-----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, LgZX4iKkDnEQj0mZIdQGxSyjQES7ly6Oix4jslLPxJmbcF4197WmrAWHsKU74dBc YFRl97a7/Zhnxeu8Ep/9hg== 0000922423-96-000087.txt : 19960228 0000922423-96-000087.hdr.sgml : 19960228 ACCESSION NUMBER: 0000922423-96-000087 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960226 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: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03571 FILM NUMBER: 96525565 BUSINESS ADDRESS: STREET 1: 175 E OLD COUNTRY RD CITY: HICKSVILLE STATE: NY ZIP: 11801 BUSINESS PHONE: 5169334590 10-K 1 FORM 10-K FILING S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] COMMISSION FILE NUMBER 1-3571 LONG ISLAND LIGHTING COMPANY INCORPORATED PURSUANT TO THE LAWS OF NEW YORK STATE INTERNAL REVENUE SERVICE - EMPLOYER IDENTIFICATION NUMBER 11-1019782 175 EAST OLD COUNTRY ROAD, HICKSVILLE, NEW YORK 11801 516-755-6650 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of each class so registered: Common Stock ($5 par) Preferred Stock ($100 par, cumulative): Series B, 5.00% Series E, 4.35% Series I, 5 3/4%, Convertible Series CC, 7.66% Preferred Stock ($25 par, cumulative): Series AA, 7.95% Series GG, $1.67 Series QQ, 7.05% Series NN, $1.95 General and Refunding Bonds: 8 3/4% Series Due 1996 7.85% Series Due 1999 7.90% Series Due 2008 8 3/4% Series Due 1997 8 5/8% Series Due 2004 9 3/4% Series Due 2021 7 5/8% Series Due 1998 8.50% Series Due 2006 9 5/8% Series Due 2024 Debentures: 7.30% Series Due 1999 7.05% Series Due 2003 8.90% Series Due 2019 7.30% Series Due 2000 7.00% Series Due 2004 9.00% Series Due 2022 6.25% Series Due 2001 7.125% Series Due 2005 8.20% Series Due 2023 7.50% Series Due 2007 NAME OF EACH EXCHANGE ON WHICH EACH CLASS IS REGISTERED: The New York Stock Exchange and the Pacific Stock Exchange are the only exchanges on which the Common Stock is registered. The New York Stock Exchange is the only exchange on which each of the other securities listed above is registered. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the Common Stock held by non-affiliates of the Company at January 31, 1996 was $2,038,959,770. The aggregate market value of Preferred Stock held by non-affiliates of the Company at January 31, 1996, established by Lehman Brothers based on the average bid and asked price, was $642,932,411. COMMON STOCK ($5 PAR) - SHARES OUTSTANDING AT JANUARY 31, 1996: 119,938,810 The Company's proxy statement for its Annual Meeting of Shareowners to be held on May 9, 1996 has been incorporated by reference into Part III of this Form 10-K to provide information required in Item 10 (Directors and Executive Officers of the Company) as to Directors, Item 11 (Executive Compensation), Item 12 (Security Ownership of Certain Beneficial Owners and Management) and Item 13 (Certain Relationships and Related Transactions). TABLE OF CONTENTS ABBREVIATIONS.......................................................... iii PART I ITEM 1. BUSINESS..........................................................1 The Company......................................................1 Territory........................................................1 Segments of Business.............................................1 Employees........................................................2 Regulation and Accounting Controls...............................2 Long Island Power Authority Proposed Plan...............3 Competitive Environment..........................................3 Electric Operations..............................................4 General ...............................................4 System Requirements, Energy Available and Reliability...5 Energy Sources..........................................5 Oil ......................................5 Natural Gas....................................6 Nuclear ......................................6 Purchased Power................................6 Interconnections...............................7 Conservation Services...................................7 The 1989 Settlement.....................................7 Electric Rates..........................................8 Gas Operations...................................................8 General ...............................................8 Gas System Requirements.................................8 Peak Day Capability............................8 Firm Transportation Capacity...................9 Storage...............................9 Cogen Deliveries ..............................9 Peak Shaving..................................10 Firm Gas Supply...............................10 Gas Rates..............................................10 Other Activities.......................................10 Recovery of Transition Costs...........................10 Environment.....................................................11 General ............................................. 11 Air ..............................................11 Water ..............................................13 Land ..............................................13 Nuclear Waste..........................................16 The Company's Securities........................................17 General ..............................................17 The First Mortgage.....................................18 The G&R Mortgage.......................................18 Unsecured Debt.........................................19 Equity Securities......................................20 Preferred Stock...............................20 Preference Stock..............................20 Common Stock..................................21 Executive Officers of the Company...............................21 Capital Requirements, Liquidity and Capital Provided............26 ITEM 2. PROPERTIES.......................................................26 ITEM 3. LEGAL PROCEEDINGS................................................26 Shoreham .......................................................26 Environmental...................................................27 Human Resources.................................................27 Other Matters...................................................28 i ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............28 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................................................29 ITEM 6. SELECTED FINANCIAL DATA..........................................30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................59 Statement of Income............................................ 