ARTICLE 1 DEFINITIONS AND RULES OF CONSTRUCTION Section 1.1 Definitions..................................................2 Section 1.2 Rules of Construction........................................4 ARTICLE 2 PURCHASE RIGHT Section 2.1 Purchase Right...............................................4 Section 2.2 Exercisability...............................................5 Section 2.3 Method of Exercise...........................................5 Section 2.4 Exercise Date................................................5 Section 2.5 Request for Confirmation.....................................5 Section 2.6 Effect of Notice.............................................6 Section 2.7 Closing Date.................................................6 Section 2.8 Payment and Delivery of Interests............................6 Section 2.9 Provision of Corporate Records...............................6 Section 2.10 Non-Recourse.................................................7 ARTICLE 3 THE PURCHASE PRICE Section 3.1 Purchase Price...............................................7 Section 3.2 Arbitration..................................................7 Section 3.3 Disclosure of Third Party Offers.............................7 ARTICLE 4 REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties of Seller and Genco....................................................8 Section 4.2 Provision of Additional Schedules upon Exercise...............................................14 Section 4.3 Representations and Warranties of Buyer.....................15 ARTICLE 5 COVENANTS Section 5.1 Covenants of Seller.........................................15 Section 5.2 Covenants of Buyer..........................................18 Section 5.3 Additional Agreements.......................................19 -i- ARTICLE 6 GENERAL PROVISIONS Section 6.1 Notices.....................................................20 Section 6.2 Headings....................................................21 Section 6.3 Miscellaneous...............................................21 Section 6.4 Assignment..................................................21 Section 6.5 Schedules...................................................21 Section 6.6 Waiver; Amendment...........................................22 Section 6.7 Issue Taxes.................................................22 Section 6.8 Fees And Expenses...........................................22 Section 6.9 Alternative Dispute Resolution..............................22 -ii- GENERATION PURCHASE RIGHT AGREEMENT This GENERATION PURCHASE RIGHT AGREEMENT ("Agreement") is made and entered into as of the 25th day of June 1997, by and between LONG ISLAND LIGHTING COMPANY, a New York corporation ("Seller", also referred to herein as "LILCO"), and LONG ISLAND POWER AUTHORITY, a corporate municipal instrumentality and political subdivision of the State of New York ("Buyer", also referred to herein as "LIPA"), acknowledged and agreed to, as of the Closing (as herein defined), by Marketspan Generation LLC*, a New York limited liability company ("Genco") RECITALS WHEREAS, Parent (as therein defined), Seller, Buyer, and LIPA ACQUISITION CORP., a New York corporation ("LIPA Sub"), entered into an AGREEMENT AND PLAN OF EXCHANGE AND MERGER (the "Merger Agreement"), dated as of June 25, 1997, pursuant to which (i) LIPA Sub is to merge with and into Seller; (ii) Seller undertakes to form an entity for the purpose of receiving certain assets and properties of LILCO; and (iii) Seller is to enter into a generation purchase right agreement in substantially the form of this Agreement. WHEREAS, Genco will own and have all right, title and interest to the Generating Facilities (as defined herein) at or prior to the Closing. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: - ------------------ *Pursuant to the Merger Agreement, Seller will identify, prior to the Closing (as therein defined), a limited liability company (formed by Seller or one or more of its wholly-owned subsidiaries), which will execute this Agreement as Genco and to which will be transferred at such Closing the Generating Facilities. ARTICLE 1 DEFINITIONS AND RULES OF CONSTRUCTION Section 1.1 Definitions. All capitalized terms used in this Agreement and not otherwise defined shall have the meanings assigned to them in the Power Supply Agreement, dated as of the date hereof, between LILCO and Buyer, attached to the Merger Agreement as Exhibit B (the "Power Supply Agreement"). The following terms, as used herein, shall have the respective meanings set forth in this Section 1.1: "Additional Assets" means assets other than interests in real property reasonably required for the Business (as defined herein), including, without limitation any fuel supply agreements (other than Basic Agreements), spare parts and fuel inventory on site. "Agreement" means this Generation Purchase Right Agreement and all Exhibits and Schedules annexed hereto, as the same may be amended from time to time. "Audited Balance Sheet" has the meaning assigned to it in Section 2.6 herein. "Business" means the business of operating the Generating Facilities (as defined herein) as it is operated on the date hereof. "Closing" has the meaning assigned to it in the Merger Agreement. "Closing Date" has the meaning assigned to it in Section 2.7 herein. "Confirmation" has the meaning assigned to it in Section 2.5 herein. "Contract" means any contract, agreement, purchase order, lease, indenture, mortgage, loan agreement, note, guarantee, commitment, undertaking or arrangement of any kind. "Easements" has the meaning assigned to it in Section 5.3(d) herein. "Engineer's Report" has the meaning assigned to it in Section 2.1 herein. "Exercise Date" has the meaning assigned to it in Section 2.4 herein. - 2 - "Fair Market Value" means the amount that a willing buyer and a willing seller, neither of whom is under any compulsion to sell or to buy, would be willing to pay or receive, as the case may be, in an all cash transaction in an orderly market for the Interests; provided, however, that the Additional Assets shall be deemed to have been transferred to Genco prior to the Exercise Date. "GAAP" means United States generally accepted accounting principles. "Generating Facilities" means the electric generating facilities to be owned by Genco as defined in Section 1.27 of the Power Supply Agreement. "Generating Properties" has the meaning assigned to it in Section 2.1 herein. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, including the Premerger Notification Rules promulgated thereunder. "Interests" means all of the limited liability company interests (whether direct, indirect or contingent) in Genco. "Investment Bankers" has the meaning assigned to it in Section 3.1(a) herein. "Laws" means, with respect to any Person, any foreign, United States Federal, state or local laws, statutes, ordinances, rules or regulations applicable to such Person. "Liens" means, with respect to any asset, property or right of any Person, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, property or right. "Material Adverse Effect" means, with respect to a Person, an event or circumstance which could reasonably be expected to have a material adverse effect on the business, operations, properties, financial condition, results of operations or prospects of such Person. "Permit" means any permit, license, approval, consent, order or authorization of any Governmental Authority. "Person" means, unless otherwise specified, a natural person, corporation, society, partnership, joint venture, unincorporated association or other entity, including a Governmental Authority. - 3 - "Purchase Price" has the meaning assigned to it in Section 3.1 herein. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder by the Securities and Exchange Commission. "Taxes" means all taxes, assessments and charges imposed by any United States Federal, state or local taxing authority or any foreign taxing authority, including, without limitation, interest, penalties and additions thereto. Certain other terms are defined elsewhere in this Agreement. Section 1.2 Rules of Construction. Unless the context otherwise requires: (a) Words in the singular include the plural, and words in the plural include the singular; (b) Provisions apply to successive events and transactions; (c) An accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (d) "Herein", "hereof" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision of this Agreement; (e) Words in the masculine gender include the feminine gender and words in feminine gender include the masculine gender; and (f) The Article and Section headings used or contained in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. ARTICLE 2 PURCHASE RIGHT Section 2.1 Purchase Right. Subject to the terms and conditions of this Agreement, Seller hereby grants to Buyer the right to purchase all of the outstanding Interests (the "Right") at the price, in the manner and at the time specified in this Article 2. No later than nine months from the date hereof, LIPA's consulting engineer will identify with respect to each of - 4 - the existing Generating Facilities, the specific size and location of interests in real property required for the operation of such Generating Facility (the "Generating Properties"), subject to any Request for Confirmation pursuant to Section 2.5 (the "Engineer's Report"). Such property shall be transferred to Genco at or prior to the Closing. To the extent that, prior to the Exercise Date, Genco has any right, title or interest in real property other than the Generating Properties, Genco may transfer such right, title or interest to Seller or any affiliate or subsidiary of Seller, provided, however, that the value of any such right, title or interest transferred by Genco prior to the Closing shall not be reflected in the Purchase Price calculated pursuant to Section 3.1 herein. Section 2.2 Exercisability. Subject to the further terms of this Agreement, the Right shall become exercisable at any time after the third anniversary of the date of the Closing. The Right shall expire and cease to be exercisable at 12:01 a.m. on the fourth anniversary of the Closing. Section 2.3 Method of Exercise. The Right may be exercised only by the giving of written notice to the Seller in such form and in such manner as is prescribed in Section 6.1 herein. Notice must be accompanied by:(i)certification by the Chairman or Executive Director of LIPA that the exercise of the Right has been affirmatively approved by the vote of two thirds of all members of the entire LIPA Board of Trustees; (ii) a copy of the related resolutions of the LIPA Board of Trustees certified as true and correct by the Chairman or Executive Director of LIPA; (iii) evidence reasonably satisfactory to Seller of the approval of the exercise of the Right and of any financing required to exercise the Right by the Public Authorities Control Board; and (iv) Buyer's election either (x) to operate the Generating Facilities by itself or by an Affiliate or (y) to retain Seller or an Affiliate of Seller to operate the Generating Facilities pursuant to Section 5.3(c). Section 2.4 Exercise Date. The date of exercise of the Right shall be the date on which the Notice is delivered to the Seller, during normal business hours, at its address as provided in Section 6.1 of this Agreement (the "Exercise Date"). Section 2.5 Request for Confirmation. Seller shall be entitled to appoint an additional independent consulting engineer to consider the Engineer's Report and shall provide Buyer within thirty business days of the receipt of the Engineer's Report either: (i) notice that it intends to waive Confirmation (as herein defined); or (ii) a request for Confirmation, in which case a copy of the report of Seller's independent consulting engineer shall be given to Buyer and to its independent consulting engineer within 90 days of Seller's request for - 5 - Confirmation. In the event Seller requests Confirmation, the parties are to select an independent consulting engineer to identify with respect to each of the Generating Facilities the specific size and location of land parcels required for the operation of such Generating Facility (the "Confirmation") and such Confirmation will be conclusive and binding on the parties. Section 2.6 Effect of Notice. (a) Upon receipt of the Notice, Buyer shall be legally bound to purchase, and Seller shall be legally bound to sell, all of the Interests, subject to:(i) the receipt of Confirmation or Seller's waiver thereof; (ii) the provisions of Section 4.2; (iii) Buyer's right not to purchase the Interests if on the Closing Date any of the representations set forth in Section 4.1 are inaccurate in any material respect; and (iv) the other terms and conditions contained herein. (b) Upon receipt of the Notice, Seller will: (i) cause to be prepared and delivered to Buyer not later than the 90th day after such receipt an audited balance sheet of Genco as of the quarter-end immediately preceding the date of such exercise (the "Audited Balance Sheet") and (ii) provide Buyer and the Investment Bankers with reasonable access to the books and records of Genco. Section 2.7 Closing Date. The closing of this Agreement will be on a date scheduled by LIPA not later than 90 days after the final determination of the Purchase Price pursuant to Section 3.1 hereunder (the "Closing Date") at a location to be agreed upon by the parties hereto following the Exercise Date. The Closing Date may be extended by the written agreement of the parties hereto. Section 2.8 Payment and Delivery of Interests. On the Closing Date, Seller shall deliver to Buyer documents sufficient to cause the entire right, title and interest in and to all outstanding Interests to be transferred of record to Buyer and in consideration thereof Buyer shall pay to Seller an amount in cash equal to the Purchase Price. All such payments and deliveries shall be deemed to occur simultaneously as a single transaction and no such payment or delivery shall be effective unless all such payments and deliveries have been made. Section 2.9 Provision of Corporate Records. Seller shall arrange as soon as practicable following the Closing Date for transportation, at Seller's cost, to Buyer of the records in Seller's possession relating to the assets of Genco, including, without limitation, all agreements, litigation files and filings with governmental agencies relating to the Generating Facilities, - 6 - except to the extent such items are already in the possession of Buyer. Section 2.10 Non-Recourse. The sale and purchase of the Interests transferred hereunder shall be made on an "as-is" basis without recourse to Seller, and without representation, covenant or warranty by Seller, express or implied, except in each case as expressly set forth in this Agreement. Seller makes no representation and takes no responsibility with respect to the financial condition of Genco. In particular, the parties hereby agree that, without limiting the generality of the foregoing, Buyer assumes any and all obligations pursuant to then existing Contracts of Genco, in addition to assuming any and all obligations with respect to any pension, employment or insurance arrangements maintained by Genco. ARTICLE 3 THE PURCHASE PRICE Section 3.1 Purchase Price. The purchase price for the Interests ("Purchase Price") shall be the Fair Market Value of the Interests, to be determined as of the Exercise Date by two independent nationally recognized investment banking firms experienced in the valuation of comparable property, one of which shall be appointed by each of Buyer and Seller (collectively, the "Investment Bankers") to negotiate and agree upon Fair Market Value. In determining the Fair Market Value, the Investment Bankers shall consider all of the terms of the Power Supply Agreement for the term of such agreement. Section 3.2 Arbitration. If the Investment Bankers are not able to agree on the Fair Market Value or such appropriate interest rate, then Buyer and Seller will select a mutually agreeable independent nationally recognized investment banking firm experienced in the valuation of comparable properties to provide its determination of the Fair Market Value, which will be used to determine the Purchase Price and will be conclusive and binding on the parties. Section 3.3 Disclosure of Third Party Offers. If at any time within six months of the Exercise Date and prior to the Closing Date Buyer has received any binding or serious offers from any third party to purchase some or all of the assets of Genco, Buyer shall disclose the terms and existence of such offers to Seller and to the Investment Bankers. If Buyer agrees to any such third-party offers and consummates such transaction within 3 months after the Closing Date, Seller will pay to Buyer 50% of Buyer's reasonable incremental financing costs (excluding interest or other costs of carry), if any, and including legal - 7 - fees, underwriter's compensation and other costs of issuance, specifically related to such financing, if any, up to $2 million. ARTICLE 4 REPRESENTATIONS AND WARRANTIES Section 4.1 Representations and Warranties of Seller and Genco. Except for the representation and warranty contained in Section 4.1(a), the following representations and warranties are furnished solely for the purpose of facilitating the determination of Fair Market Value and shall not preclude the Investment Bankers from pursuing such due diligence as they require to perform their obligations hereunder. Seller and Genco, jointly and severally, represent and warrant to the Buyer at the Closing and on the Closing Date that, except as disclosed to Buyer in writing on the date hereof and as updated in writing not later than the date the Audited Balance Sheet is delivered and further updated in writing by Seller prior to the determination of Fair Market Value (the "Schedule"): (a) ownership of Interests. On the Closing Date, Seller will own and hold, beneficially, the entire right, title and interest in and to all of the then existing Interests free and clear of all Liens. As of the Closing Date, there will be no outstanding subscriptions, options, calls, contracts, voting trusts, proxies or other commitments, understandings, restrictions, arrangements, rights or warrants, including any right of conversion or exchange under any outstanding security, instrument or other agreement, obligating Genco to issue, deliver or sell, or cause to be issued, delivered or sold, additional Interests, or obligating Genco to grant, extend or enter into any such agreement or commitment. (b) Execution and Enforceability. Seller has and Genco will have as of the Closing all requisite power and authority to execute and deliver this Agreement and to perform each of their obligations hereunder. Seller has and Genco will have as of the Closing duly authorized the execution, delivery and performance of this Agreement. This Agreement is the legal, valid and binding obligation of Seller and will be the legal, valid and binding obligation of Genco as of the Closing, and (assuming that this Agreement has been duly authorized, executed and delivered by Buyer) is enforceable against Seller and Genco in accordance with its terms. (c) Organization and Qualification of Genco. On the Closing Date, Genco is a limited liability company duly - 8 - organized, validly existing and in good standing under the laws of the State of New York and will have all requisite power and authority to conduct its business as then conducted and to own and lease its properties and assets. On the Closing Date, Genco will be qualified to do business and in good standing in each jurisdiction in which the ownership of its property or the conduct of its business then requires such qualification. (d) No Violations or Conflicts. Neither the execution and delivery of this Agreement by Seller or Genco nor the consummation of the transactions contemplated by this Agreement (i) results in a violation or breach of, or constitutes a default or an event of default under, any bond or other material Contract, Permit, instrument or other obligation to which Seller or Genco is a party, or (ii) violates any Laws, writ, judgment, injunction or court decree. (e) Consents and Approvals. Except as otherwise provided in this Agreement, no consent, approval or authorization of, or declaration, filing or registration with, any Governmental Authority is required to-be made or obtained by Genco or Seller in connection with the execution, delivery and performance of this Agreement by Genco or Seller. No consent, approval or authorization by, or notice to, any other Person is required to be made or obtained by Genco or Seller in connection with the execution, delivery and performance of this