60 Balance Sheet...................................................61 Statement of Retained Earnings..................................63 Statement of Capitalization.....................................63 Statement of Cash Flows.........................................65 Notes to Financial Statements...................................66 Report of Independent Auditors.................................105 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................106 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.......106 ITEM 11. EXECUTIVE COMPENSATION.........................................106 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.106 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................106 PART IV ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 106 List of Financial Statements....................................106 List of Financial Statement Schedules...........................107 List of Exhibits................................................108 Reports on Form 8-K.............................................113 Schedule II.....................................................114 SIGNATURES...............................................................115 ii ABBREVIATIONS The following abbreviations are sometimes used in this Annual Report. ACO............ Administrative Consent Order AFC............ Allowance For Funds Used During Construction ALJ............ Administrative Law Judge BFC............ Base Financial Component BVPA........... Bondable Value of Property Additions DEC............ New York State Department of Environmental Conservation DOE............ United States Department of Energy DSM............ Demand Side Management Dth............ Dekatherms EFRBs.......... Electric Facilities Revenue Bonds EPA............ United States Environmental Protection Agency FCA............ Fuel Cost Adjustment FERC........... Federal Energy Regulatory Commission First Mortgage. Indenture of Mortgage and Deed of Trust dated as of September 1, 1951 FRA............ Financial Resource Asset G&R Bonds...... General and Refunding Bonds G&R Mortgage... General and Refunding Indenture dated as of June 1, 1975 GAAP........... Generally Accepted Accounting Principles GWh............ Gigawatt Hour IPP............ Independent Power Producers kW............. Kilowatts kWh............ Kilowatt hour LIPA........... Long Island Power Authority LRPP........... Lilco Ratemaking and Performance Plan MW............. Megawatts NMPC........... Niagara Mohawk Power Corporation NMP2........... Nine Mile Point Nuclear Power Station, Unit 2 NRC............ Nuclear Regulatory Commission NYPA........... New York Power Authority NYPP........... New York Power Pool NYSEG.......... New York State Electric & Gas Corporation NYSERDA........ New York State Energy Research and Development Authority PCRBs.......... Pollution Control Revenue Bonds PILOTs......... Payments in-lieu-of-taxes PRP............ Potentially Responsible Party PSC............ Public Service Commission of the State of New York QF............. Qualified Facilities RMA............ Rate Moderation Agreement RMC............ Rate Moderation Component Shoreham....... Shoreham Nuclear Power Station iii A LISTING OF ABBREVIATIONS FREQUENTLY USED IN THIS REPORT MAY BE FOUND IMMEDIATELY AFTER THE TABLE OF CONTENTS PART I ITEM 1. BUSINESS THE COMPANY: Long Island Lighting Company (the Company) was incorporated in 1910 under the Transportation Corporations Law of the State of New York and supplies electric and gas service in Nassau and Suffolk Counties and to the Rockaway Peninsula in Queens County, all on Long Island (L.I.), New York. The mailing address of the Company is 175 East Old Country Road, Hicksville, New York 11801 and its general telephone number is (516)755-6650. TERRITORY: The Company's service territory covers an area of approximately 1,230 square miles. The population of the service area, according to the Company's 1995 estimate, is 2.7 million persons, including approximately 98,000 persons who reside in Queens County within the City of New York. The 1995 population estimate reflects a 0.3% increase since the 1990 census. Approximately 80% of all workers residing in Nassau and Suffolk Counties are employed within the two counties. In 1995 total non-agricultural employment in Nassau and Suffolk Counties increased by approximately 7,800 positions, an employment increase of 0.7%. The Company serves approximately 1 million electric customers of which 915,000 are residential. The Company receives approximately 49% of its electric revenues from residential customers and 48% from commercial/industrial customers and 3% from sales to other utilities and public authorities. The Company also serves approximately 453,000 gas customers, 408,000 of which are residential, accounting for 62% of the gas revenues, with the balance of the gas revenues made up by the commercial/industrial customers and off-system sales. SEGMENTS OF BUSINESS: For information concerning the Company's electric and gas financial and operating results, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the Year Ended December 31, 1995, "Selected Financial Data" and Notes 2, 3, and 11 of Notes to Financial Statements for the Year Ended December 31, 1995. 1 EMPLOYEES: As of December 31, 1995, the Company had 5,688 full-time employees, of which 2,347 belong to Local 1049 and 1,342 belong to Local 1381 of the International Brotherhood of Electrical Workers. Effective February 14, 1996, the Company and these unions agreed upon contracts which will expire on February 13, 2001. The contracts provide, among other things, for wage increases totaling 15.5% over the term of the agreements. REGULATION AND ACCOUNTING CONTROLS: The Company is subject to regulation by the Public Service Commission of the State of New York (PSC) with respect to rates, issuances and sales of securities, adequacy and continuance of service, safety and siting of certain facilities, accounting, conservation of energy, management effectiveness and other matters. To ensure that its accounting controls and procedures are consistently maintained, the Company actively monitors these controls and procedures. The Audit Committee of the Company's Board of Directors, as part of its responsibilities, periodically reviews this monitoring program. New York law requires that all utilities be periodically audited to identify those aspects of their operations, if any, which are in need of improvement. The results of the PSC Internal Control Practices audit and the Executive Compensation audit were issued during 1995. The Company is in the process of implementing improvements to address the audit findings. The Company is also subject, in certain of its activities, to the jurisdiction of the United States Department of Energy (DOE) and the Federal Energy Regulatory Commission (FERC). In addition to its accounting jurisdiction, FERC has jurisdiction over the rates the Company may charge for the sale of electric energy for resale in interstate commerce, including the rates the Company charges for electricity sold to municipal electric systems within the Company's territory, and for the transmission, through the Company's system, of electric energy to other utilities or certain industrial customers. It is in the exercise of this jurisdiction over transmission that FERC is currently considering certain issues relating to competition in the electric industry. For a discussion of these FERC proceedings see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the Year Ended December 31, 1995 under the heading "Competitive Environment". FERC also has some jurisdiction over a portion of the Company's gas supplies and substantial jurisdiction over transportation to the Company of its gas supplies. Operation of Nine Mile Point Nuclear Power Station, Unit 2 (NMP2), a nuclear facility in which the Company has an 18% interest, is subject to regulation by the Nuclear Regulatory Commission (NRC). 2 LONG ISLAND POWER AUTHORITY PROPOSED PLAN: A discussion of the Long Island Power Authority's (LIPA) proposed plan, regarding the restructuring/acquisition of the Company, appears in Note 10 of Notes to Financial Statements for the Year Ended December 31, 1995. COMPETITIVE ENVIRONMENT: A discussion of the competitive issues the Company faces appears in Note 10 of Notes to Financial Statements for the Year Ended December 31, 1995. 3 ELECTRIC OPERATIONS: General The Company's system energy requirements are supplied from sources located both on and off Long Island. The following table indicates the 1995 summer capacity of the Company's generating facilities, Internal Combustion Units (IC) and facilities under its control as reported to the New York Power Pool (NYPP) in December 1995: Mega- Location of Units Description Fuel Units watts COMPANY OWNED Northport, L.I. Steam Turbine Dual* 2 781 Oil 2 740 Port Jefferson, L.I. Steam Turbine Oil 2 382 Glenwood, L.I. Steam Turbine Gas 2 221 Island Park, L.I. Steam Turbine Dual 2 386 Far Rockaway, L.I. Steam Turbine Dual 1 109 Throughout L.I. IC Units Dual 12 281 Oil 30 1,057 JOINTLY OWNED NMP2 (18% Share) Oswego, New York Steam Turbine Nuclear 1 203 OWNED BY THE NEW YORK POWER AUTHORITY Holtsville, L.I. Combined Cycle Dual 1 142 Total 55 4,302 == ===== *Dual - Oil or natural gas, whichever is more economical. Additional generating facilities owned by others, such as independent power producers (IPPs) and cogenerators located on Long Island and investor-owned and public electric systems located off Long Island, provide the balance of the Company's energy supplies. The maximum demand on the Company's system to date was 4,077 Megawatts (MW) on August 4, 1995, representing 84% of its total available capacity of 4,873 MW on that day, which included 713 MW of firm 4 capacity purchased from other sources. By agreement with the NYPP, the Company is required to maintain, on a monthly basis, an installed and contracted firm power reserve generating capacity equal to at least 18% of its actual peak load. The Company is currently meeting this NYPP requirement. System Requirements, Energy Available and Reliability In 1995, system kilowatt hour (kWh) energy requirements on the Company's system were .2% lower than in 1994. The Company forecasts a 0.1% decrease and 1.2% increase, relative to 1995's experience in system energy requirements for the years 1996 and 1997, respectively. However, for the period 1998-2007, the Company forecasts an average annual growth rate in system energy requirements of 1.0%. With the availability of electricity provided by the Company's existing generating facilities, including its portion of energy generated at NMP2 and by power purchased from other electric systems and certain non-Company owned facilities located within the Company's service territory, the Company believes it has adequate generating sources to meet its energy demands for the next several years. The percentages of total energy available by type of fuel for electric operations for the years 1995, 1994 and 1993 are as follows: Fuel Mix (Based on MW Hours) 1995 1994 1993 Oil 17% 25% 34% Natural Gas 36 23 19 Nuclear (NMP2) 7 9 7 Purchased Power 40 43 40 Total 100% 100% 100% Energy Sources Total energy provided by oil and natural gas is generated on the Company's own system while the nuclear generation is provided from NMP2. The total energy provided by purchased power is described below. Oil In recent years, the Company has been able to reduce its oil requirements by burning natural gas. Oil consumption in 1995 was 5.2 million barrels compared to 7.5 million barrels in 1994. The availability and cost of oil used by the Company are affected by factors beyond its control such as the international oil market, environmental regulations, conservation measures and the availability of alternative fuels. The Company's fuel oil is supplied principally by five suppliers. For information concerning federal and other regulatory environmental 5 limitations on fuel oil burned by the Company, see "Environment -Air." For additional information concerning the recovery of electric fuel costs, see Note 1 of Notes to Financial Statements for the Year Ended December 31, 1995. Natural Gas Several of the Company's generating stations have the capability of burning either oil or natural gas. These dual-fired units enable the Company to burn the most cost efficient fuel thereby reducing the Company's dependency on oil. In 1995 the Company completed the conversion of the second dual-fired unit at the Northport Power Station and began work on the conversion of two units at its Port Jefferson Power Station. These two units have projected completion dates of December 1996 and May 1997. Gas consumption in 1995 was 69.8 million dekatherms (Dth) compared to 44.3 million Dth in 1994. In 1995, 67% of the energy generated by the Company's steam and internal combustion units was produced by burning natural gas. In 1992, that percentage was approximately 33%. Nuclear The Company holds an 18% interest in NMP2, a 1,143 MW nuclear generating unit near Oswego, New York. The cotenants of NMP2, in addition to the