Agreement by Genco or Seller. On the Closing Date, all notices or other actions required to be made or taken, if any, pursuant to any applicable Laws to permit the closing of this Agreement will have been made and taken. (f) Compliance with Laws; Permits. The operations and activities of Genco are in compliance with all Laws and neither Seller or Genco has received any notice to the contrary. Genco has all material Permits required for it to conduct the Business and no material violations have been recorded in respect of any Permits and no proceeding is pending or, to the knowledge of Seller, threatened with respect to the limitation or revocation of any Permit. (g) Audited Balance Sheet. The Audited Balance Sheet will, as of and for the periods ended on the applicable date, fairly present, in all material respects, the financial position and results of operations of Genco as of the dates and for the periods presented therein in accordance with GAAP, applied on a consistent basis during the periods concerned, except as otherwise noted therein. - 9 - (h) Records. The books of account and records of Genco fairly reflect, in all material respects, all of the properties, assets, liabilities and transactions of Genco. (h) Assets. On the Closing Date, Genco will have good and marketable title (except to the extent that such assets are leased) to all of the Generating Facilities free and clear of any debts, Taxes, claims, options, liabilities, obligations or Liens. On or before the Closing Date, Seller shall cause Genco to deliver to Buyer copies of all deeds, endorsements, assignments and other good and sufficient instruments to evidence Gencol's right, title and interest in and to any and all of the Generating Facilities, as Buyer may reasonably request. (j) Sufficiency of Assets. on the Closing Date, Genco will own, lease or otherwise have a right to the use of all assets and properties relating to the Business. Except as set forth on the Schedule, Parent and/or Genco have obtained all consents required in order to maintain such leases and rights to use in the context of a transfer of ownership of the Interests. (k) Properties. The Schedule sets forth a list of all of the real property that is owned by a third party which is leased to Genco and all real property that is owned by Genco. Genco enjoys peaceful and undisturbed possession of all such properties that are owned by Genco, and such properties are free and clear of all debts, Taxes, claims, options, liabilities, obligations and Liens. (1) Environmental Protection. Environmental Protection. Except as set forth in the Schedule or in Parent SEC Reports (as defined in the Merger Agreement) filed prior to the date hereof: (i) Compliance. Genco is in material compliance with all Environmental Laws (as defined in Section 4.1(j)(vii)(B)) applicable to the Generating Facilities; and neither Seller nor Genco has received any communication (written or oral), from any person or Governmental Authority that alleges that Genco is not in such compliance with applicable Environmental Laws. (ii) Environmental Permits. Genco has obtained or has applied for all material environmental health and safety permits and all other governmental licenses, permits, and authorizations (collectively, the "Environmental Permits") necessary for the construction of the - 10 - facilities constituting part of the Generating Facilities or the ownership or operation of such facility or the Generating Facilities, and all such Environmental Permits are in good standing or, where applicable, a renewal application has been timely filed and is pending agency approval, and Genco is in material compliance with all terms and conditions of the Environmental Permits. (iii) Environmental claims. There is no material Environmental Claim (as defined in Section 4.1(j)(vii)(A)) pending (A) against Genco, (B) to the best knowledge of Seller and Genco, against any person or entity whose liability for any Environmental Claim Genco has or may have retained or assumed either contractually or by operation of law, or (C) against any real or personal property or operations which Genco owns or formerly owned or, to the best knowledge of Seller and Genco, any real or personal property or operations which Genco leases or manages or formerly leased or managed, in whole or in part. (iv) Releases. Genco has no knowledge of any material Releases (as defined in Section 4.1(j)(vii)(D)) of any Hazardous Material (as defined in Section 4.1(j)(vii)(C)), that would be reasonably likely to form the basis of any material Environmental Claim against Genco, or against any person or entity whose liability for any material Environmental Claim Genco has or may have retained or assumed either contractually or by operation of law. (v) Predecessors. Seller and Genco have no knowledge, with respect to any predecessor of Genco's, of any material Environmental Claim pending or threatened, or of any Release of Hazardous Materials that would be reasonably likely to form the basis of any material Environmental Claim. (vi) Disclosure. Seller and Genco have disclosed to Buyer all material facts which they reasonably believe form the basis of a material Environmental Claim arising from (A) the cost of Genco pollution control equipment currently required or known to be required in the future with respect to the Generating Facilities; (B) current Genco remediation costs or Genco -11- remediation and site monitoring costs known to be required in the future with respect to the Generating Facilities; or (C) any other environmental matter affecting Genco with respect to the Generating Facilities. (vii) As used in this Agreement: (A) "Environmental Claim" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, directives, claims, liens, investigations, proceedings or notices of noncompliance or violation (written or oral) by any person or entity (including any Governmental Authority) alleging potential liability (including, without limitation, potential responsibility for or liability for enforcement, investigatory costs, cleanup costs, governmental response costs, removal costs, remedial costs, natural resources damages, property damages, personal injuries or penalties) arising out of, based on or resulting from (a) the presence, or Release or threatened Release into the environment, of any Hazardous Materials at any location, whether or not owned, operated, leased or managed by Genco and constituting a portion of the Generating Facilities (for purposes of this Section 4.1); or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law with respect to the Generating Facilities; or (c) any and all claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from the presence or Release of any Hazardous Materials with respect to the Generating Facilities. (B) "Environmental Laws" means all federal, state, local laws, ordinances, rules and regulations relating to health and safety, pollution, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or protection of human health as it relates to the environment including, without limitation, laws and regulations relating to Releases or threatened Releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, -12- storage, disposal, transport or handling of Hazardous Materials. (C) "Hazardous Materials" means (A) any petroleum or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, and transformers or other equipment that contain dielectric fluid containing polychlorinated biphenyls; and (B) any chemicals, materials or substances which are now defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous wastes", "restricted hazardous wastes", "toxic substances", "toxic pollutants", or words of similar import, under any Environmental Law; and (C) any other chemical, material, substance or waste, exposure to which is now prohibited, limited or regulated under any Environmental Law in a jurisdiction in which Genco operates the Generating Facilities (for purposes of this Section 4.1). (D) "Release" means any release, spill, emission, leaking, injection, deposit, disposal, discharge, dispersal, leaching or migration into the atmosphere, surface or subsurface soil, surface water, saltwater shoreline or floor bottom, groundwater or property from or affecting any of the Generating Facilities. (m) Regulation as a Utility. Except as set forth in the Schedule, Genco is not subject to any regulation as a public utility or public service company (or similar designation) by any state in the United States other than New York or any foreign country. (n) Undisclosed Liabilities. Except as and to the extent set forth in the Audited Balance Sheet, as of the date thereof, Genco did not have any liabilities required by GAAP to be reflected on a balance sheet. Since such date, Genco has not incurred any liabilities (whether absolute, accrued, contingent or otherwise) required by GAAP to be reflected on a balance sheet or set forth in the notes thereto, except such liabilities which were incurred in the ordinary course of business. (o) Absence of Certain Changes. Since the Closing, Genco has not (i) suffered any change in its business, operations, financial condition or prospects, except such -13- changes which, in the aggregate, have not had and are not reasonably likely to have a Material Adverse Effect, (ii) incurred any long-term indebtedness for borrowed money or guaranteed, assumed or endorsed the obligations of any third party, (iii) sold, transferred or otherwise disposed of any material asset, property or right or (iv) created or suffered to exist any Lien on any Generating Facilities, other than easements created pursuant to the Merger Agreement or the other Basic Agreements. (p) Conduct of Business of Genco. Since the Closing, Genco has conducted its operations and affairs only in accordance with the ordinary and usual course of business. (q) Contracts and Commitments. The Schedule sets forth a list and description of the following agreements, oral or written, to which is a party or by which Genco is bound: (i) all Contracts involving an obligation on the part of Genco of more than $500,000 individually or more than $10 million in the aggregate, (ii) all purchase orders in excess of $500,000 individually or more than $10 million in the aggregate, (iii) all agreements under which Genco may be obligated to perform services or expects to receive fees in excess of $500,000 individually or more than $10 million in thee aggregate, (iv) all real and personal property leases involving annual payments in excess of $500,000 individually or more than $10 million in the aggregate, (v) all employment contracts with employees or former employees of Genco, and (vi) all other material agreements (the contracts and commitments identified in clauses (i) through (vi) of this Section 4.1(q) being hereafter collectively referred to as the "Commitments"). Neither Genco nor any of its employee is in default or breach of any of the Commitments, and, to the best knowledge of Seller, no other party to any of the Commitments is in default or breach thereof. (r) Litigation. There is no claim, suit, litigation, investigation or proceeding pending, or to the best knowledge of Seller threatened, against Genco in any court, by any governmental entity or before any arbitrator or other tribunal. Neither Genco nor any of its employees is subject to any outstanding action, order, writ, judgment, injunction or decree of any court or governmental entity. Section 4.2 Provision of Additional Schedules upon Exercise. The Schedule provided on the date hereof pursuant to Section 4.1 is valid as of the date hereof. On or before the date on which the Audited Balance Sheet is delivered to Buyer, Seller will provide Buyer and each Investment Banker with an updated Schedule valid as of the Exercise Date. If the Buyer determines that any such update contains evidence of any change -14- or event which has had a Material Adverse Effect since the date hereof, Buyer must notify Seller within thirty days of the delivery of such update if it intends to revoke its exercise of the Right. Upon delivery of such notice, this Agreement shall immediately terminate and no party shall have any further obligation or right hereunder. After the expiration of such thirty day period, Buyer (unless it shall have prior to such expiration delivered such notice) shall be legally bound by its exercise of the Right. Section 4.3 Representations and Warranties of Buyer. Except as otherwise disclosed to Seller in writing, Buyer represents and warrants to the Seller on the date hereof and on the Closing Date as follows: (a) Power and Authority. Buyer has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Buyer has duly authorized the execution; delivery and performance of this Agreement. This Agreement is the legal, valid and binding obligation of Buyer and (assuming that this Agreement has been duly authorized, executed and delivered by Seller) is enforceable against Buyer in accordance with its terms. (b) Applicability of HSR Act. Buyer is an agency of the State of New York and is not a "corporation engaged in commerce" within the meaning of the HSR Act as of either the date hereof, the Exercise Date or the Closing Date. ARTICLE 5 COVENANTS Section 5.1 Covenants of Seller. After the date hereof and prior to the Closing Date or earlier termination of this Agreement, Seller agrees on its own behalf or agrees that it will cause Genco to act, as the case may be, as follows, except as expressly contemplated or permitted in this Agreement or to the extent the other parties hereto shall otherwise consent in writing: (a) No transfer of Seller's interest in Genco without Prior Approval. Seller is not permitted to transfer or to permit its subsidiaries to transfer any or all of its or their right, title and interest in and to all of the Interests, except where the intended transferee: (i) is a direct or indirect wholly owned subsidiary of Seller; (ii) executes and delivers a copy of this Agreement to Buyer; and (iii) assumes in writing all of Seller's obligations with respect hereto. -15- (b) Ordinary Course of Business. Genco shall carry on its business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and use all commercially reasonable efforts to preserve intact its present business organization and goodwill and preserve the goodwill and relationships with customers, suppliers and others having business dealings with it. Genco may, with the prior approval of Buyer, engage in transactions out of the ordinary course of business relating to the Generating Facilities, such approval not to be unreasonably withheld. (c) No Change in Business. Genco shall not engage in any new lines of business or make any material change in the line of business in which it engages as of the date hereof other than as contemplated or permitted by the Power Supply Agreement. (d) Maintenance of Assets. In the conduct of its business, Genco shall endeavor to maintain all of its right, title and interest in and to the Generating Facilities, which shall include, without limitation: (i) Capital Assets. All equipment, computers, photocopy machines and other tangible personal property owned by Genco and used by Genco in the ordinary course of the Business, subject to replacement or retirement in the ordinary course of business; (ii) Records and Documentation. All books, records, files, working papers, correspondence, memoranda and other documentation relating to any services rendered by Genco in the Business and otherwise related to the assets, properties and rights referred to in clause (i) of this Section. (e) No Acquisitions. Genco shall not acquire, or publicly propose to acquire, or agree to acquire, by merger or consolidation with, or by purchase or otherwise, a substantial equity interest in or a substantial portion of the assets of, any business or any corporation, partnership, association or other business organization or division thereof, nor shall any party acquire or agree to acquire, a material amount of assets other than in the ordinary course of business. (f) No Dispositions. Genco shall not sell, lease, license or otherwise dispose of the Generating Facilities, other than dispositions in the ordinary course of its business and other than dispositions of less than $10 million in the aggregate. -16- (g) Transmission, Generation. Except as required pursuant to tariffs on file with the Federal Energy Regulatory Commission as of the date hereof, in the ordinary course of business consistent with past practice or as contemplated or permitted by the Power Supply Agreement, Genco shall not (i) commence construction of any additional electric generating capacity, or (ii) obligate itself to purchase or otherwise acquire, or to sell or otherwise dispose of, or to share, any additional electric generating capacity. (h) Cooperation, Notification. Commencing on the third anniversary hereof, Genco shall: (i) during reasonable business hours and upon reasonable notice, allow Buyer and its authorized representatives to make such investigation of the business, property, books and records of Genco, and to conduct such examinations and to confer with the officers and employees of Genco, as Buyer deems reasonably necessary for purposes of verifying the accuracy of Genco's representations and warranties hereunder and compliance with the terms hereof; (ii) confer on a regular and frequent basis with one or more representatives of Buyer to discuss, subject to applicable law, material operational matters and the general status of its ongoing operations; (iii) promptly notify Buyer of any significant changes in its business, properties, assets, condition (financial or other), results of operations or prospects; (iv) advise Buyer of any change or event which has had or, insofar as reasonably can be foreseen, is reasonably likely to result in a Material Adverse Effect; and (v) promptly provide Buyer with copies of all filings made by Genco with any state or federal court, administrative agency, commission or other Governmental Authority in connection with this Agreement and the transactions contemplated hereby. Genco shall provide similar access to each Investment Banker and the investment bankers, if any, appointed pursuant to Section 3.2. (i) Reasonable Access for Consulting Engineers. From the date hereof until the completion of the Engineer's Report pursuant to Section 2.1 and, if required, the receipt of Confirmation pursuant to Section 2.5, LIPA's consulting engineer shall have a right of unrestricted access to the Generating Facilities at such times and for such purposes as it reasonably deems necessary and desirable for the purpose of preparing the Engineer's Report; provided, however, that: (i) such access shall not be granted outside normal business hours, except with reasonable notice; (ii) such consulting engineer shall comply with any on-site safety policies and procedures; -17- (iii) such access shall only be for the purpose of preparing the Engineer's Report and any information obtained therefrom shall only be used for such purpose; and (iv) if Seller so requests, such access shall only be granted subject to such consulting engineer executing and complying with the terms of a confidentiality agreement in a mutually acceptable form, subject to any applicable Laws. (j) Third-Party Consents. Genco and Seller shall use all commercially reasonable efforts to obtain all required consents for the exercise of the Right. Genco shall promptly notify Buyer of any failure or prospective failure to obtain any such consents and, if requested by Buyer, shall provide copies of all required consents obtained to Buyer. (k) No Breach, Etc. Genco and Seller shall not willfully take any action that would or is reasonably likely to result in a material breach of any provision of this Agreement or in any of its representations and warranties set forth in this Agreement, being untrue on and as of the Closing Date. (l) Tax-Exempt Status. Genco shall not take any action that would likely jeopardize the qualification of Genco's outstanding revenue bonds which qualify on the date hereof under Section 142(a) of the Code as "exempt facility bonds" or as tax-exempt industrial development bonds under Section 103(b)(4) of the Internal Revenue Code of 1954, as amended, prior to the Tax Reform Act of 1986. (m) Permits. Genco shall use reasonable efforts to maintain in effect all existing permits for the Business. (n) Transfer of Additional Assets. Prior to the Closing Date, Parent will cause to be transferred to Genco, to the extent controlled by Parent and not already owned by Genco, any Additional Assets. Section 5.2 Covenants of Buyer. After the Exercise Date and prior to the Closing Date or earlier termination of this Agreement, Buyer agrees as follows, except as expressly contemplated or permitted in this Agreement or to the extent the other parties hereto shall otherwise consent in writing: (a) Third-Party Consents. Buyer shall use all commercially reasonable efforts to obtain all required third-party consents. Buyer shall promptly notify Seller -18- and Genco of any failure or prospective failure to obtain any such consents and, if requested by Seller or Genco, shall provide copies of all such consents obtained to Seller and Genco. (b) No Breach, Etc. Buyer shall not willfully take any action that would or is reasonably likely to result in a material breach of any provision of this Agreement or in any of its representations and warranties set forth in this Agreement being untrue on and as of the Closing Date. (c) Buyer Actions. Buyer shall take only those actions, from the date hereof until the Closing Date, that are required or contemplated by this Agreement to be so taken by Buyer, including, without limitation, the declaration, filing or registration with, or notice to or authorization, consent or approval of, any Governmental Authority. Section 5.3 Additional Agreements. (a) Notification of Certain Matters. Commencing on the third anniversary hereof, each party hereto shall give prompt notice to the other parties hereto of (i) the occurrence or failure to occur of any event, which occurrence or failure would be reasonably likely to cause any representation or warranty of such party contained herein to be untrue or inaccurate in any material respect at any time, (ii) any material failure of such party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, and (iii) any newly discovered fact or circumstance that might reasonably be expected to have a material effect on the accuracy of any representation or warranty of such party contained herein. (b) No Layoffs or Salary Cuts. For a period of two years following the Closing Date, Buyer shall not cause or permit to occur any layoffs or salary cuts to any non-union Genco personnel. (c) Management Contract. If Buyer elects in the Exercise Notice to retain Seller or an Affiliate of Seller to operate the Generating Facilities, the parties will negotiate in good faith the terms and conditions of a mutually acceptable agreement therefor. (d) Easements. Prior to the Closing Date, Genco may grant Seller an irrevocable and perpetual easement for the installation, maintenance and access of and to any assets of Seller or its affiliates or subsidiaries located on or under such property, provided if Seller's use of such easement -19- materially interferes with either the physical operation of any generating facilities or with Buyer's environmental compliance, Seller shall compensate Buyer for the adverse impact on Buyer of such interference. ARTICLE 6 GENERAL PROVISIONS Section 6.1 Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed to have been duly given or made if (i) sent by registered or certified mail, return receipt requested, or (ii) hand delivered, or (iii) sent by prepaid overnight carrier, with a record of receipt, to the parties at the following addresses (or at such other addresses as shall be specified by the parties by like notice): (a) if to Buyer: Richard Kessel Chairman of the Board Long Island Power Authority 333 Earle Ovington Blvd, Suite 403 Uniondale, NY 11553 with copies to: Patrick Foye Deputy Chairman of the Board Long Island Power Authority 333 Earle Ovington Blvd, Suite 403 Uniondale, NY 11553 and to: Winthrop, Stimpson, Putnam & Roberts One Battery Park Plaza New York, N.Y. 10004 Attn: Stephen R. Rusmisel (b) if to Seller: Long Island Lighting Company 175 East Old Country Road Hicksville, N.Y. 11801 Attn: Chief Executive Officer -20- with copies to: Kramer, Levin, Naftalis Frankel 919 Third Avenue New York, New York 10022 Attn: Thomas E. Constance Each notice or communication shall be deemed to have been given on the date received. Section 6.2 Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 6.3 Miscellaneous. This Agreement, together with the Exhibits and Schedules annexed hereto: (i) constitute the entire agreement and supersede all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and thereof; (ii) shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and permitted assigns and, except as expressly provided under the terms of any Exhibit, are not intended to confer upon any other Person, any rights or remedies hereunder or thereunder; (iii) shall be governed, including, without limitation, as to validity, interpretation and effect, by the Laws of the State of New York, without regard to the principles of conflicts of laws; and (iv) may be executed in two or more counterparts which together shall constitute a single agreement. Section 6.4 Assignment. (a) Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties, except, in the case of Buyer, to LILCO and, in the case of Seller, to any direct or indirect wholly owned subsidiary or other legal entity of Seller to which it also assigns all of the Interests. No party shall be relieved of any liability arising hereunder in respect of any assignment pursuant to this Section, unless such assignor has received a written release expressly excepting such assignor from any liability that may arise hereunder. (b) Effective upon the Closing, Seller shall assign its rights, obligations and interests hereunder to the Parent. Section 6.5 Schedules. Any information set forth on any Schedules annexed hereto shall, to the extent applicable, be - 21 - deemed to be included on each other appropriate Schedule annexed to this Agreement. Section 6.6 Waiver; Amendment. No waiver by any party hereto of any term, condition or obligation of this Agreement shall be valid unless in writing and signed by the waiving party. No failure or delay by any party hereto at any time to require any other party hereto to perform strictly in accordance with the terms hereof shall preclude any party from requiring performance by such other party hereto at any later time. No waiver of any one or several of the terms, conditions or obligations of this Agreement, and no partial waiver thereof, shall be construed as a waiver of any of the other terms, conditions or obligations of this Agreement. This Agreement may not be amended, changed or modified in any fashion except by written instrument signed by each of the parties hereto. Section 6.7 Issue Taxes. Buyer alone shall bear, to the extent allowed by law, all documentary transfer, and similar taxes levied under the laws of the United States of America or any State or local taxing authority thereof or therein in connection with the sale of the Interests. Section 6.8 Fees and Expenses. All fees, costs and expenses incurred in connection with the execution and delivery of this Agreement shall be paid by the party incurring such fees, costs or expenses; provided, however, that Buyer shall pay all of the fees and expenses of the Investment Bankers and the investment bankers, if any, selected pursuant to Section 3.2; provided further, that such fees and expenses shall have been agreed to by Buyer in advance (such agreement not to be unreasonably withheld or delayed). Section 6.9 Alternative Dispute Resolution (a) Any dispute arising out of or relating to this Agreement, other than disputes regarding the Purchase Price to be settled pursuant to Section 3.2 herein, shall be resolved in accordance with the procedures specified in this Section, which shall constitute the sole and exclusive procedures for the resolution of such disputes. (b) The parties agree to use their best efforts to settle promptly any disputes or claims arising out of or relating to this Agreement through negotiation conducted in good faith between executives having authority to reach such a settlement. If either party hereto shall so request, the parties shall mutually agree on the selection of a mediator who shall mediate the negotiations which shall be non-binding. -22- All negotiations and mediation discussions pursuant to this paragraph are confidential and shall be treated as compromise and settlement negotiations for purposes of Federal Rule of Evidence 408 and applicable state rules of evidence. (c) Any dispute arising out of or relating to this Agreement or the breach, termination, or validity thereof, which dispute has not been resolved by a negotiation or mediation as provided in paragraph (b) hereof within 60 days from the date that either negotiations or mediation shall have been first requested, shall be settled by binding arbitration before three independent and impartial arbitrators in accordance with the then current rules of the American Arbitration Association, except to the extent such rules are inconsistent with any provision of this Agreement, in which case the provisions of this Agreement shall be followed, and except that the arbitrations under this Agreement shall not be administered by the American Arbitration Association. The Arbitrators shall be (i) independent of the parties and disinterested in the outcome of the dispute, (ii) attorneys, accountants, investment bankers, commercial bankers or engineers familiar with contracts governing the operation of electric utility assets, and (iii) qualified in the subject area of the issue in dispute. For purposes of the preceding sentence, residents of Long Island shall not be considered interested merely by virtue of their residence. The Arbitrators shall be chosen by the parties, with each party choosing one arbitrator and those arbitrators choosing the third arbitrator. Judgment on the award rendered by the Arbitrators may be entered in any court in the State of New York having jurisdiction thereof. If either party refuses to participate in good faith in the negotiations or mediation proceedings described in paragraph (b) hereof, the other may initiate arbitration at any time after such refusal without waiting for the expiration of the 60 day period. Except as provided in Paragraph D hereof relating to provisional remedies, the Arbitrators shall decide all aspects of any dispute brought to them including attorney disqualification and the timeliness of the making of any claim. (d) Either party may, without prejudice to any negotiation, mediation, or arbitration procedures, proceed in any court to seek provisional judicial relief if, in such party's sole discretion, such action is necessary to avoid imminent irreparable harm, to provide uninterrupted electrical and other services, or to preserve the status quo pending the conclusion of the dispute procedures specified in this Section. (e) The Arbitrators shall have no authority to award punitive damages or any other damages aside from the prevailing party's actual and consequential damages, plus interest thereon at the Best Interest Rate (as defined in the Management Services Agreement), accrued from the date such - 23 - damages were incurred. The Arbitrators shall not have the authority to make any ruling, finding, or award that does not conform to the terms and conditions of this Agreement. (f) The Arbitrators may award reasonable attorneys' fees and costs of the arbitration. (g) Any claim under this Agreement shall be time-barred, regardless of any statute of limitations periods provided by state or federal law, unless negotiation or mediation with respect thereto is commenced with respect to such claim within twelve months after the basis for such claim has been discovered. (h) The Arbitrators shall have the discretion to order a pre-hearing exchange of information by the parties, including, without limitation, the production of requested documents, the exchange of summaries of testimony of proposed witnesses, and the examination by deposition of parties. Each of the parties agrees to produce all such requested documents and to deliver to the other a certificate, executed by a senior executive of such party, stating that all such documents have been so produced. (i) The site of any Arbitration brought pursuant to this Agreement shall be Mineola or Hauppauge, New York. (j) The Arbitrator's award shall be in writing and shall set forth the factual and legal bases for the award. - 24 - IN WITNESS WHEREOF, each party hereto has duly executed this Agreement as of the date first above written. LONG ISLAND LIGHTING COMPANY, as Seller By:/s/ Dr. William J. Catacosinos --------------------------------- Name: Dr. William J. Catacosinos Title: Chief Executive Officer LONG ISLAND POWER AUTHORITY, as Buyer By:/s/ Richard M. Kessel --------------------------------- Name: Richard M. Kessel Title: Chairman By:/s/ Patrick Fove --------------------------------- Name: Patrick Foye Title: Deputy Chairman Acknowledged and agreed to, as of the Closing, by: MARKETSPAN GENERATION LLC By: ------------------------------------- Name: Joseph E. Fontana Title: Vice President EX-10.(E) 9 GUARANTY AGREEMENT - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- GUARANTY AGREEMENT from MARKETSPAN CORPORATION to LONG ISLAND POWER AUTHORITY Dated May 28, 1998 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- GUARANTY AGREEMENT THIS GUARANTY AGREEMENT is made and dated as of May 28, 1998, from MARKETSPAN CORPORATION, a corporation organized and existing under the laws of the State of New York (together with any permitted successors and assigns hereunder, the "Guarantor"), to Long Island Power Authority (together with its subsidiaries and other permanent assignees of the Agreements (as defined below), the "Authority"). RECITALS The Authority and various affiliates of the Guarantor, a New York corporation, have entered into a series of agreements, including a Management Services Agreement dated June 26, 1997, as supplemented (the "Management Services Agreement"), whereby MarketSpan Energy Management, LLC, as Manager (the "Manager"), has agreed to operate, maintain and manage the Authority's electricity transmission and distribution system (the "T&D System"), a Power Supply Agreement dated June 26, 1997, as supplemented (the "Power Supply Agreement"), whereby MarketSpan Generation, LLC ("Genco") has agreed to sell capacity and energy to the Authority, an Energy Management Agreement dated June 26, 1997, as supplemented (the "Energy Management Agreement") whereby MarketSpan Energy Management, LLC (the "Energy Manager") has agreed to manage the System Power Supply and purchase Fuel for use in the operation of the generating facilities of Genco (collectively, the "Agreements") all as more particularly described therein. The Agreements when entered into pursuant to the terms of an Agreement and Plan of Merger dated as of June 26, 1997 by and among the Authority, Long Island Lighting Company, the Guarantor and LIPA Acquisition Corp. (the "Acquisition Corp"). Each of the Manager, the Energy Manager and GENCO (the "Subsidiaries") is a subsidiary of the Guarantor. The Authority entered into the Agreements only upon the condition that the Guarantor guarantee the performance by the Manager of all of the Subsidiaries' responsibilities and obligations under the Agreements as set forth in this Guaranty Agreement ("the Guaranty"). In order to induce the execution and delivery of the Agreements by the Authority and in consideration of the foregoing, the Guarantor agrees as follows: 1 ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1. DEFINITIONS. For the purposes of this Guaranty, the following words and terms shall have the respective meanings set forth as follows. Any capitalized word or term used but not defined herein is used as defined in the Agreements. "Obligations" means the amounts payable by, the obligations to perform of, and the covenants and agreements of, the Subsidiaries pursuant to the terms of the Agreements. "Transaction Agreement" means any agreement entered into by the Subsidiaries or the Authority in connection with the transactions contemplated by the Agreements, including the Acquisition Agreement, the Basic Agreements (as defined in the Acquisition Agreement) and any amendments or supplements thereto. SECTION 1.2. INTERPRETATION. In this Guaranty, unless the context otherwise requires: (A) References Hereto. The terms "hereby", "hereof", "herein", "hereunder" and any similar terms refer to this Guaranty, and the term "hereafter" means after, and the term "heretofore" means before, the date of execution and delivery of this Guaranty. (B) Gender and Plurality. Words of the masculine gender mean and include correlative words of the feminine and neuter genders and words importing the singular number mean and include the plural number and vice versa. (C) Persons. Words importing persons include firms, companies, associations, general partnerships, limited partnerships, trusts, business trusts, corporations and other legal entities, including public bodies, as well as individuals. (D) Headings. The table of contents and any headings preceding the text of the Articles, Sections and subsections of this Guaranty shall be solely for convenience of reference and shall not constitute a part of this Guaranty, nor shall they affect its meaning, construction or effect. (E) Entire Agreement; Authority. This Guaranty and the Agreements constitute the entire agreement between the parties hereto with respect to the transactions contemplated by this Guaranty. Nothing in this Guaranty is intended to confer on any person other than the Guarantor, the Authority and their successors and assigns as permitted hereunder any rights or remedies under or by reason of this Guaranty. 2 (F) Counterparts. This Guaranty may be executed in any number of original counterparts. All such counterparts shall constitute but one and the same Guaranty. (G) Applicable Law. This Guaranty shall be governed by and construed in accordance with the applicable laws of the State of New York. (H) Severability. If any clause, provision, subsection, Section or Article of this Guaranty shall be ruled invalid by any court of competent jurisdiction, the invalidity of any such clause, provisions, subsection, Section or Article shall not affect any of the remaining provisions hereof, and this Guaranty shall be construed and enforced as if such invalid portion did not exist provided that such construction and enforcement shall not increase the Guarantor's liability beyond that expressly set forth herein. (I) Approvals. All approvals, consents and acceptances required to be given or made by any party hereto shall be at the sole discretion of the party whose approval, consent or acceptance is required. (J) Payments. All payments required to be made by the Guarantor hereunder shall be made in lawful money of the United States of America. 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR SECTION 2.1. REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR. The Guarantor hereby represents and warrants that: (1) Existence and Powers. The Guarantor is duly organized and validly existing as a corporation under the laws of the State of New York, with full legal right, power and authority to enter into and perform its obligations under this Guaranty. (2) Due Authorization and Binding Obligation. The Guarantor has duly authorized the execution and delivery of this Guaranty, and this Guaranty has been duly executed and delivered by the Guarantor and constitutes the legal, valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms except insofar as such enforcement may be affected by bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights generally. (3) No Conflict. Neither the execution or delivery by the Guarantor of this Guaranty nor the performance by the Guarantor of its obligations hereunder (a) to the Guarantor's knowledge conflicts with, violates or results in a breach of any law or governmental regulation applicable to the Guarantor, (b) conflicts with, violates or results in a material breach of any term or condition of the Guarantor's corporate charter or by-laws or any judgment, decree, agreement or instrument to which the Guarantor is a party or by which the Guarantor or any of its properties or assets are bound, or constitutes a default under any such judgment, decree, agreement or instrument or (c) will result in the creation or imposition of any material encumbrance of any nature whatsoever upon any of the properties or assets of the Guarantor except as permitted hereby or by any Transaction Agreement. (4) No Governmental Approval Required. No approval, authorization, order or consent of, or declaration, registration or filing with, any governmental authority is required for the valid execution and delivery by the Guarantor of this Guaranty, except such as shall have been duly obtained or made. (5) No Litigation. There is no action, suit or other proceeding, at law or in equity, before or by any court or governmental authority, pending or, to the Guarantor's knowledge, threatened against the Guarantor which has a likelihood of an unfavorable decision, ruling or finding that would materially and adversely affect the validity or enforceability of this Guaranty. 