Company, are Niagara Mohawk Power Corporation (NMPC) (41%), New York State Electric & Gas Corporation (18%), Rochester Gas and Electric Corporation (14%) and Central Hudson Gas & Electric Corporation (9%). For additional information on NMP2 and nuclear plant insurance, see Note 5 and Note 10 of Notes to Financial Statements for the Year Ended December 31, 1995. Purchased Power To keep electric rates as low as possible, the Company provides its customers with the most economical energy available. Often, this energy is generated at more economical power plants within other electric systems and transmitted to the Company through its interconnections. In addition, the Company purchases energy from sources located within its service territory including the New York Power Authority (NYPA) Holtsville facility, IPPs and cogenerators. IPPs and cogenerators located within the Company's service territory provided approximately 204 MW of capacity to the Company in 1995. Capacity from these sources is expected to remain at approximately the same level in 1996. In 1995, 1994 and 1993, IPPs and cogenerators provided 9.7%, 9.3% and 9.5% respectively, of the Company's total system energy available. The Company does not expect any new major IPPs or cogenerators to be built on Long Island in the foreseeable future. Among the reasons supporting this conclusion is the Company's belief that the market for IPPs and cogenerators to provide power to the Company's remaining commercial and industrial customers is small. Furthermore, under federal law, the Company is required to buy energy from qualified 6 producers at the Company's long-range avoided costs. Current long-range avoided cost estimates for the Company have significantly reduced the economic advantage to entrepreneurs seeking to compete with the Company and with existing IPPs. For additional information respecting competitive issues facing the Company, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the Year Ended December 31, 1995 under the heading "Competitive Environment". Interconnections Five interconnections allow for the transfer of electricity between the Company and members of the NYPP and the New England Power Pool. Energy from these sources is transmitted pursuant to transmission agreements with NMPC, NYPA, Northeast Utilities Service Company (NUSCO), a co-owner of one of these interconnections, and Consolidated Edison Company of New York, Inc. (Con Edison) and displaces energy which would otherwise be generated on the Company's system at a higher cost. The capacity of these interconnections is utilized for Company requirements including the transmission of the Company's share of power from NMP2, the requirements of Con Edison, a co-owner with the Company of three of these interconnections, and the requirements on Long Island of NYPA, the owner of one of these interconnections. Conservation Services A discussion of conservation services appears in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the Year Ended December 31, 1995 under the heading "Conservation Services". The 1989 Settlement On February 28, 1989, the Company and the State of New York entered into the 1989 Settlement resolving certain issues relating to the Company and providing, among other matters, for the financial recovery of the Company and for the transfer of the Shoreham Nuclear Power Station (Shoreham) to LIPA for its subsequent decommissioning. A discussion of the 1989 Settlement and Shoreham decommissioning appears in Note 2 of Notes to Financial Statements for the Year Ended December 31, 1995. 7 Electric Rates A discussion of electric rates appears in Note 3 of Notes to Financial Statements for the Year Ended December 31, 1995. GAS OPERATIONS: General In 1995, the Company was an active participant in proceedings before FERC in an effort to reduce interstate pipeline charges, to improve operational tariffs and to mitigate any adverse impact from interstate pipeline filings on the Company's customers. In addition, in 1996, the Company will actively participate in the proceedings before the PSC in an attempt to positively influence the establishment of the new competitive natural gas marketplace within the State of New York. Gas System Requirements At December 31, 1995 and 1994, the Company had a monthly average of 452,906 and 447,689 firm gas customers, respectively. The monthly average of space heating customers was 280,479 and 273,633, respectively at December 31, 1995 and 1994. Total firm sales in 1995 were approximately 58,704,000 Dth, compared to 58,889,000 Dth in 1994. The maximum daily sendout experienced on the Company's gas system in 1995 was 564,874 Dth on February 6, 1995. The forecasted maximum daily sendout for the 1995-96 winter season (November 1 - March 31) is 622,000 Dth, representing 87% of the Company's per day capability of 717,035 Dth for this period. The Company recovers the cost of its gas supply from its customers through provisions in the Company's rate schedules. Continuing its recent efforts to expand its base of customers, the Company is actively marketing its natural gas services to potential customers. In step with regulatory changes in the gas industry, the Company has proposed a firm transportation program that will enable gas customers to choose their gas supplier. The Company is educating its customers to make them aware of all the services that the Company provides. In addition, the Company's proposed transportation rates may attract new customers to the Company. Another growth area being pursued is the Natural Gas Vehicle (NGV) market. Although recent changes in federal funding and mandates have made NGV promotion more difficult, this market still has a high growth potential, especially in large fleet applications. NGV fueling stations have been completed at two Company locations, with both sites suited to refuel the Company and U.S. Post Office vehicles which utilize natural gas as fuel. Peak Day Capability The Company's gas peak day capability to meet its 1995-96 winter season requirements is summarized in the following portfolio: 8 Peak Day Capability Dth per day Firm Transportation Capacity 248,486 Storage 302,009 Cogen Deliveries 41,840 Peak Shaving 124,700 ------- Total 717,035 ======= Firm Transportation Capacity The Company has contracted for 306,486 Dth per day of year-round pipeline transportation capacity, of which options to purchase 58,000 Dth per day for the 1995-1996 winter season have been sold. This year-round transportation capacity is provided by four interstate pipeline companies: Transcontinental, Texas Eastern, Tennessee Gas Pipeline Company and Iroquois Gas Transmission System. The Company, is a general partner in the Iroquois pipeline through its wholly owned subsidiary, LILCO Energy Systems, Inc., with an equity share of 1%. Storage To assure necessary quantities to meet higher winter demand, the Company also has long-term firm storage services which provide a total operation supply of approximately 302,009 Dth per day, with a total capacity of 24,203,885 Dth for the winter period. Of these totals, 291,789 Dth per day or a total capacity of 22,977,485 Dth is provided by gas storage fields in Pennsylvania and 10,220 Dth per day or a total capacity of 1,226,400 Dth is provided by a gas storage field in upstate New York operated by Honeoye Storage Corporation (Honeoye). The Company currently owns 23-1/3% of the common stock of Honeoye. In order to provide the Company with greater security of supply and enhanced operational flexibility in meeting peak-day requirements, the Company also contracts for storage capacity in Louisiana and Mississippi. The Company has no incremental firm pipeline transportation capacity for these supplies. Up to 52,461 Dth per day can be withdrawn from the Washington storage facility in Louisiana which has a total storage capacity of 4,459,220 Dth. Up to 18,300 Dth per day can be withdrawn from the Eminence, Mississippi storage facility and up to 25,000 Dth per day can be withdrawn from the Hattiesburg, Mississippi storage facility. The Eminence and Hattiesburg facilities have total storage capabilities of 147,296 Dth and 250,000 Dth, respectively. Cogen Deliveries The Company has contract rights with NYPA to receive a total of 900,000 Dth during a continuous 100-day period between November 1 and March 31 of each winter season at a daily rate not to exceed 30,840 Dth per day. Also, the Company has contract rights with Nissequogue Cogen facility to receive a total of up to 330,000 Dth for 30 days during each winter season at a daily rate not to exceed 11,000 Dth per day. In addition, the Company has the right to request 812,500 Dth in 9 the winter period from TBG Cogen Facility with the obligation to return the actual taken quantities in kind during the following summer period. Peak Shaving The Company has its own peak shaving supplies to meet its requirements on excessively cold winter days. They include a liquefied natural gas plant with a storage capacity of approximately 600,000 Dth of gas and vaporization facilities which provide 103,300 Dth per day to the peakday capability of the Company's system. In addition, the Company has propane facilities that produce 21,400 Dth per day of peak shaving with a storage capacity of approximately 100,000 Dth. Firm Gas Supply The Company has 212,069 Dth per day of firm supplies, of which 83,175 Dth per day are Canadian and 128,894 Dth per day are domestic. Included in the long-term firm Canadian gas is 2,525 Dth per day of gas contracted with Boundary Gas, Inc. (Boundary). The Company owns 2.7% of the common stock of Boundary, a corporation formed with 14 other gas utility companies to act as a purchasing agent for the importation of natural gas from Canada. The Company also purchases 91,223 Dth per day in both the seasonal and monthly spot markets. In addition, the Company contracts for 3,194 Dth per day of winter seasonal supply on a month-to-month or winter-term basis. Gas Rates A discussion of gas rates appears in Note 3 of Notes to Financial Statements for the Year Ended December 31, 1995. Other Activities As a result of FERC Order 636, pipeline companies can no longer act as sales agents to "bundle" the mix of services from the producers and other interstate pipeline companies. This "unbundling" of gas transportation activities and the need for local distribution companies to negotiate directly with producers, other suppliers and with pipeline companies has provided the Company with new business opportunities. These new opportunities include providing gas to non-traditional markets, including local distribution companies and end-users from Mississippi to Connecticut. In 1995 and 1994, total activity in this area generated revenues of $24 million and $26 million, respectively. The Company's firm gas customers receive 85% and its shareholders receive 15% of the profit realized from this activity. Recovery of Transition Costs Transition costs are the costs associated with unbundling the pipeline companies' merchant services in compliance with FERC Order No. 636. They include pipeline companies' unrecovered gas costs and the costs that pipelines incur as a result of reforming or terminating their gas 10 supply contracts. In order to recover transition costs, pipeline companies must demonstrate to FERC that such costs were attributable to Order No. 636 and that they were prudently incurred. While the Company has challenged, on both eligibility and prudence grounds, its supplier pipelines' efforts to recover their claimed transition costs, the Company presently estimates that its total transition costs will be approximately $9 million. As of December 31, 1995, the Company has paid approximately $7 million of these transition costs and is currently collecting these costs from its gas customers in rates. ENVIRONMENT: General The Company's ordinary business operations necessarily involve materials and activities which subject the Company to federal, state and local laws, rules and regulations dealing with the environment, including air, water and land quality. These environmental requirements may entail significant expenditures for capital improvements or modifications and may expose the Company to potential liabilities which, in certain instances, may be imposed without regard to fault or for historical activities which were lawful at the time they occurred. Enacted laws which may impose such potential liabilities include (but are not limited to) the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (commonly known as Superfund), the federal Toxic Substances Control Act, the federal Clean Water Act (CWA), and the federal Clean Air Act (CAA). Air Federal, state and local regulations affecting new and existing electric generating plants govern emissions including sulfur dioxide (SO2) and nitrogen oxide (NOx) and, potentially in the future, hazardous air pollutants. Sulfur Dioxide Requirements The laws governing the sulfur content of the fuel oil being burned by the Company are administered by the New York State Department of Environmental Conservation (DEC) in compliance with the United States