4 (6) No Legal Prohibition. The Guarantor has no knowledge of any Applicable Law in effect on the date as of which this representation is being made which would prohibit the performance by the Guarantor of this Guaranty (7) Consent to Agreements. The Guarantor is fully aware of and consents to the terms and conditions of the Agreements. (8) Consideration. This Guaranty is made in furtherance of the purposes for which the Guarantor has been organized, and the assumption by the Guarantor of its obligations hereunder will result in a material benefit to the Guarantor. 5 ARTICLE III GUARANTY COVENANTS SECTION 3.1. GUARANTY TO THE AUTHORITY. The Guarantor hereby absolutely, presently, irrevocably and unconditionally guarantees to the Authority for the benefit of the Authority (1) the full and prompt payment when due of each and all of the payments required to be credited or made by each of the Subsidiaries under the Agreements (including all amendments and supplements thereto) to, or for the account of, the Authority, and (2) the full and prompt performance and observance of each and all of the Obligations. Notwithstanding the unconditional nature of the Guarantor's obligations as set forth herein, the Guarantor shall have the right to assert the defenses provided in Section 3.4 hereof against claims made under this Guaranty. SECTION 3.2. RIGHT OF AUTHORITY TO PROCEED AGAINST GUARANTOR. This Guaranty shall constitute a guaranty of payment and of performance and not of collection, and the Guarantor specifically agrees that in the event of a failure by any Subsidiary to pay or perform any Obligation guaranteed hereunder, the Authority shall have the right to proceed first and directly against the Guarantor under this Guaranty and without proceeding against such Subsidiary or exhausting any other remedies against such Subsidiary which the Authority may have. Without limiting the foregoing, the Guarantor agrees that it shall not be necessary, and that the Guarantor shall not be entitled to require, as a condition of enforcing the liability of the Guarantor hereunder, that the Authority (1) file suit or proceed to obtain a personal judgment against any Subsidiary, (2) make any other effort to obtain payment or performance of the Obligations from the Subsidiary other than providing the Subsidiary with any notice of such payment or performance as may be required by the terms of the Agreements or required to be given to the Subsidiary under Applicable Law, (3) foreclose against or seek to realize upon any security for the Obligations, or (4) exercise any other right or remedy to which the Authority is or may be entitled in connection with the Obligations or any security therefor or any other guarantee thereof, except to the extent that any such exercise of such other right or remedy may be a condition to the Obligations of the Subsidiaries or to the enforcement of remedies under the Agreements. Upon any unexcused failure by any Subsidiary in the payment or performance of any Obligation and the giving of such notice or demand, if any, to the Subsidiaries as may be required in connection with such Obligation, the liability of the Guarantor shall be effective and shall immediately be paid or performed. Notwithstanding the Authority's right to proceed directly against the Guarantor, the Authority (or any successor) shall not be entitled to more than a single full performance of the obligations in regard to any breach or non-performance thereof. SECTION 3.3. GUARANTY ABSOLUTE AND UNCONDITIONAL: Except as set forth in Section 3.4 hereof, the obligations of the Guarantor hereunder are absolute, present, irrevocable and unconditional and shall remain in full force and effect until the Subsidiaries shall 6 have fully discharged the Obligations in accordance with their respective terms, and except as provided in Section 3.4 hereof, shall not be subject to any counterclaim, set-off, deduction or defense (other than full and strict compliance with, or release, discharge or satisfaction of, such Obligations) based on any claim that the Guarantor may have against the Subsidiaries, the Authority or any other person. Without limiting the foregoing, the obligations of the Guarantor hereunder shall not be released, discharged or in any way modified by reason of any of the following (whether with or without notice to, knowledge by or further consent of the Guarantor): (1) the extension or renewal of this Guaranty or the Agreements in accordance with the terms of each agreement; (2) any exercise or failure, omission or delay by the Authority in the exercise of any right, power or remedy conferred on the Authority with respect to this Guaranty or the Agreements except to the extent such failure, omission or delay gives rise to an applicable statute of limitations defense with respect to a specific claim; (3) any permitted transfer or assignment of rights or obligations under the Agreements or under any other Transaction Agreement by any party thereto or any permitted assignment, conveyance or other transfer of any of their respective interests in the GENCO Generating Facilities or the T&D System or in, to or under any of the Transaction Agreements; (4) any permitted assignment for the purpose of creating a security interest or mortgage of all or any part of the respective interests of the Authority or any other person in any Transaction Agreement or in the GENCO Generating Facilities or the T&D System; (5) any renewal, amendment, change or modification in respect of any of the Obligations or terms or conditions of any Transaction Agreement; (6) any failure of title with respect to all or any part of the respective interests of any person in the GENCO Generating Facilities or the T&D System; (7) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets, marshalling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, moratorium, arrangement, composition with creditors or readjustment of, or other similar proceedings against the Subsidiaries or the Guarantor, or any of the property of either of them, or any allegation or contest of the validity of this Guaranty or any other Transaction Agreement in any such proceeding (it is specifically understood, consented and agreed to that, to the extent permitted by law, this Guaranty shall remain and continue in full force and effect and shall be enforceable against the Guarantor to the same extent and with the same force and effect as if any such proceeding had not been instituted and as if no rejection, stay, termination, assumption or modification has 7 occurred as a result thereof, it being the intent and purpose of this Guaranty that the Guarantor shall and does hereby waive all rights and benefits which might accrue to it by reason of any such proceeding); (8) except as permitted by Sections 4.1 or 4.2 hereof, any sale or other transfer by the Guarantor or any Affiliate of any of the capital stock or other interest of the Guarantor or any Affiliate in the Subsidiaries now or hereafter owned, directly or indirectly, by the Guarantor or any Affiliate, or any change in composition of the interests in the Subsidiaries; (9) any failure on the part of the Subsidiaries for any reason to perform or comply with any agreement with the Guarantor; (10) the failure on the part of the Authority to provide any notice to the Guarantor which is not required to be given to the Subsidiaries as a condition to the enforcement of Obligations pursuant to the Agreements; (11) any failure of any party to the Transaction Agreements to mitigate damages resulting from any default by the Subsidiaries or the Guarantor under any Transaction Agreement; (12) the merger or consolidation of any party to the Transaction Agreements into or with any other person, or any sale, lease, transfer, abandonment or other disposition of any or all of the property of any of the foregoing to any person; (13) any legal disability or incapacity of any party to the Transaction Agreements; or (14) the fact that entering into any Transaction Agreement by the Subsidiaries or the Guarantor was invalid or in excess of the powers of such party. Should any money due or owing under this Guaranty not be recoverable from the Guarantor due to any of the matters specified in subparagraphs (1) through (14) above, then, in any such case, such money, together with all additional sums due hereunder, shall nevertheless be recoverable from the Guarantor as though the Guarantor were principal obligor in place of the Subsidiaries pursuant to the terms of the Agreements and not merely a guarantor and shall be paid by the Guarantor forthwith. Notwithstanding anything to the contrary expressed in this Guaranty, nothing in this Guaranty shall be deemed to amend, modify, clarify, expand or reduce the Subsidiaries' rights, benefits, duties or obligations under the Agreements. To the extent that any of the matters specified in subparagraphs (1) through (6) and (8) through (14) would provide a defense to, release, discharge or otherwise affect the Subsidiaries' Obligations, the Guarantor's obligations under this Guaranty shall be treated the same. 8 SECTION 3.4. DEFENSES, SET-OFFS AND COUNTERCLAIMS. Notwithstanding any provision contained herein to the contrary, the Guarantor shall be entitled to exercise or assert any and all legal or equitable rights or defenses which the Subsidiaries may have under the Agreements or under Applicable Law (other than bankruptcy or insolvency of the Subsidiaries and other than any defense which the Subsidiaries has expressly waived in the Agreements), and the obligations of the Guarantor hereunder are subject to such counterclaims, set-offs or deductions which the Subsidiaries is permitted to assert pursuant to the Agreements if any. The Guarantor reserves the right to bring independent claims against the Authority not arising from the Agreements, provided however, any such claims shall not be used to set-off or deduct from any claims which the Authority may have against the Guarantor arising from this Guaranty. SECTION 3.5. WAIVERS BY THE GUARANTOR. The Guarantor hereby unconditionally and irrevocably waives: (1) notice from the Authority of its acceptance of this Guaranty; (2) notice of any of the events referred to in Section 3.3 hereof except to the extent that notice is required to be given as a condition to the enforcement of Obligations; (3) to the fullest extent lawfully possible, all notices which may be required by statute, rule of law or otherwise to preserve intact any rights against the Guarantor, except any notice to the Subsidiaries required pursuant to the Agreements or Applicable Law as a condition to the performance of any Obligation; (4) to the fullest extent lawfully possible, any statute of limitations defense based on a statute of limitations period which may be applicable to guarantors (or parties in similar relationships) which would be shorter than the applicable statute of limitations period for the underlying claim; (5) any right to require a proceeding first against the Subsidiaries; (6) any right to require a proceeding first against any person or the security provided by or under any Transaction Agreement except to the extent such Transaction Agreement specifically requires a proceeding first against any person (except the Subsidiaries) or security; (7) any requirement that the Subsidiaries be joined as a party to any proceeding for the enforcement of any term of any Transaction Agreement; (8) the requirement of, or the notice of, the filing of claims by the Authority in the event of the receivership or bankruptcy of the Subsidiaries; and 9 (9) all demands upon the Subsidiaries or any other person and all other formalities the omission of any of which, or delay in performance of which, might, but for the provisions of this Section 3.5, by rule of law or otherwise, constitute grounds for relieving or discharging the Guarantor in whole or in part from its absolute, present, irrevocable, unconditional and continuing obligations hereunder. SECTION 3.6. PAYMENT OF COSTS AND EXPENSES. The Guarantor agrees to pay the Authority on demand all reasonable costs and expenses, legal or otherwise (including counsel fees), incurred by or on behalf of the Authority in successfully enforcing by Legal Proceeding observance of the covenants, agreements and obligations contained in this Guaranty against the Guarantor, other than the costs and expenses that the Authority incurs in performing any of its obligations under the Agreements, or other applicable Transaction Agreement where such obligations are a condition to performance by the Subsidiaries of its Obligations. SECTION 3.7. SUBORDINATION OF RIGHTS. The Guarantor agrees that any right of subrogation or contribution which it may have against the Subsidiaries solely as a result of any payment or performance hereunder is hereby fully subordinated to the rights of the Authority hereunder and under the Transaction Agreements and that the Guarantor shall not recover or seek to recover any payment made by it hereunder from the Subsidiaries until the Subsidiaries and the Guarantor shall have fully and satisfactorily paid or performed and discharged the Obligations giving rise to a claim under this Guaranty. SECTION 3.8. SEPARATE OBLIGATIONS: REINSTATEMENT. The obligations of the Guarantor to make any payment or to perform and discharge any other duties, agreements, covenants, undertakings or obligations hereunder shall (1) to the extent permitted by Applicable Law, constitute separate and independent obligations of the Guarantor from its other obligations under this Guaranty, (2) give rise to separate and independent causes of action against the Guarantor and (3) apply irrespective of any indulgence granted from time to time by the Authority. The Guarantor agrees that this Guaranty shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of the Subsidiaries is rescinded or must be otherwise restored by the Authority, whether as a result of any proceedings in bankruptcy, reorganization or similar proceeding, unless such rescission or restoration is pursuant to the terms of the Agreements, or any applicable Transaction Agreement or the Subsidiaries' enforcement of such terms under Applicable Law. SECTION 3.9. TERM. This Guaranty shall remain in full force and effect from the date of execution and delivery hereof until all of the Obligations of the Subsidiaries have been fully paid and performed. 10 ARTICLE IV GENERAL COVENANTS SECTION 4.1. MAINTENANCE OF CORPORATE EXISTENCE. (A) Consolidation, Merger, Sale or Transfer. The Guarantor covenants that during the term of this Guaranty it will maintain its corporate existence, will not dissolve or otherwise dispose of all or substantially all of its assets and will not consolidate with or merge into another entity or permit one or more other entities to consolidate with or merge into it unless the successor is the Guarantor and the conditions contained in clause (2) below are satisfied; provided, however, that the Guarantor may consolidate with or merge into another entity, or permit one or more other entities to consolidate with or merge into it, or sell or otherwise transfer to another entity all or substantially all of its assets as an entirety and thereafter dissolve if (1) the successor entity (if other than the Guarantor) (a) assumes in writing all the obligations of the Guarantor hereunder and, if required by law, is duly qualified to do business in the State, and (b) delivers to the Authority an opinion of counsel to the effect that its obligations under this Guaranty are legal, valid, binding and enforceable subject to applicable bankruptcy and similar insolvency or moratorium laws, and (2) any such transaction does not result in a Material Decline in Credit Standing of the Guarantor, as defined in Section 9.1 of the Management Services Agreement or if such transaction results in a Material Decline in Credit Standing of the Guarantor, as defined in Section 9.1 of the Management Services Agreement, the Successor Guarantor provided credit enhancement as required by Section 9.1 of the Management Services Agreement. (B) Continuance of Obligations. If a consolidation, merger or sale or other transfer is made as permitted by this Section 4.1, the provisions of this Section 4.1 shall continue in full force and effect and no further consolidation, merger or sale or other transfer shall be made except in compliance with the provisions of this Section 4.1. No such consolidation, merger or sale or other transfer shall have the effect of releasing the initial Guarantor from its liability hereunder unless a successor entity has assumed responsibility for this Guaranty as provided in this Section 4.1. and if such transaction results in a Material Decline in Credit Standing of the Guarantor as defined in Section 9.1 of the Management Services Agreement, the Successor Guarantor shall provide credit enhancement as required by Section 9.1 of the Management Services Agreement. SECTION 4.2. ASSIGNMENT. Without the prior written consent of the Authority, this Agreement may not be assigned by the Guarantor, except pursuant to Section 4.1 hereof. SECTION 4.3. QUALIFICATION IN STATE. The Guarantor agrees that, so long as this Guaranty is in effect, if required by law, the Guarantor will be duly qualified to do business in the State. 11 SECTION 4.4. CONSENT TO JURISDICTION. The Guarantor irrevocably: (1) agrees that any suit, action or other legal proceeding arising out of this Guaranty shall be brought in the courts of the State of New York; (2) consents to the jurisdiction of such court in any such suit, action or proceeding; (3) waives any objection which it may have to the laying of the jurisdiction of any such suit, action or proceeding in any of such courts. SECTION 4.5. BINDING EFFECT. This Guaranty shall inure to the benefit of the Authority and any successors and assigns to whom the Authority may assign its interests in the Agreements and shall be binding upon the Guarantor and its successors and assigns. SECTION 4.6. AMENDMENTS, CHANGES AND MODIFICATIONS. This Guaranty may not be amended, changed or modified or terminated and none of its provisions may be waived, except with the prior written consent of the Authority and of the Guarantor. SECTION 4.7. LIABILITY. It is understood and agreed to by the Authority that nothing contained herein shall create any obligation of or right to look to any director, officer, employee or stockholder of the Guarantor (or any affiliate thereof) for the satisfaction of any obligations hereunder, and no judgment, order or execution with respect to or in connection with this Guaranty shall be taken against any such director, officer, employee or stockholder. SECTION 4.8. NOTICES. Any notices or communications required or permitted hereunder shall be in writing and shall be sufficiently given if sent by registered or certified mail, return receipt requested, postage prepaid, delivered in person, or sent by nationally recognized overnight delivery service, signature required upon signed receipt, to the following addresses, or to such other addresses as any of the recipients may from time to time designate by notice given in writing. If to the Guarantor: MarketSpan Corporation 175 East Old Country Road Hicksville, New York 11801 Attn: Chief Executive Officer If to the Authority: Long Island Power Authority 333 Earle Ovington Boulevard Uniondale, New York 11553 Attention: Executive Director 12 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed in its name and on its behalf by its duly authorized officer as of the date first above written. MARKETSPAN CORPORATION as Guarantor By /s/ Joseph E. Fontana -------------------------------------- Name: Joseph E. Fontana Title: Vice President Accepted and Agreed to by: LONG ISLAND POWER AUTHORITY By: -------------------------- Name: Richard M. Kessel Title: Chairman 13 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be executed in its name and on its behalf by its duly authorized officer as of the date first above written. MARKETSPAN CORPORATION as Guarantor By -------------------------------------- Name: Title: Accepted and Agreed to by: LONG ISLAND POWER AUTHORITY By: /s/ Richard M. Kessel -------------------------- Name: Richard M. Kessel Title: Chairman EX-10.(F) 10 LIABILITIES UNDERTAKING AND INDEMNIFICATION AGREEMENT LIABILITIES UNDERTAKING AND INDEMNIFICATION AGREEMENT UNDERTAKING dated as of June 26, 1997 by LONG ISLAND LIGHTING COMPANY, a New York corporation ("LILCO") and MARKETSPAN ELECTRIC SERVICES LLC, a New York limited liability company formerly known as BL TD MANAGEMENT LLC, MARKETSPAN GENERATION LLC, a New York limited liability company formerly known as BL GENERATION LLC, MARKETSPAN TRADING SERVICES LLC, a New York limited liability company formerly known as BL ENERGY MANAGEMENT LLC, MARKETSPAN UTILITY SERVICES LLC, a New York limited liability company formerly known as BL UTILITY SERVICES LLC, MARKETSPAN GAS CORPORATION (DBA BROOKLYN UNION), a New York corporation formerly known as BL GAS, INC., MARKETSPAN CORPORATE SERVICES LLC, a New York limited liability company formerly known as BL CORPORATE SERVICES LLC and MARKETSPAN FINANCE CORPORATION (the "Transferee Subsidiaries"), in favor of LONG ISLAND POWER AUTHORITY, a corporate municipal instrumentality and political subdivision of the State of New York ("LIPA") and, as of the closing of the Merger Agreement (as herein defined), the LONG ISLAND LIGHTING COMPANY, a New York corporation (the "Surviving Corporation"). All references herein to the Surviving Corporation shall mean LILCO after the Effective Time (as defined in the Merger Agreement). All references herein to LILCO shall mean Long Island Lighting Company prior to the Effective Time. W I T N E S S E T H: WHEREAS, pursuant to an Agreement and Plan of Exchange and Merger (the "Merger Agreement") dated as of June 26, 1997 among Parent (used herein as therein defined), LILCO, LIPA and LIPA Acquisition Corp., a New York corporation ("LIPA Sub"), LIPA Sub is to merge with and into LILCO; WHEREAS, pursuant to the Merger Agreement, the assets and properties of LILCO set forth on Schedule A thereto are to be transferred to the Transferee Subsidiaries (the "Transferred Assets") and the balance of LILCO's assets and properties are to be retained by the Surviving Corporation (the "Retained Assets"); and WHEREAS, in partial consideration therefor, the Merger Agreement requires LILCO and each of the Transferee Subsidiaries to execute and deliver to LIPA and the Surviving Corporation this Undertaking; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which by LILCO and the Transferee Subsidiaries are hereby acknowledged, LILCO and the Transferee Subsidiaries hereby agree as follows: 1. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Merger Agreement. 2. LILCO and the Transferee Subsidiaries, jointly and severally, hereby undertake, assume and agree, subject to the limitations contained herein, to pay or discharge, when due: a. Unpaid debts, liabilities or obligations of Parent, LILCO, Surviving Corporation or the Transferee Subsidiaries relating to the Transferred Assets, including, without limitation, liabilities or obligations relating to the Transferred Assets resulting or arising from: (i) claims for personal injury or property damage, or (ii) non-performance of any contract, commitment or obligation imposed by law or otherwise; and b. Except as provided in Section 6.8 of the Generation Purchase Right Agreement, legal, accounting, investment banking, engineering and similar fees or other transaction expenses ("Transaction Expenses") incurred by Parent, LILCO or the Transferee Subsidiaries in connection with the Merger Agreement and the other Basic Agreements or the consummation of the transactions contemplated thereby; and c. Taxes as defined in Schedule D imposed on Parent, LILCO or the Transferee Subsidiaries or for which Parent, LILCO or the Transferee Subsidiaries are responsible pursuant to paragraphs 3 and 4 of Schedule D; and d. Liabilities or obligations of Parent, LILCO, Surviving Corporation or the Transferee Subsidiaries resulting or arising from any non-performance by Parent, LILCO or the Transferee Subsidiaries of any provision of the Merger Agreement or any other Basic Agreement; and e. Debts, liabilities or obligations incurred by Parent or the Transferee Subsidiaries after the Closing; and f. Liabilities or obligations of Parent, LILCO, Surviving Corporation or the Transferee Subsidiaries relating to severance, change of control or similar payments payable to executives of LILCO in connection with the Closing; and -2- g. Liabilities or obligations of Parent, LILCO, Surviving Corporation or the Transferee Subsidiaries relating to the indemnification of Persons who were officers or directors of LILCO prior to the Closing or relating to any proxy or registration statement issued by LILCO or The Brooklyn Union Gas Company or any affiliate or successor of either in connection with the transactions contemplated by the Merger Agreement; and h. Liabilities or obligations of Parent, LILCO, Surviving Corporation or the Transferee Subsidiaries relating to Company Dissenting Shares or any other shares of any Person exercising their rights under Section 910 of the NYBCL; and i. Liabilities (other than contingent liabilities) or obligations of Surviving Corporation which would not otherwise be liabilities or obligations assumed hereby by Parent and the Transferee Subsidiaries and which should have been, in accordance with GAAP, reflected on the Closing Date Balance Sheet but which were not so reflected; provided, however, that no claim may be made pursuant to this clause (i) later than fourteen months after the Closing Date; j. Liabilities or obligations of LILCO, Surviving Corporation or the Transferee Subsidiaries relating to or arising out of any filing or other submission by LILCO or the Transferee Subsidiaries with any Governmental Authority; and k. Liabilities or obligations of LIPA or LIPA Sub relating to or arising out of any information provided by LILCO or the Transferee Subsidiaries to LIPA in writing for inclusion in any filing or other submission by LIPA or LIPA Sub with any Governmental Authority or in any offering document prepared by LIPA or LIPA Sub in connection with any financing required to consummate the transactions contemplated by the Merger Agreement; and 1. Liabilities or obligations of Parent, LILCO, Surviving Corporation or the Transferee Subsidiaries relating to the debt Parent assumes pursuant to Section 2.1(h) of the Merger Agreement, the New Parent Preferred Stock issued pursuant to Section 1.4(d) of the Merger Agreement and any federal or state securities laws liabilities, including, without limitation, underwriter liability, related to such debt or New Parent Preferred Stock. -3- m. Liabilities (including, without limitation, underwriter liability) or obligations of Parent, LILCO, Surviving Corporation or Transferee Subsidiaries relating to or arising out of the (i) investment by the Exchange Agent of the Cash Purchase Price in Parent Common Stock and (ii) delivery by the Exchange Agent of the Parent Shares. 3. Notwithstanding anything to the contrary contained above, the debts, liabilities and obligations assumed by LILCO and the Transferee Subsidiaries shall not include any: a. Unpaid debts, liabilities or obligations of LIPA, LIPA Sub or the Surviving Corporation relating to the Retained Assets, including, without limitation, liabilities or obligations relating to the Retained Assets resulting or arising from: (i) claims for personal injury or property damage, or (ii) non-performance of any contract, commitment or obligation imposed by law or otherwise; or b. Transaction Expenses incurred by LIPA, LIPA Sub or the Surviving Corporation in connection with the Merger Agreement and the other Basic Agreements or the consummation of the transactions contemplated thereby; or c. Taxes as defined in Schedule D imposed on LIPA or LIPA Sub or for which LIPA or LIPA Sub are responsible pursuant to paragraph 4 of Schedule D; or d. Liabilities or obligations of LILCO or the Transferee Subsidiaries resulting or arising from any non-performance by LIPA, LIPA Sub or the Surviving Corporation of any provision of the Merger Agreement or the other Basic Agreements; or e. Liabilities or obligations of LIPA, LIPA Sub or the Surviving Corporation relating to the indemnification of Persons who are officers or directors of the Surviving Corporation or relating to any registration or official statement or other offering document issued by LIPA, LIPA Sub or the Surviving Corporation in connection with any financing required to consummate the transactions contemplated by the Merger Agreement; or f. Liabilities or obligations of LIPA, LIPA Sub or the Surviving Corporation arising under the Merger Agreement or any other Basic Agreement; or -4- g. Except as provided in Section 2(a), (c), (f), (g) and (i), debts, liabilities or obligations of LIPA, LIPA Sub or the Surviving Corporation relating to or arising out of acts or events occurring after the Closing. 4. Nothing contained herein shall require LILCO or any Transferee Subsidiary to pay or discharge any debt, liability or obligation to any third party expressly assumed hereby so long as LILCO or such Transferee Subsidiary shall in good faith contest or cause to be contested the amount or validity thereof (and perform their obligations (to the extent applicable) pursuant to Section 6 hereof), in which case LILCO or such Transferee Subsidiary, as the case may be, shall give LIPA and the Surviving Corporation written notice of its action and the basis therefor and keep LIPA and the Surviving Corporation informed of the progress and disposition thereof. 5. a. Other than as specifically stated above, neither LILCO nor any of the Transferee Subsidiaries assumes any debt, liability or obligation of the Surviving Corporation by this Undertaking, and it is expressly understood and agreed that all debts, liabilities and obligations not assumed hereunder by LILCO or the Transferee Subsidiaries shall remain the sole obligation of the Surviving Corporation, its successors and assigns and, subject to the provisions of Paragraph 5(b) herein, no person, firm or corporation other than LIPA and the Surviving Corporation shall have any rights under this Undertaking or the provisions contained herein. b. Effective upon the Closing Date, LILCO shall assign its rights, obligations and interests hereunder to the Parent. LILCO agrees that it will not transfer any of its assets to Parent or any of the Transferee Subsidiaries or to any of their respective Affiliates unless and until Parent shall have assumed all of LILCO's obligations hereunder. 6. a. LILCO and the Transferee Subsidiaries (jointly and severally, the "Indemnifying Party") shall indemnify and hold harmless LIPA and LIPA Sub, and their respective agents, representatives, employees, officers and directors (each individually, an "Indemnified Party" and collectively, the "Indemnified Parties") against any action, proceeding, claim, judgment, settlement, damage, loss, injury, cost or expense, including, without limitation, reasonable fees and expenses of attorneys and other professionals (collectively, "Loss"), arising out of or relating to any debt, liability or obligation assumed by LILCO and the Transferee Subsidiaries hereby. b. An Indemnified Party seeking indemnification pursuant to Section 6(a) herein with respect to a claim, action or proceeding shall give prompt notice to the Indemnifying Party -5- of the assertion of any claim, or the commencement of any action or proceeding, in respect of which indemnity may be sought hereunder; provided that the failure to give such notice shall not affect the Indemnified Party's rights to indemnification hereunder, except to the extent that the Indemnifying Party is actually prejudiced thereby. The Indemnifying Party shall be entitled to control the handling of any such claim and to defend or settle any such claim, in its or their sole discretion, with counsel of its own choosing that is reasonably acceptable to the Indemnified Party; provided, however, that, in the case of any such settlement, the Indemnifying Party shall obtain written release of all liability of the Indemnified Party, in form and substance reasonably acceptable to the Indemnified Party. Notwithstanding the foregoing, each Indemnified Party shall have the right to employ its own separate counsel in connection with, and to participate in (but, except as provided below, not control) the defense of, such claim, but the fees and expenses of such counsel incurred after notice from the Indemnifying Party of its assumption of the defense thereof shall be at the expense of such Indemnified Party unless: (i) the employment of counsel by such Indemnified Party has been authorized by the Indemnifying Party; (ii) counsel to such Indemnified Party shall have reasonably concluded that there may be a conflict on any significant issue between the Indemnifying Party and such Indemnified Party in the conduct of the defense of such claim; or (iii) the Indemnifying Party shall not in fact have employed counsel reasonably acceptable to the Indemnified Party to assume the defense of such claim within twenty (20) days following the receipt by the Indemnifying Party of the notice specified in the first sentence of this Section 6(b), in each of which cases the fees and expenses of counsel for such Indemnified Party shall be at the expense of the Indemnifying Party; provided, however, that, with respect to clauses (ii) and (iii) of this sentence, the Indemnifying Party shall not be obligated to pay the fees and expenses of more than one law firm, plus local counsel if necessary in each relevant jurisdiction, for all such Indemnified Parties with respect to any claims arising out of the same events or facts or the same series of events or facts. The Indemnifying Party shall not be entitled, without the consent of such Indemnified Party, to assume or control the defense of any claim as to which counsel to such Indemnified Party shall have reasonably made the conclusion that there may be a conflict on any significant issue between the Indemnifying -6- Party and such Indemnified Party in the conduct of the defense of such claim as set forth in clause (ii) above, provided that the foregoing limitation shall apply only with respect to those issues for which there may be such a conflict. 7. This Undertaking shall be governed by the laws of the State of New York. Any dispute with respect to the interpretation or enforcement hereof shall be submitted to an alternative dispute resolution procedure to be agreed by the parties. 8. All notices and other communications given or made pursuant to this Undertaking shall be given or made in accordance with Section 11.2 of the Merger Agreement. -7- IN WITNESS WHEREOF, this Undertaking has been executed as of the date first above written. LONG ISLAND LIGHTING COMPANY By: /s/ Dr. William J. Catacosinos ------------------------------ Name: Dr. William J. Catacosinos Title: Chief Executive Officer IN WITNESS WHEREOF, this Undertaking has been executed as of the 28th day of May, 1998. MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Joseph E. Fontana ------------------------------ Name: Joseph E. Fontana Title: Vice President MARKETSPAN GENERATION LLC By: /s/ Joseph E. Fontana ------------------------------ Name: Joseph E. Fontana Title: Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Joseph E. Fontana ------------------------------ Name: Joseph E. Fontana Title: Vice President MARKETSPAN GAS CORPORATION (DBA BROOKLYN UNION) By: /s/ Joseph E. Fontana ------------------------------ Name: Joseph E. Fontana Title: Vice President -8- MARKETSPAN CORPORATE SERVICES LLC By: /s/ Joseph E. Fontana ------------------------------ Name: Joseph E. Fontana Title: Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Joseph E. Fontana ------------------------------ Name: Joseph E. Fontana Title: Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Joseph E. Fontana ------------------------------ Name: Joseph E. Fontana Title: Vice President -9- EX-10.(G) 11 LIABILITIES UNDERTAKING AND INDEMNIFICATION AGREEMENT LIABILITIES UNDERTAKING AND INDEMNIFICATION AGREEMENT UNDERTAKING dated as of June 26, 1997 by LONG ISLAND POWER AUTHORITY, a corporate municipal instrumentality and political subdivision of the State of New York ("LIPA") and, as of the closing of the Merger Agreement (as herein defined), LONG ISLAND LIGHTING COMPANY, a New York corporation (the "Surviving Corporation"), in favor of LONG ISLAND LIGHTING COMPANY, a New York corporation ("LILCO"), any successors and assigns of LILCO pursuant to paragraph 5(b) herein and MARKETSPAN ELECTRIC SERVICES LLC, a New York limited liability company formerly known as BL TD MANAGEMENT LLC, MARKETSPAN GENERATION LLC, a New York limited liability company formerly known as BL GENERATION LLC, MARKETSPAN TRADING SERVICES LLC, a New York limited liability company formerly known as BL ENERGY MANAGEMENT LLC, MARKETSPAN UTILITY SERVICES LLC, a New York limited liability company formerly known as BL UTILITY SERVICES LLC, MARKETSPAN GAS CORPORATION (DBA BROOKLYN UNION), a New York corporation formerly known as BL GAS, INC., MARKETSPAN CORPORATE SERVICES LLC, a New York limited liability company formerly known as BL CORPORATE SERVICES LLC and MARKETSPAN FINANCE CORPORATION (the "Transferee Subsidiaries"). All references herein to the Surviving Corporation shall mean LILCO after the Effective Time (as defined in the Merger Agreement). All references herein to LILCO shall mean Long Island Lighting Company prior to the Effective Time. W I T N E S S E T H: WHEREAS, pursuant to an Agreement and Plan of Exchange and Merger (the "Merger Agreement") dated as of June 26, 1997 among Parent (used herein as therein defined), LILCO, LIPA and LIPA Acquisition Corp., a New York corporation ("LIPA Sub"), LIPA Sub is to merge with and into LILCO; WHEREAS, pursuant to the Merger Agreement, the assets and properties of LILCO set forth on Schedule A thereto are to be transferred to the Transferee Subsidiaries (the "Transferred Assets") and the balance of LILCO's assets and properties are to be retained by the Surviving Corporation (the "Retained Assets"); and WHEREAS, in partial consideration therefor, the Merger Agreement requires LIPA and the Surviving Corporation to execute and deliver to LILCO and to each of the Transferee Subsidiaries this Undertaking; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which by LIPA and the Surviving Corporation are hereby acknowledged, LIPA and the Surviving Corporation hereby agree as follows: 1. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Merger Agreement. 2. LIPA and the Surviving Corporation, jointly and severally, hereby undertake, assume and agree, subject to the limitations contained herein, to pay or discharge, when due any and all: a. Unpaid debts, liabilities or obligations of LIPA, LIPA Sub or the Surviving Corporation relating to the Retained Assets, including, without limitation, liabilities or obligations relating to the Retained Assets resulting or arising from: (i) claims for personal injury or property damage, or (ii) non-performance of any contract, commitment or obligation imposed by law or otherwise; and b. Legal, accounting, investment banking, engineering and similar fees, or other transaction expenses ("Transaction Expenses") incurred by LIPA, LIPA Sub or the Surviving Corporation in connection with the Merger Agreement and the other Basic Agreements or the consummation of the transactions contemplated thereby; and c. Taxes as defined in Schedule D imposed on LIPA or LIPA Sub or for which LIPA or LIPA Sub are responsible pursuant to paragraph 4 of Schedule D; and d. Liabilities or obligations of LIPA, LIPA Sub or the Surviving Corporation resulting or arising from any non-performance by LIPA, LIPA Sub or the Surviving Corporation of any provision of the Merger Agreement or the other Basic Agreements; and e. Liabilities or obligations of LIPA, LIPA Sub or the Surviving Corporation relating to the indemnification of Persons who are officers or directors of the Surviving Corporation or relating to any registration or official statement or other offering document issued by LIPA, LIPA Sub or the Surviving Corporation in connection with any financing required to consummate the transactions contemplated by the Merger Agreement; and -2- f. Debts, liabilities or obligations of LIPA, LIPA Sub or the Surviving Corporation relating to or arising out of acts or events occurring after the Closing. 