Environmental Protection Agency (EPA). The Company does not expect to incur any costs to satisfy the 1990 amendments to the federal CAA with respect to the reduction of SO2 emissions, since the Company already uses oil with acceptably low levels of sulfur and natural gas as boiler fuels. Continuous Emissions Monitoring and NOx Requirements During 1995, the Company spent approximately $4.9 million in its ongoing effort to comply with the 1990 amendments to the federal CAA. These expenditures were necessary to meet continuous emissions monitoring (CEM) requirements, Phase I NOx reduction requirements and for upgrades to particulate control systems. Expenditures for CEMs in 11 1995 totaled $0.4 million. Expenditures for Phase I NOx and particulate controls were $1.3 million. In 1995, the Company spent $3.2 million to upgrade its NOx control systems. As a result of this earlier-than-required upgrade, the Company generated NOx reduction credits which were sold for a price in excess of $3.2 million. Subject to requirements that are expected to be promulgated in forthcoming regulations, the Company estimates that it may be required to spend an additional $50 to $60 million by the year 2003 to meet Phase II and Phase III NOx reduction requirements under the federal CAA. In an effort to minimize costs associated with anticipated NOx reduction requirements, the Company is engaged in an extensive research and development project, along with several other organizations who have provided co-funding, to demonstrate an innovative NOx reduction technology at one of its power stations. Through 1995, approximately $7 million have been expended by all of the co-funders, of which the Company has contributed about $4.3 million. Hazardous Air Pollutants Utility boilers are presently exempt from regulation as sources of hazardous air pollutants until the EPA completes a study of the risks, if any, to public health reasonably anticipated to occur as a result of emissions by electric generating units. The EPA is expected to make a determination concerning the need for control of hazardous air pollutants from utility facilities in 1996. Until such determination is made by the EPA, the Company cannot fully determine what, if any, costs will be incurred for the control of hazardous air pollutants. The Company currently estimates that it may be required to spend approximately $3.8 million by the year 2000 to meet the potential requirements for the control of hazardous air pollutants from its power plants. Electromagnetic Fields Electromagnetic fields (EMF) occur naturally and also are produced wherever there is electricity. These fields exist around power lines and other utility equipment. The Company is in compliance with all applicable regulatory standards and requirements concerning EMF. The Company also monitors scientific developments in the study of EMF, contributes to funding for research efforts and is actively involved in customer and employee outreach programs to inform the community of EMF developments as they occur. Although an extensive body of scientific literature has not shown an unsafe exposure level or a causal relationship between EMF exposure and adverse health effects, concern over the potential for adverse health effects will likely continue without final resolution for some time. To date, the Company has not been involved in any matter that alleged such a causal relationship. However, four residential property owners have initiated separate lawsuits against the Company alleging that the existence of EMF has diminished the value of their homes. These actions are in the preliminary stages of discovery and their outcome 12 is uncertain. The Company is currently unable to predict the impact, if any, that EMF-related matters will have on its financial position. Water In 1995, the Company spent $1.8 million to upgrade its waste water treatment facilities and for other measures designed to protect surface and ground water quality. The Company plans to spend approximately $1.5 million for continued enhancements in 1996. Under the federal CWA and the New York State Environmental Conservation Law, the Company is required to obtain a state Pollutant Discharge Elimination System permit to discharge into the waters of the United States or New York State. The DEC has the jurisdiction to issue these permits and their renewals and has issued permits for the Company's generating units. The permits allow the continued use of the circulating water systems which have been determined to be in compliance with state Water Quality Standards. The permits also allow for the continued use of the chemical treatment systems and for the continued discharge of water in accordance with applicable permit limits. Long Island Sound Transmission Cables The Connecticut Department of Environmental Protection (DEP) and the Company have signed an Administrative Consent Order (ACO) which will require the Company to address leaks from an electric transmission cable located under the Long Island Sound (Sound Cable). The Sound Cable is jointly owned by the Company and the Connecticut Light and Power Company, a subsidiary of Northeast Utilities. Specifically, the order requires the Company to evaluate existing procedures and practices for cable maintenance, operations, fluid spill response procedures and to propose alternatives to minimize fluid spill occurrences and their impacts on the environment. Alternatives to be evaluated range from improving existing monitoring and maintenance practices to removal or replacement of the transmission cables. The Company is currently unable to determine the costs it will incur to complete the requirements of the ACO or to comply with any additional DEP requirements. In addition, the Company has been served a subpoena from the U.S. Attorney for the District of Connecticut to supply certain written information regarding releases of fluid from the Sound Cable, as well as associated operating and maintenance practices for the cable. Since the investigation is in its preliminary stages, the Company is unable to determine the likelihood of a criminal proceeding being initiated at this time. However, the Company believes all activities associated with the response to releases from the Sound Cable were consistent with legal and regulatory requirements. Land Superfund imposes joint and several liability, regardless of fault, 13 upon generators of hazardous substances for costs associated with environmental cleanup activities. Superfund also imposes liability for remediation of pollution caused