3. Notwithstanding anything to the contrary contained above, the debts, liabilities and obligations assumed by LIPA and the Surviving Corporation shall not include any: a. Unpaid debts, liabilities or obligations of Parent, LILCO or the Transferee Subsidiaries relating to the Transferred Assets, including, without limitation, liabilities or obligations relating to the Transferred Assets resulting or arising from: (i) claims for personal injury or property damage, or (ii) non-performance of any contract, commitment or obligation imposed by law or otherwise; or b. Except as provided in Section 6.8 of the Generation Purchase Right Agreement, Transaction Expenses incurred by Parent, LILCO or the Transferee Subsidiaries in connection with the Merger Agreement or the other Basic Agreements or the consummation of the transactions contemplated thereby; or c. Taxes as defined in Schedule D imposed on Parent, LILCO or the Transferee Subsidiaries or for which Parent, LILCO or the Transferee Subsidiaries are responsible pursuant to paragraphs 3 and 4 of Schedule D; or d. Liabilities or obligations of LILCO or the Transferee Subsidiaries resulting or arising from any non-performance by LILCO or the Transferee Subsidiaries of any provision of the Merger Agreement or any other Basic Agreement; or e. Liabilities or obligations of Parent, LILCO or the Transferee Subsidiaries arising under the Merger Agreement or the other Basic Agreements; or f. Debts, liabilities or obligations incurred by Parent, LILCO or the Transferee Subsidiaries after the Closing; or g. Liabilities or obligations of Parent, LILCO or the Transferee Subsidiaries relating to severance, change of control or similar payments payable to executives of LILCO in connection with the Closing; or h. Liabilities or obligations of Parent, LILCO or the Transferee Subsidiaries relating to the indemnification of Persons who were officers or directors of LILCO -3- prior to the Closing or relating to any proxy or registration statement issued by LILCO or The Brooklyn Union Gas Company or any affiliate or successor of either in connection with the transactions contemplated by the Merger Agreement; or i. Liabilities or obligations of Parent, LILCO or the Transferee Subsidiaries relating to Company Dissenting Shares or any other shares of any Person exercising their rights under Section 410 of the NYBCL; or j. Liabilities or obligations of LILCO or the Transferee Subsidiaries relating to or arising out of any filing or other submission by Parent, LILCO or the Transferee Subsidiaries with any Governmental Authority; or k. Liabilities or obligations of LIPA or LIPA Sub relating to or arising out of any information provided by Parent, LILCO or the Transferee Subsidiaries to LIPA in writing for inclusion in any filing or other submission by LIPA or LIPA Sub with any Governmental Authority or in any offering document prepared by LIPA or LIPA Sub in connection with any financing required to consummate the transactions contemplated by the Merger Agreement. 4. Nothing contained herein shall require LIPA or the Surviving Corporation to pay or discharge any debt, liability or obligation to any third party expressly assumed hereby so long as LIPA or the Surviving Corporation shall in good faith contest or cause to be contested the amount or validity thereof (and perform their obligations (to the extent applicable) pursuant to Section 5 hereof), in which case LIPA or the Surviving Corporation, as the case may be, shall give LILCO and the Transferee Subsidiaries written notice of its action and the basis therefor and keep LILCO and the Transferee Subsidiaries informed of the progress and disposition thereof. 5. a. Other than as specifically stated above, neither LIPA nor the Surviving Corporation assumes any debt, liability or obligation of LILCO by this Undertaking, and it is expressly understood and agreed that all debts, liabilities and obligations not assumed hereunder by LIPA or the Surviving Corporation shall remain the sole obligation of LILCO, its successors and assigns and, subject to the provisions of Paragraph 5(b) herein, no person, firm or corporation other than LILCO and the Transferee Subsidiaries shall have any rights under this Undertaking or the provisions contained herein. b. Effective upon the Closing Date, LILCO may assign its rights, obligations and interests hereunder to the Parent or any affiliate thereof. -4- 6. a. LIPA and the Surviving Corporation (jointly and severally, the "Indemnifying Party") shall indemnify and hold harmless LILCO and the Transferee Subsidiaries, and their respective agents, representatives, employees, officers and directors (each individually, an "Indemnified Party" and collectively, the "Indemnified Parties") against any action, proceeding, claim, judgment, settlement, damage, loss, injury, cost or expense, including, without limitation, reasonable fees and expenses of attorneys and other professionals (collectively, "Loss"), arising out of or relating to any debt, liability or obligation assumed by LIPA and the Surviving Corporation hereby. b. An Indemnified Party seeking indemnification pursuant to Section 6(a) herein with respect to a claim, action or proceeding shall give prompt notice to the Indemnifying Party of the assertion of any claim, or the commencement of any action or proceeding, in respect of which indemnity may be sought hereunder; provided that the failure to give such notice shall not affect the Indemnified Party's rights to indemnification hereunder, except to the extent that the Indemnifying Party is actually prejudiced thereby. The Indemnifying Party shall be entitled to control the handling of any such claim and to defend or settle any such claim, in its or their sole discretion, with counsel of its own choosing that is reasonably acceptable to the Indemnified Party; provided, however, that, in the case of any such settlement, the Indemnifying Party shall obtain written release of all liability of the Indemnified Party, in form and substance reasonably acceptable to the Indemnified Party. Notwithstanding the foregoing, each Indemnified Party shall have the right to employ its own separate counsel in connection with, and to participate in (but, except as provided below, not control) the defense of, such claim, but the fees and expenses of such counsel incurred after notice from the Indemnifying Party of its assumption of the defense thereof shall be at the expense of such Indemnified Party unless: (i) the employment of counsel by such Indemnified Party has been authorized by the Indemnifying Party; (ii) counsel to such Indemnified Party shall have reasonably concluded that there may be a conflict on any significant issue between the Indemnifying Party and such Indemnified Party in the conduct of the defense of such claim; or (iii) the Indemnifying Party shall not in fact have employed counsel reasonably acceptable to the Indemnified Party to assume the defense of such claim within twenty (20) days following the receipt by the Indemnifying Party of the notice specified in the first sentence of this Section 6(b), in each of which -5- cases the fees and expenses of counsel for such Indemnified Party shall be at the expense of the Indemnifying Party; provided, however, that, with respect to clauses (ii) and (iii) of this sentence, the Indemnifying Party shall not be obligated to pay the fees and expenses of more than one law firm, plus local counsel if necessary in each relevant jurisdiction, for all such Indemnified Parties with respect to any claims arising out of the same events or facts or the same series of events or facts. The Indemnifying Party shall not be entitled, without the consent of such Indemnified Party, to assume or control the defense of any claim as to which counsel to such Indemnified Party shall have reasonably made the conclusion that there may be a conflict on any significant issue between the Indemnifying Party and such Indemnified Party in the conduct of the defense of such claim as set forth in clause (ii) above, provided that the foregoing limitation shall apply only with respect to those issues for which there may be such a conflict. 7. This Undertaking shall be governed by the laws of the State of New York. Any dispute with respect to the interpretation or enforcement hereof shall be submitted to an alternative dispute resolution procedure to be agreed by the parties. 8. All notices and other communications given or made pursuant to this Undertaking shall be given or made in accordance with Section 11.2 of the Merger Agreement. -6- IN WITNESS WHEREOF, this Undertaking has been executed as of the date first above written. LONG ISLAND POWER AUTHORITY By: /s/ Richard M. Kessel ------------------------------- Name: Richard M. Kessel Title: Chairman By: /s/ Patrick Foye ------------------------------- Name: Patrick Foye Title: Deputy Chairman IN WITNESS WHEREOF, this Undertaking has been executed as of the 28th day of May, 1998. LONG ISLAND LIGHTING COMPANY By: /s/ Seth Hulkower -------------------------------- Name: Seth Hulkower Title: Executive Director -7- EX-10.(H) 12 ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of May 28, 1998 (this "ASSIGNMENT AGREEMENT"), by and between LONG ISLAND LIGHTING COMPANY, a New York corporation ("LILCO"), MARKETSPAN TRADING SERVICES LLC, a New York limited liability company formerly known as BL ENERGY MANAGEMENT LLC ("Energy Manager") and MARKETSPAN CORPORATION, a New York corporation formerly known as BL HOLDING CORP. ("MKT"), and acknowledged and agreed to by LONG ISLAND POWER AUTHORITY, a corporate municipal instrumentality and political subdivision of the State of New York ("LIPA") and LIPA ACQUISITION CORP., a New York corporation and a wholly owned subsidiary of LIPA ("LIPA Sub"). W I T N E S S E T H WHEREAS, LIPA, LILCO, MKT and LIPA Sub are parties to that certain Agreement and Plan of Merger, dated as of June 26, 1997 (the "Merger Agreement"); WHEREAS, in connection with the transactions contemplated by the Merger Agreement, LIPA and LILCO entered into an Energy Management Agreement, dated as of June 26, 1997 (as amended and supplemented up to and including the Closing Date as therein defined, the "EMA"), Section 13.3 of which provided that, effective upon the Closing Date, LILCO shall assign all of its rights, obligations and interests thereunder to MKT or any affiliate thereof; WHEREAS, MKT hereby directs LILCO to assign to Energy Manager, its wholly owned subsidiary, all rights, obligations and interests under the EMA to be assigned pursuant to Section 13.3 thereof; WHEREAS, in connection with the Merger Agreement and in accordance with the requirements of Section 13.3 of the EMA, MKT will, prior to the Effective Time (as defined in the Merger Agreement), execute a Guaranty Agreement, in substantially the form of the Guaranty Agreement attached to the Merger Agreement as Exhibit E, pursuant to which MKT will, among other things, guarantee the obligations of Energy Manager under the EMA; NOW THEREFORE, in consideration of the premises, the covenants and agreements contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1 . Definitions. Capitalized terms used herein and not otherwise defined herein have the respective meanings given in the Merger Agreement. 2. Assignment by LILCO to Energy Manager. Pursuant to the direction of MKT, LILCO hereby assigns to Energy Manager all of its rights, obligations and interests under the EMA. 1 3. Assumption of Liabilities and Obligations by Energy Manager. Energy Manager hereby agrees to assume all liabilities and obligations of LILCO under the EMA. 4. Substitution of Energy Manager Where LILCO Appears. The EMA is hereby deemed amended, such that Energy Manager is substituted for LILCO as a named party, as the context may indicate, for all purposes under such Agreement and all references to LILCO in such Agreement shall be deemed to refer to Energy Manager. 5. Acknowledgment by LIPA and LIPA Sub of Assumption, Assignment and Substitution. LIPA and LIPA Sub each hereby acknowledge and confirm that all of the liabilities, obligations, benefits and rights of LILCO under the EMA shall inure hereby to the benefit of Energy Manager under such Agreement. 6. Counterparts. This Assignment Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, LILCO, LIPA, LIPA Sub, MKT and Energy Manager have caused this Assignment Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. LONG ISLAND LIGHTING COMPANY MARKETSPAN TRADING SERVICES LLC By: /s/ Leonard P. Novello By: /s/ Joseph E. Fontana ---------------------------------- -------------------------------- Name: Leonard P. Novello Name: Joseph E. Fontana Title: Senior Vice President/ Title: Vice President General Counsel MARKETSPAN CORPORATION By: /s/ Joseph E. Fontana ---------------------------------- Name: Joseph E. Fontana Title: Vice President Acknowledged and Agreed to by: LONG ISLAND POWER AUTHORITY LIPA ACQUISITION CORP. By: /s/ Seth Hulkower By: /s/ Seth Hulkower ---------------------------------- -------------------------------- Name: Seth Hulkower Name: Seth Hulkower Title: Executive Director Title: Executive Director 2 EX-10.(I) 13 ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of May 28, 1998 (this "ASSIGNMENT AGREEMENT"), by and between LONG ISLAND LIGHTING COMPANY, a New York corporation ("LILCO"), MARKETSPAN ELECTRIC SERVICES LLC, a New York limited liability company formerly known as BL TD MANAGEMENT LLC ("Manager") and MARKETSPAN CORPORATION, a New York corporation formerly known as BL HOLDING CORP. ("MKT"), and acknowledged and agreed to by LONG ISLAND POWER AUTHORITY, a corporate municipal instrumentality and political subdivision of the State of New York ("LIPA") and LIPA ACQUISITION CORP., a New York corporation and a wholly owned subsidiary of LIPA ("LIPA Sub"). WITNESSETH WHEREAS, LIPA, LILCO, MKT and LIPA Sub are parties to that certain Agreement and Plan of Merger, dated as of June 26, 1997 (the "Merger Agreement"); WHEREAS, in connection with the transactions contemplated by the Merger Agreement, LIPA and LILCO entered into a Management Services Agreement, dated as of June 26, 1997 (as amended and supplemented up to and including the Closing Date as therein defined, the "MSA"), Section 9.7 of which provided that, effective upon the Closing Date, LILCO shall assign all of its rights, obligations and interests thereunder to MKT or any affiliate thereof; WHEREAS, MKT hereby directs LILCO to assign to Manager, its wholly owned subsidiary, all rights, obligations and interests under the MSA to be assigned pursuant to Section 9.7 thereof; WHEREAS, in connection with the Merger Agreement and in accordance with the requirements of Section 9.7 of the MSA, MKT will, prior to the Effective Time (as defined in the Merger Agreement), execute a Guaranty Agreement, in substantially the form of the Guaranty Agreement attached to the Merger Agreement as Exhibit E, pursuant to which MKT will, among other things, guarantee the obligations of Manager under the MSA; NOW THEREFORE, in consideration of the premises, the covenants and agreements contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise defined herein have the respective meanings given in the Merger Agreement. 2. Assignment by LILCO to Manager. Pursuant to the direction of MKT, LILCO hereby assigns to Manager all of its rights, obligations and interests under the MSA. 3. Assumption of Liabilities and Obligations by Manager. Manager hereby agrees to assume all liabilities and obligations of LILCO under the MSA. 1 4. Substitution of Manager Where LILCO Appears. The MSA is hereby deemed amended, such that Manager is substituted for LILCO as a named party, as the context may indicate, for all purposes under the MSA and all references to LILCO in the MSA shall be deemed to refer to Manager. 5. Acknowledgment by LIPA and LIPA Sub of Assumption, Assignment and Substitution. LIPA and LIPA Sub each hereby acknowledge and confirm that all of the liabilities, obligations, benefits and rights of LILCO under the MSA shall inure hereby to the benefit of Manager under the MSA. 6. Counterparts. This Assignment Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, LILCO, LIPA, LIPA Sub, MKT and Manager have caused this Assignment Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. LONG ISLAND LIGHTING COMPANY MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Leonard P. Novello By: /s/ Joseph E. Fontana -------------------------------- --------------------------- Name: Leonard P. Novello Name: Joseph E. Fontana Title: Senior Vice President/General Counsel Title: Vice President MARKETSPAN CORPORATION By: /s/ Joseph E. Fontana ------------------------------- Name: Joseph E. Fontana Title: Vice President Acknowledged and Agreed to by: LONG ISLAND POWER AUTHORITY LIPA ACQUISITION CORP. By: /s/ Seth Hulkower By: /s/ Seth Hulkower ------------------------------- ----------------------------- Name: Seth Hulkower Name: Seth Hulkower Title: Executive Director Title: Executive Director 2 EX-10.(J) 14 ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of May 28, 1998 (this "ASSIGNMENT AGREEMENT"), by and between LONG ISLAND LIGHTING COMPANY, a New York corporation ("LILCO"), MARKETSPAN GENERATION LLC, a New York limited liability company formerly known as BL GENERATION LLC ("Genco") and MARKETSPAN CORPORATION, a New York corporation formerly known as BL HOLDING CORP. ("MKT"), and acknowledged and agreed to by LONG ISLAND POWER AUTHORITY, a corporate municipal instrumentality and political subdivision of the State of New York ("LIPA") and LIPA ACQUISITION CORP., a New York corporation and a wholly owned subsidiary of LIPA ("LIPA Sub"). WITNESSETH WHEREAS, LIPA, LILCO, MKT and LIPA Sub are parties to that certain Agreement and Plan of Merger, dated as of June 26, 1997 (the "Merger Agreement"); WHEREAS, in connection with the transactions contemplated by the Merger Agreement, LIPA and LILCO entered into a Power Supply Agreement, dated as of June 26, 1997 (as amended and supplemented up to and including the Closing Date as therein defined, the "PSA"), Section 21.3 of which provided that, effective upon the Closing Date, LILCO shall assign all of its rights, obligations and interests thereunder to MKT or any affiliate thereof; WHEREAS, MKT hereby directs LILCO to assign to Genco, its wholly-owned subsidiary, all rights, obligations and interests under the PSA to be assigned pursuant to Section 21.3 thereof; WHEREAS, in connection with the Merger Agreement and in accordance with the requirements of Section 21.3 of the PSA, MKT will, prior to the Effective Time (as defined in the Merger Agreement), execute a Guaranty Agreement, in substantially the form of the Guaranty Agreement attached to the Merger Agreement as Exhibit E, pursuant to which MKT will, among other things, guarantee the obligations of Genco under the PSA; NOW THEREFORE, in consideration of the premises, the covenants and agreements contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise defined herein have the respective meanings given in the Merger Agreement. 2. Assignment by LILCO to Genco. Pursuant to the direction of MKT, LILCO hereby assigns to Genco all of its rights, obligations and interests under the PSA. 1 3. Assumption of Liabilities and Obligations by Genco. Genco hereby agrees to assume all liabilities and obligations of LILCO under the PSA. 4. Substitution of Genco Where LILCO Appears. The PSA is hereby deemed amended, such that Genco is substituted for LILCO as a named party, as the context may indicate, for all purposes under the PSA and all references to LILCO in the PSA shall be deemed to refer to Genco. 5. Acknowledgment by LIPA and LIPA Sub of Assumption, Assignment and Substitution. LIPA and LIPA Sub each hereby acknowledge and confirm that all of the liabilities, obligations, benefits and rights of LILCO under the PSA shall inure hereby to the benefit of Genco under the PSA. 6. Counterparts. This Assignment Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, LILCO, LIPA, LIPA Sub, MKT and Genco have caused this Assignment Agreement to be signed by their respective officers thereunto duty authorized as of the date first written above. LONG ISLAND LIGHTING COMPANY MARKETSPAN GENERATION LLC By: /s/ Leonard P. Novello By: /s/ Joseph E. Fontana _______________________ _______________________ Name: Leonard P. Novello Name: Joseph E. Fontana Title: Senior Vice President/General Counsel Tile: Vice President MARKETSPAN CORPORATION By: /s/ Joseph E. Fontana ______________________ Name: Joseph E. Fontana Title: Vice President Acknowledged and Agreed to by: LONG ISLAND POWER AUTHORITY LIPA ACQUISITION CORP. By: /s/ Seth Hulkower By: /s/ Seth Hulkower _______________________ _______________________ Name: Seth Hulkower Name: Seth Hulkower Title: Executive Director Title: Executive Director 2 EX-10.