by historical acts which were lawful at the time they occurred. In the course of the Company's ordinary business operations, the Company is involved in the handling of materials that are deemed to be hazardous substances under Superfund. These materials include asbestos, metals, certain flammable and organic compounds and dielectric fluids containing polychlorinated biphenyls (PCBs). Other hazardous substances may be handled in the Company's operations or may be present at Company locations as a result of historical practices by the Company or its predecessors in interest. The Company has received notice concerning possible claims under Superfund or analogous state laws relating to a number of sites at which it is alleged that hazardous substances generated by the Company and other potentially responsible parties (PRPs) were deposited. Estimates of the Company's allocated share of costs for investigative, removal, and remedial activities at these sites range from preliminary to refined and are updated as new information becomes available. The Company has notified its former and current insurance carriers that it seeks to recover from them certain of these cleanup costs. However, the Company is unable to predict the amount of insurance recovery, if any, that it may obtain. Metal Bank Superfund Site The EPA has notified the Company that it is one of many PRPs that may be liable for the remediation of a licensed disposal site located in Philadelphia, Pennsylvania, and operated by Metal Bank of America. The Company and nine other PRPs, all of which are public utilities, entered into an ACO with the EPA to conduct a Remedial Investigation and Feasibility Study (RI/FS). Under a PRP participation agreement, the Company is responsible for 8.2% of the costs associated with this RI/FS, which has been completed and is currently being reviewed by the EPA. The Company's total share of costs to date is approximately $0.5 million. The level of remediation required will be determined when the EPA issues its decision, but based on information available to date, the Company currently anticipates that the total cost to remediate this site will be between $14 million and $30 million. The Company has recorded a liability of $1.1 million representing its estimated share of the additional cost to remediate this site. PCB, Inc. Superfund Sites The Company has also been named a PRP for disposal sites in Kansas City, Kansas, and Kansas City, Missouri. The two sites were used by a PCB, Inc. from 1982 until 1987 for the storage, processing, and treatment of electric equipment, dielectric oils, and materials containing PCBs. According to the EPA, the buildings' floor slabs and ceilings and the soil areas outside the buildings' loading docks are contaminated with PCBs. The Company is investigating allegations that it had made agreements for disposal of PCBs or items containing PCBs 14 at this site. In 1994, the EPA requested certain of the larger PRPs to form a group, sign an ACO, and conduct a cleanup program for the sites under the Toxic Substances Control Act, or, in the alternative, to perform a Superfund cleanup for the sites. At the meeting, the EPA provided the Company with documents indicating that the Company was responsible for less than 1% of the materials that were shipped to the Missouri site. The EPA has not yet completed compiling the documents for the Kansas site. The PRPs are attempting to organize for the purpose of developing and implementing acceptable cleanup programs for the sites. The Company is currently unable to determine its share of the cost to remediate these sites or the impact, if any, on the Company's financial position. Port Washington Superfund Site In 1989, the EPA notified the Company that it was a PRP for a landfill in Port Washington, New York. The Company does not believe that it has contributed to the contamination of the site and has declined the EPA's requests to participate in the investigation and remediation activities at the property. The Company has not received further communications regarding this site. Liberty Superfund Site The EPA has notified the Company that it is a PRP in a Superfund site located in Farmingdale, New York. Industrial operations took place at this site for at least fifty years. The PRP group has claimed that the Company should absorb expenses in the amount of approximately $0.1 million associated with removing PCB-contaminated soils from a portion of the site which formerly contained electric transformers. The Company is currently unable to determine its share of the cost of remediation or the impact, if any, on the Company's financial position. Manufactured Gas Plant Sites The DEC has required the Company and other New York State utilities to investigate and, where necessary, remediate their former manufactured gas plant (MGP) sites. Currently, the Company is the owner of six pieces of property on which the Company or certain of its predecessor companies produced manufactured gas. The Company expects to enter into an ACO with the DEC in 1996 regarding the management of environmental activities at these six properties. Although the exact amount of the Company's cleanup costs cannot yet be determined, based on the findings of investigations at two of these six sites, preliminary estimates indicate that it may cost approximately $35 million to clean up all of these sites through the year 2005 and 15 accordingly, the Company has recorded a $35 million liability. The Company believes that the PSC will provide for future recovery of these costs and has recorded a $35 million regulatory asset. The Company is also evaluating its responsibilities with respect to several other former MGP sites that existed in its territory which it does not presently own. Research is underway to determine the existence and nature of operations and relationship, if any, to the Company or its predecessor companies. Operations at these facilities in the late 1800's and early 1900's may have resulted in the disposal of certain waste products located on these sites. Inwood Gas Holder Property The Company entered into an ACO with the DEC to remediate lead-contaminated soils at a former distribution gas holder site in Inwood, New York that contained a gas holder coated with lead paint. Based on the current cleanup objectives, 1996 remediation costs are estimated at about $1 million. North Hills Leak The Company has undertaken remediation of certain soil locations in North Hills, New York that were impacted by a release of insulating fluid from an electrical cable