(L) 15 ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT, dated as of May 28, 1998 (this "ASSIGNMENT AGREEMENT"), by and among LONG ISLAND POWER AUTHORITY, a corporate municipal instrumentality and political subdivision of the State of New York ("LIPA"), LIPA ACQUISITION CORP., a New York corporation and a wholly owned subsidiary of LIPA ("Acquisition Corp."), and MARKETSPAN CORPORATION a New York corporation, formerly named BL Holding Corp. ("Parent"). WITNESSETH WHEREAS, LIPA, Acquisition Corp., Long Island Lighting Company ("LILCO") and Parent are parties to that certain Agreement and Plan of Merger, dated as of June 26, 1997, as supplemented and/or amended through the date hereof (as so supplemented and/or amended, the "Merger Agreement"); WHEREAS, in connection with the transactions contemplated by the Merger Agreement, LIPA and LILCO entered into a Management Services Agreement, dated as of June 26, 1997, as supplemented through the date hereof (as so supplemented, the "MSA"), a Power Supply Agreement, dated as of June 26, 1997, as supplemented through the date hereof (as so supplemented, the "PSA"), an Energy Management Agreement, dated as of June 26, 1997, as supplemented through the date hereof (as so supplemented, the "EMA") (the MSA, the PSA and the EMA are collectively referred to herein as the "Operating Agreements"); WHEREAS, in connection with the Merger Agreement, LILCO executed a Liabilities Undertaking and Indemnification Agreement, dated as of June 26, 1997 (the "Parent Liabilities Undertaking"), and prior to the Effective Time (as defined in the Merger Agreement), certain Transferee Subsidiaries (as defined in the Merger Agreement) will also have executed a substantially similar Liabilities Undertaking and Indemnification Agreement (together with the Parent Liabilities Undertaking, the "MarketSpan Parties Liabilities Undertaking"); WHEREAS, in connection with the Merger Agreement, LIPA executed a Liabilities Undertaking and Indemnification Agreement, dated as of June 26, 1997 (the "LIPA Liabilities Undertaking"); WHEREAS, in connection with the Merger Agreement, Parent will, prior to the Effective Time, execute a Guaranty Agreement, in substantially the form of the Guaranty Agreement attached to the Merger Agreement as Exhibit E; WHEREAS, in connection with the Merger Agreement, certain rights and obligations were granted to LIPA and undertaken by LIPA, respectively, pursuant to Schedule B (Principles and Procedures for Finalizing the Transferred Assets Schedule), Schedule E (Employment Matters), and Schedule F (Grant of Future Rights); WHEREAS, pursuant to the Merger Agreement, Acquisition Corp. will merge with and into LILCO (the "Merger"), with the result that LILCO will be the surviving corporation and become a wholly owned subsidiary of LIPA; NOW THEREFORE, in consideration of the premises, the covenants and agreements contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise defined herein have the respective meanings given in the Merger Agreement. 2. Assumption of LIPA Repayment Obligation. Acquisition Corp. agrees to assume, effective as of the Effective Time, and agrees to pay in full, all of LIPA's obligations to repay amounts advanced by the State of New York and the Power Authority of the State of New York prior to the Effective Time, being an aggregate amount of approximately $28 million. 3. Assumption of Liabilities and Obligations by Acquisition Corp. Acquisition Corp. agrees to assume, effective as of the Effective Time, all liabilities and obligations of LIPA under each of the Operating Agreements, the LIPA Liabilities Undertaking, Paragraph 5 of Schedule B, Schedule E, and Schedule F (collectively, the "Assumed Liabilities"). 4. Assignment by LIPA to Acquisition Corp. LIPA hereby assigns to Acquisition Corp. each of the Operating Agreements. 5. Addition of Acquisition Corp. Where LIPA Appears. (a) The Merger Agreement, including each of the Schedules thereto, each of the Operating Agreements, the LIPA Liabilities Undertaking, the MarketSpan Parties Liabilities Undertaking, and the Guaranty is each hereby deemed amended, effective as of the Effective Time, such that Acquisition Corp. is added as a named party in addition to LIPA, in each case as the context may indicate, for all purposes under such Agreements and all references to LIPA in such Agreements shall be deemed to refer to Acquisition Corp. as well. 6. Acknowledgment of Acquisition Corp. Assumption, Assignment and Substitution; Release. Parent hereby acknowledges and confirms that, effective as of the Effective Time, all of the liabilities, obligations, benefits and rights of LIPA under the Operating Agreements, the BHC Parties Liabilities Undertaking, and the Guaranty shall inure to the benefit of Acquisition Corp. under those Agreements. Parent also hereby agrees to release LIPA from any and all obligations under the Operating Agreements and with respect to the Assumed Liabilities and to look only to LILCO in respect thereof after the Effective Time. 7. Counterparts. This Assignment Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 8. Survival. This Assignment Agreement shall survive the Closing. IN WITNESS WHEREOF, LIPA, Acquisition Corp., and Parent have caused this Assignment Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. LONG ISLAND POWER AUTHORITY By: /s/ [illegible] ------------------------------- LIPA ACQUISITION CORP. By: /s/ [illegible] ------------------------------- MARKETSPAN CORPORATION By: /s/ [illegible] ------------------------------- 3 EX-10.(M) 16 COLLECTIONS ALLOCATION AND SEGREGATION AGREEMENT - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- COLLECTIONS ALLOCATION AND SEGREGATION AGREEMENT among LONG ISLAND POWER AUTHORITY, LIPA ACQUISITION CORP., and MARKETSPAN TRADING SERVICES, LLC, as Manager Dated as of May 28, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- COLLECTIONS ALLOCATION AND SEGREGATION AGREEMENT This COLLECTIONS ALLOCATION AND SEGREGATION AGREEMENT, dated as of May 28, 1998 (this "Agreement"), by and among LONG ISLAND POWER AUTHORITY, a corporate municipal instrumentality and political subdivision of the State of New York (the "Authority"), party of the first part, LIPA ACQUISITION CORP., a corporation organized and existing under the laws of the State of New York (the "Subsidiary"), party of the second part, MARKETSPAN CORPORATION, a corporation organized and existing under the laws of the State of New York ("MarketSpan"), party of the third part, and MARKETSPAN ENERGY MANAGEMENT, LLC, a limited liability company organized and existing under the laws of the State of New York, as the successor Manager under the Management Services Agreement mentioned hereinbelow (the "Manager"), party of the fourth part (capitalized terms used herein and not otherwise explicitly defined have the meanings ascribed to them in the Management Services Agreement); WITNESSETH: WHEREAS, the Authority and Long Island Lighting Company ("LILCO") entered into a certain Management Services Agreement, dated as of June 26, 1997, (as amended and supplemented the "Management Services Agreement"), under which LILCO, as Manager, agreed (i) to operate and maintain the T&D System, and (ii) in connection with the aforementioned duties and responsibilities, to collect certain amounts due and owing to the Authority; and WHEREAS, on May 13, 1998 the Authority adopted its Electric System General Revenue Bond Resolution (as amended and supplemented from time to time, the "Bond Resolution"), pursuant to which, among other things, the Authority may issue its bonds, notes or other evidences of indebtedness from time to time, including $3,449,527,638.05 aggregate initial principal amount of Electric System General Revenue Bonds, Series 1998A (the "Series 1998A Bonds"); and WHEREAS, on May 20, 1998 the Authority adopted its Electric System General Subordinated Revenue Bond Resolution, pursuant to which, among other things, the Authority may issue its bonds, notes or other evidences of indebtedness from time to time, including $1,500,000,000 aggregate principal amount of Electric System Subordinated Revenue Bonds, Series 1, 2, 3, 4, 5 and 6 (the "Initial Subordinated Indebtedness" and, together with the Series 1998A Bonds, the "1998 Bonds"); and WHEREAS, in conjunction with the issuance of the 1998 Bonds, the Subsidiary will succeed to the rights and interests of the Authority under the Management Services Agreement and MarketSpan Energy Management, LLC will succeed LILCO as Manager under the Management Services Agreement; and WHEREAS, under the Management Services Agreement, (a) the Manager is required to use its best efforts to collect on a timely basis (i) all amounts due Subsidiary for service provided to customers, and for other services, in accordance with the Schedule of Rates for the periods in which services were provided, and (ii) other monies owed to the Subsidiary pursuant to the operation of the T&D System; and (b) it is expected that gas customers of MarketSpan (or another Affiliate of the Manager) and the T&D System electric customers will be billed in a single statement and, in the event any electric customer who is also a gas customer shall pay less than all of the amount due at any time under a single statement, the amounts collected shall be applied pro rata between amounts owed by such customer with respect to electric service and gas service; and WHEREAS, the parties hereto desire to clarify and implement provisions of the Management Services Agreement relating to the allocation and segregation of (i) amounts due the Subsidiary and collected by the Manager or any Subcontractor pursuant to the Management Services Agreement, and (ii) amounts due MarketSpan (or other Affiliates of the Manager) and collected by the Manager or any Subcontractor in respect of gas service; NOW, THEREFORE, the Authority, the Subsidiary, MarketSpan and the Manager agree as follows: Section 1. Daily Customer Remittances. Subject to Section 3 of this Agreement, all amounts remitted to the Manager or any Subcontractor by T&D System electric customers (including combination electric and gas customers) shall be (a) segregated from all other funds within the custody, control or possession of the Manager or such Subcontractor, and (b) on the Business Day of such collection, deposited (for overnight clearing, if in the form of checks) into a separate bank account, established by and for the sole benefit of the Subsidiary (except to the extent of MarketSpan's interest in the Gas Payment or Gas Overpayment, as defined below), into which only such remittances are deposited from time to time (such account hereinafter referred to as the "Customer Remittance Account"). Section 2. Disbursements from Customer Remittance Account. Not later than 10:00 A.M., New York time, on each Business Day, the Manager shall (i) calculate the proportion of remittances (i.e., cash and the amount drawn as checks) in respect of electric service to total remittances received by the Manager during the preceding five (5) Business Days (on each such date of calculation, the "Five-Day Electric Percentage"), (ii) transfer from the Customer Remittance Account to the Revenue Fund established and maintained pursuant to the Bond Resolution (the "Revenue Fund") an amount equal to the product of (x) the amount deposited on the preceding Business Day into the Customer Remittance Account ("Yesterday's Receipts") times (y) the Five-Day Electric Percentage (the "Revenue Fund Payment"), and (iii) transfer from the Customer Remittance Account, to or upon the order of MarketSpan, the excess (if any) of Yesterday's Receipts over the Revenue Fund Payment (the "Gas Payment"). Section 3. Weekly Reconciliation and True-Up. (a) On each Business Day, the Manager shall determine, in accordance with the Management Services Agreement, (i) the -2- amount deposited in the Customer Remittance Account on the preceding Business Day constituting actual collections in respect of electric service, and (ii) the amount deposited in the Customer Remittance Account on the preceding Business Day constituting actual collections in respect of gas service. (b) On Monday of each week (or, if such Monday is not a Business Day, on the immediately succeeding Business Day), before any cash collected by the Manager or any Subcontractors from customers on such day ("Monday Cash") is deposited in the Customer Remittance Account, the Manager shall: (i) deposit in the Revenue Fund, for each Business Day of the preceding week (each a "Business Day of the Preceding Week"), an amount of Monday Cash equal to the excess (if any) of (A) the amount transferred from the Customer Remittance Account pursuant to clause (iii) of Section 2 of this Agreement on such Business Day of the Preceding Week, over (B) the amount determined pursuant to clause (ii) of Section 3(a) of this Agreement for each such Business Day of the Preceding Week (each a "Gas Overpayment"), together with interest on each Gas Overpayment calculated at the Base Interest Rate (such interest to be calculated on the basis of a 360-day year consisting of twelve 30-day months); and (ii) pay to or upon the order of MarketSpan, for each Business Day of the Preceding Week, an amount of Monday Cash equal to the excess (if any) of (A) the amount transferred from the Customer Remittance Account pursuant to clause (ii) of Section 2 of this Agreement on each such Business Day of the Preceding Week, over (B) the amount determined pursuant to clause (i) of Section 3(a) of this Agreement for such Business Day of the Preceding Week (each an "Electric Overpayment"), together with interest on each Electric Overpayment calculated at the Base Interest Rate (such interest to be calculated on the basis of a 360-day year consisting of twelve 30-day months). To the extent (if any) that Monday Cash is insufficient at any time to make the deposit and/or payment then required pursuant to the preceding sentence, then such Monday Cash shall be so applied pro rata according to the amounts of such requirements and (x) MarketSpan shall pay (or cause to be paid) to the Subsidiary, from funds other than those within the custody or possession of the Manager pursuant to the Management Services Agreement or this Agreement, the resulting deposit deficiency (provided, however, that such payment by MarketSpan shall not be deposited in the Revenue Fund), and (y) the Subsidiary shall pay to or upon the order of MarketSpan, from funds of the Subsidiary other than those in the Revenue Fund or within the custody or possession of the Manager, the resulting payment deficiency. Section 4. Manager Restrictions and Limitations; Books, Records and Accounts. (a) In connection with the collections, deposits and payments contemplated by Sections 1 and 3 of this Agreement, the Manager and any Subcontractor (x) shall act solely as an agent for the Subsidiary, (y) shall have no right or claim to either the Customer Remittance Account or the Revenue Fund or the amounts and monies deposited therein or, pursuant to the Management Services Agreement and this Agreement, required to be deposited therein, and (z) shall have no right to assert a claim of set-off, recoupment, abatement, counterclaim of deduction for any amounts which may be owed to the Manager or with respect to any other matter in dispute. -3- (b) Proper, accurate and complete books, records and accounts regarding the aforementioned collections, deposits and payments (and the determinations required by Section 3 of this Agreement) shall be prepared and maintained by the Manager in accordance with Sections 4.9(C) and 4.15(F) of the Management Services Agreement. Section 5. No Recourse to Revenue Fund. No provision of the Management Services Agreement or of this Agreement shall confer, or be deemed to confer, upon the Manager, the Subsidiary or MarketSpan any title, recourse or right to or interest in the Revenue Fund or the amounts on deposit therein, and the Manager, the Subsidiary and MarketSpan do hereby irrevocably disavow, waive and forfeit any such title, recourse, right or interest (whether pursuant to contract or arising by operation of law). Section 6. Term of Ageement. This Agreement shall become effective upon execution hereof by all the parties hereto and shall remain in effect, until the expiration or earlier termination of the Management Services Agreement. Section 7. Affirmation of Bond Resolution and Management Services Agreement. Except as expressly stated herein, no provisions of this Agreement shall, or be deemed to intend to, amend, nullify, supersede, repeal or waive any agreement, term or provision whatsoever contained or set forth in the Bond Resolution or in the Management Services Agreement. Section 8. Counterparts. This Agreement may be executed in any number of original counterparts, all of which shall constitute but one and the same instrument. Section 9. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts executed, and to be entirely performed, within the State of New York, without regard to or application of rules or principles of conflicts of laws. Section 10. Captions. Titles or captions of the sections of this Agreement are inserted only as a matter of convenience and for reference, and in no way define, limit, extend, describe or otherwise affect the scope or meaning of this Agreement or the intent of any provision hereof. -4- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers or representatives, all as of the date first above written. LONG ISLAND POWER AUTHORITY By: /s/ David P. Warren --------------------------------- Name: Title: LIPA ACQUISITION CORP. By: /s/ David P. Warren --------------------------------- Name: Title: MARKETSPAN CORPORATION By: --------------------------------- Name: Title: MarketSpan ENERGY MANAGEMENT, LLC, as Manager By: [**MarketSpan SUB**], its managing member By: --------------------------------- Name: Title: -5- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers or representatives, all as of the date first above written. LONG ISLAND POWER AUTHORITY By: --------------------------------------- Name: David P. Warren Title: Chief Financial Officer LIPA ACQUISITION CORP. By: --------------------------------------- Name: David P. Warren Title: Chief Financial Officer MARKETSPAN CORPORATION By: /s/ Joseph E. Fontana --------------------------------------- Name: Joseph E. Fontana Title: Vice President MARKETSPAN ENERGY MANAGEMENT, LLC, as Manager By: MARKETSPAN CORPORATION, its managing member By: /s/ Joseph E. Fontana --------------------------------------- Name: Joseph E. Fontana Title: Vice President -5- EX-10.(N) 17 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee") the principal amount of THREE HUNDRED NINETY SEVEN MILLION Dollars ($397,000,000.00) (as such amount may be reduced to reflect the aggregate principal amount of Debentures (as defined below) outstanding following an exchange offer by MarketSpan Corporation therefor), on June 15, 1999 and to pay interest thereon from December 15, 1997, semi-annually on December 15 and June 15 in each year commencing June 15, 1998, at a rate per annum equal to 7.30%, until the principal hereof is paid. This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Debentures, 7.30% Series Due 1999, which were issued by the Obligee under the Fourth Supplemental Indenture, dated as of July 1, 1992, to the Indenture between the Obligee and State Street Bank and Trust Company (as successor to The Connecticut Bank and Trust Company, National Association), as Trustee, dated as of November 1, 1986 (the "Debentures"). All provisions of the Debentures relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Company" shall be deemed to be references to the Obligors, (ii) all references to the "Holders" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Securities" shall be deemed to be references to this Promissory Note and (iv) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto. In addition to the events and circumstances included in the definition of the term "Events of Default" incorporated herein from the Debentures, such term, as used in this Promissory Note, shall include the occurrence of any Event of Default under the Debentures. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the Debentures in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its right, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 2 MARKETSPAN CORPORATION By: /s/Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 3 MARKETSPAN CORPORATE SERVICES LLC By: /s/Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARXETSPAN FINANCE CORPORATION By: /s/Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 EX-10.(O) 18 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee") the principal amount of TWO HUNDRED SEVENTY MILLION Dollars ($270,000,000.00) (as such amount may be reduced to reflect the aggregate principal amount of Debentures (as defined below) outstanding following an exchange offer by MarketSpan Corporation therefor), on February 15, 2023 and to pay interest thereon from February 15, 1998, semi-annually on February 15 and August 15 in each year commencing August 15, 1998, at a rate per annum equal to 8.20%, until the principal hereof is paid. This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Debentures, 8.20% Series Due 2023, which were issued by the Obligee under the First Supplemental Indenture, dated as of March 1, 1993, to the Indenture between the Obligee and The Chase Manhattan Bank (as successor to Chemical Bank), as Trustee, dated as of November 1, 1992 (the "Debentures"). All provisions of the Debentures relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Company" shall be deemed to be references to the Obligors, (ii) all references to the "Holders" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Securities" shall be deemed to be references to this Promissory Note and (iv) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto. In addition to the events and circumstances included in the definition of the term "Events of Default" incorporated herein from the Debentures, such term, as used in this Promissory Note, shall include the occurrence of any Event of Default under the Debentures. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the Debentures in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its right, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 2 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ---------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion --------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 3 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ---------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ---------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ---------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ---------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 EX-10.(P) 19 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of December 1, 1976, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the $28,375,000 Pollution Control Revenue Bonds (Long Island Lighting Company Projects), Series A issued by NYSERDA, and the related Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 100.000% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents (the "Applicable Percentage"). All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. 2 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(Q) 20 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of December 1, 1976, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the $1,000,000 Industrial Development Revenue Bonds (Long Island Lighting Company Projects), Series A issued by NYSERDA, and the related Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 100.000% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents (the "Applicable Percentage"). All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. 2 This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(R) 21 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of December 1, 1976, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the $1,000,000 Industrial Development Revenue Bonds (Long Island Lighting Company Projects), Series B issued by NYSERDA, and the related Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 100.000% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents (the "Applicable Percentage"). All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. 2 This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(S) 22 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the First Supplemental Participation Agreement", dated as of October 1, 1979, to the Participation Agreement dated as of December 1, 1976, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the $19,100,000 Pollution Control Revenue Bonds (Long Island Lighting Company Projects), Series B issued by NYSERDA, and the related Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 100.000% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents (the "Applicable Percentage"). All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. 2 This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(T) 23 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of October 1, 1982, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Pollution Control Revenue Bonds (Long Island Lighting Company Projects), Series 1982 issued by NYSERDA, and the related Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 3.6047% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be September 1, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ----------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(U) 24 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of December 1, 1985, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Adjustable Rate Pollution Control Revenue Bonds (Long Island Lighting Company Project), 1985 Series A issued by NYSERDA, and the related Corporation Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 3.5933% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to (A) any acceleration of any such payment obligations for any reason and (B) any fees or other expenses relating to letters of credit, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Corporation Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be August 1, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(V) 25 PROMISSORY NOTE PROMISSORY NOTE May 28,1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 1 1801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"), This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of December 1, 1985, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Adjustable Rate Pollution Control Revenue Bonds (Long Island Lighting Company Project), 1985 Series B issued by NYSERDA, and the related Corporation Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 3.5933% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to (A) any acceleration of any such payment obligations for any reason and (B) any fees or other expenses relating to letters of credit, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Corporation Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be August 1, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(W) 26 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of December 1, 1989, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1989 Series A issued by NYSERDA, and the related Corporation Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 37.3650% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Corporation Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be August 1, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion -------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion -------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion -------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion -------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion -------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion -------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion -------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion -------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(X) 27 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of December 1, 1989, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1989 Series B issued by NYSERDA, and the related Corporation Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 37.3650% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Corporation Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be August 1, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ----------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ----------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ----------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ----------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ----------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ----------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ----------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ----------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(Y) 28 PROMISSORY NOTE PROMISSORY NOTE May 28,1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of May 1, 1990, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1990 Series A issued by NYSERDA, and the related Corporation Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 74.8400% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (1) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Corporation Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(Z) 29 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of January 1, 1991, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1991 Series A issued by NYSERDA, and the related Corporation Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 29.2000% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Corporation Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(AA) 30 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of February 1, 1992, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1992 Series A issued by NYSERDA, and the related Corporation Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 16.5650% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Corporation Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be July 1, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(BB) 31 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of February 1, 1992, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1992 Series B issued by NYSERDA, and the related Company Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 16.5650% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Company" or the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Company Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be July 1, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN, CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(CC) 32 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of August 1, 1992, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1992 Series C issued by NYSERDA, and the related Company Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 30.6450% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Company" or the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Company Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be July 1, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(DD) 33 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of August 1, 1992, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1992 Series D issued by NYSERDA, and the related Company Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 30.6450% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to any acceleration of any such payment obligations for any reason, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Company" or the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Company Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be July 1, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(EE) 34 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of November 1, 1993, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1993 Series A issued by NYSERDA, and the related Company Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 32.1000% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to (A) any acceleration of any such payment obligations for any reason and (B) any fees or other expenses relating to letters of credit, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Company" or the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Company Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(FF) 35 PROMISSORY NOTE PROMISSORY NOTE May 28,1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of November 1, 1993, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1993 Series B issued by NYSERDA, and the related Company Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 32.1000% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to (A) any acceleration of any such payment obligations for any reason and (B) any fees or other expenses relating to letters of credit, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Company" or the "Corporation" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Company Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(GG) 36 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of October 1, 1994, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1994 Series A issued by NYSERDA, and the related Company Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 8.6000% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to (A) any acceleration of any such payment obligations for any reason and (B) any fees or other expenses relating to letters of credit, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Company" shall be deemed to be references to the Obligors jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Company Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ------------------------ Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-10.(HH) 37 PROMISSORY NOTE PROMISSORY NOTE May 28, 1998 FOR VALUE RECEIVED, MARKETSPAN CORPORATION, MARKETSPAN GAS CORPORATION (d/b/a BROOKLYN UNION), MARKETSPAN TRADING SERVICES LLC, MARKETSPAN GENERATION LLC, MARKETSPAN CORPORATE SERVICES LLC, MARKETSPAN UTILITY SERVICES LLC, and MARKETSPAN ELECTRIC SERVICES LLC, each a New York corporation or limited liability company, with its principal place of business at 175 East Old Country Road, Hicksville, New York 11801, and MARKETSPAN FINANCE CORPORATION, a Vermont corporation (collectively, the "Obligors"), hereby jointly and severally promise to pay, on or before the dates set forth below, the amounts set forth below, to LONG ISLAND LIGHTING COMPANY, a New York corporation, with its principal place of business at 333 Earle Ovington Boulevard, Suite 403, Uniondale, New York 11553 (the "Obligee"). This Promissory Note is one of a series of Promissory Notes issued pursuant to the purchase price adjustment provisions of Section 2.1 of the Agreement and Plan of Merger dated as of June 26, 1997 by and among MarketSpan Corporation (formerly known as BL Holding Corp.), the Obligee, Long Island Power Authority and LIPA Acquisition Corp., as amended and/or supplemented through the date hereof (as so amended and/or supplemented, the "Merger Agreement"), and is subject to the terms and provisions thereof relating hereto. Upon the occurrence of a Material Decline in Parent's Credit Standing (as such term is defined in Section 2.1(f)(ii) of the Merger Agreement) this Promissory Note (i) shall be secured by a letter of credit provided by MarketSpan Corporation, at its sole cost and expense, and (ii) may be economically defeased by MarketSpan Corporation, in each case as provided under Section 2.1(f) of the Merger Agreement. The terms and conditions of this Promissory Note shall be determined by reference to the debt and other obligations of the Obligee under the Participation Agreement dated as of August 1, 1995, between New York State Energy Research and Development Authority ("NYSERDA") and the Obligee (the "Participation Agreement"), relating to the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1995 Series A issued by NYSERDA, and the related Company Note issued by the Obligee thereunder (collectively, the "NYSERDA Financing Documents"). The payment obligations of the Obligors hereunder shall equal 32.8000% of all such debt and other obligations of the Obligee under the NYSERDA Financing Documents, or such other percentage as may be finally determined in accordance with Section 2.1(e) of the Merger Agreement (the "Applicable Percentage"). In the event that the Applicable Percentage changes, as provided above, following the date hereof, the appropriate party shall pay to the other, within five (5) Business Days (as defined in the NYSERDA Financing Documents) following such change, all such amounts as shall be due upon the application of the Applicable Percentage retroactively to the date hereof. All provisions of the NYSERDA Financing Documents relating to the payment by the Obligee of principal, interest, premium and any other amounts payable thereunder, including, without limitation, all provisions relating to (A) any acceleration of any such payment obligations for any reason and (B) any fees or other expenses relating to letters of credit, are hereby incorporated herein and made a part hereof, except that, for purposes of such incorporation by reference, (i) all references to the "Company" shall be deemed to be references to the Obligors (jointly and severally), (ii) all references to the "Authority" or the "Trustee" shall be deemed to be references to the Obligee, (iii) all references to the "Company Note" shall be deemed to be references to this Promissory Note, (iv) all references to amounts payable shall be deemed to be references to such amount multiplied by the Applicable Percentage, (v) all dates specified therein for payments shall be deemed to be the respective dates thirty (30) days prior thereto, (vi) the principal amount hereof shall bear interest commencing on the date thirty (30) days prior to the immediately preceding Interest Payment Date under the NYSERDA Financing Documents, (vii) the initial Interest Payment Date hereunder shall be May 28, 1998 and (viii) the obligation of the Obligors to make any payment of principal of premium, if any, and interest on, this Promissory Note shall NOT be deemed satisfied and discharged to the extent of any payment made by the Bank under the Letter of Credit. In addition to the events and circumstances included in the definition of the term "events of default" incorporated herein from the Participation Agreement, such term, as used in this Promissory Note, shall include the occurrence of any event of default under the Participation Agreement. In the event that the amount of interest paid by the Obligors on any Interest Payment Date hereunder differs from the amount of interest otherwise payable by the Obligee on the immediately succeeding Interest Payment Date (the "Obligee Payment Date") under the NYSERDA Financing Documents (whether or not any of the obligations under the NYSERDA Financing Documents remain outstanding) multiplied by the Applicable Percentage (the "NYSERDA Interest"), the amount of such difference shall be paid by the appropriate party to the other, within five (5) Business Days following the Obligee Payment Date, so that the total interest paid hereunder shall equal the total NYSERDA Interest. Each of the Obligors hereby waives presentment for payment, demands, notice of dishonor and protest of this Promissory Note and any right to assert setoff of any of its obligations hereunder against any amounts owing by the Obligee thereto. The Obligors further agree that none of the terms or provisions of this Promissory Note may be waived, altered, modified or amended except as the Obligee may consent in a writing duly signed for and on its behalf. The Obligee agrees that it shall not agree to any alteration, modification or amendment of any of the NYSERDA Financing Documents in any way that would increase the payment obligations of the Obligees hereunder, without the prior written consent of MarketSpan Corporation. No failure or delay on the part of the Obligee in exercising any of its rights, powers or privileges hereunder shall operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. The Obligors agree to pay on demand any and all reasonable out-of-pocket costs and expenses (including reasonable fees and expenses of counsel) incurred by the Obligee and its successor and assigns in enforcing this Promissory Note. 2 This Promissory Note is binding upon the Obligors and their successors and assigns and is for the benefit of the Obligee and its successors and assigns. The Obligors may not, without the prior written consent of the Obligee, assign or otherwise transfer their obligations under this Promissory Note. This Promissory Note has been delivered in the State of New York and shall be construed and enforced in accordance with the internal and substantive laws of such State without giving effect to the choice of law rules. 3 MARKETSPAN CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GAS CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN TRADING SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN GENERATION LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 4 MARKETSPAN CORPORATE SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN UTILITY SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN ELECTRIC SERVICES LLC By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President MARKETSPAN FINANCE CORPORATION By: /s/ Kathleen A. Marion ----------------------------- Name: Kathleen A. Marion Title: Secretary and Vice President 5 EX-27 38 ARTICLE UT FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Statement of Income, Balance Sheet and Statement of Cash Flows, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS MAR-31-1999 DEC-31-1998 PER-BOOK 2,056,812 19,025 807,079 55,862 302,702 8,361,737 0 0 22,509 22,509 0 0 3,331,074 0 4,769,052 0 0 0 0 0 239,102 8,361,737 532,750 (77,862) 371,950 294,088 238,668 (152,869) 85,793 100,906 21,112 8,037 13,075 54,147 96,497 (161,948) $0 $0
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