in August 1994. The need for any further remediation has not, as yet, been finalized. If additional remediation is required, preliminary estimated cleanup costs expected to be incurred could range from $0.2 to $5 million over the next four years. The Company has initiated cost recovery actions against the third parties it believes are responsible for causing the cable leak, the outcome of which is uncertain. Storage Facilities As a result of petroleum leaks from underground storage facilities and other historical occurrences, the Company is required to investigate and, in certain cases, remediate affected soil and groundwater conditions at several facilities within its service territory. The aggregate costs of such remediation work could be between $3 and $5 million and are not expected to have a material impact on the Company's financial position. The Company believes that all significant costs incurred with respect to environmental investigation and remediation activities will be recoverable through rates. Nuclear Waste Under the federal Low Level Radioactive Waste Policy Amendment Act of 1985, New York State was required, by January 1, 1993, to have arranged for the disposal of all low level, radioactive waste generated within the state or, in the alternative, contracted for the disposal of waste at an operating facility outside the state. As a result, New York has stated its intentions of arranging for an in-state disposal facility due to the large volume of low level radioactive waste it generated within the state, and has committed to 16 develop a plan for the management of such waste during the interim period until a disposal facility is available. New York State is still developing a disposal methodology and acceptance criteria for a disposal facility. The latest New York State low level radioactive waste site development schedule now assumes two possible siting scenarios, a volunteer approach and a non-volunteer approach, either of which would begin operation in 2001. South Carolina has permitted low level radioactive waste generators outside the state, including New York, access to its waste disposal facility, effective July 1995. Previously, New York was denied access to the South Carolina waste disposal facility since the expiration of its contract in June 1994. NMPC has implemented a low level radioactive waste management program that will properly handle interim on-site storage of low level radioactive waste for NMP2 for at least ten years. The Company's share of the costs associated with temporary storage and ultimate disposal are expected to be recovered in rates. In addition, NMPC, on behalf of the NMP2 cotenants, has entered into a contract with the DOE for the permanent storage of NMP2 spent nuclear fuel. The Company reimburses NMPC for its 18% share of the cost under the contract at a rate of $1.00 per megawatt hour of net generation less a factor to account for transmission line losses. The Company is collecting its portion of this fee from the Company's electric ratepayers. Progress in developing a permanent DOE repository for such high level radioactive material has been slow and it is anticipated that the DOE facility will not be available to accept deliveries until at least 2010. NMPC does not anticipate that the DOE will accept all of its spent fuel immediately upon the opening of its facility, but rather expects a transfer period that will extend to the year 2044. NMPC has several alternatives under consideration to provide additional storage facilities, as necessary. Each alternative will likely require NRC approval, may require other regulatory approvals and would likely require incurring additional costs. Currently, all spent nuclear fuel from NMP2 is being stored at the NMPC site. The Company does not anticipate that the possible unavailability of a DOE facility until 2010 will inhibit the operation of NMP2. For information concerning environmental litigation, see Item 3 -Legal Proceedings--Environmental. THE COMPANY'S SECURITIES: General The Company's securities are rated by Moody's Investors Service, Inc., Standard and Poor's Ratings Group, Fitch Investors Service, Inc. and Duff and Phelps, Inc. For information relating to the ratings of the Company's securities, see Item 7 "Management's Discussion and Analysis 17 of Financial Condition and Results of Operations" for the Year Ended December 31, 1995. The First Mortgage With the early redemption of all outstanding First Mortgage Bonds in September 1995, the Company satisfied its obligation and discharged the lien of the First Mortgage. When the First Mortgage was discharged, the Company's outstanding General and Refunding Bonds (the G&R Bonds) became its only outstanding secured indebtedness. The G&R Mortgage The Company's General and Refunding Indenture dated June 1, 1975 (the G&R Indenture or G&R Mortgage) is a lien upon substantially all of the Company's properties. Outstanding at December 31, 1995 were approximately $2 billion of G&R Bonds. Additional information concerning the Company's G&R Mortgage is discussed below and in Note 7 of Notes to the Financial Statements for the Year Ended December 31, 1995. Under the G&R Mortgage, the Company may issue G&R Bonds on the basis of either matured or redeemed G&R Bonds or on the basis of the Bondable Value of Property Additions (BVPA). Generally, when issuing G&R Bonds, the Company must satisfy a mortgage interest coverage requirement, known as the G&R Mortgage Interest Coverage. The G&R Mortgage Interest Coverage requires that the net earnings as defined in the G&R indenture, available for interest for any 12 consecutive calendar months within the 15 consecutive calendar months preceding the issuance of any G&R Bonds must be equal to at least two times the stated annual interest payable on outstanding G&R Bonds, including any new G&R Bonds. Under the G&R Mortgage Interest Coverage, the Company would currently be able to issue approximately $4.9 billion of additional G&R Bonds based upon net earnings for the 12 months ended December 31, 1995 and an assumed interest rate of 9% for such additional G&R Bonds. A change of 1/8 of 1% in the assumed interest rate of such G&R Bonds would result in a change of approximately $67 million in the amount of such G&R Bonds that the Company could issue. The maximum amount of additional G&R Bonds which the Company is currently able to issue on the basis of either matured or retired G&R Bonds and on the basis of the BVPA is approximately $627 million. Under the provisions of the G&R indenture, the Company must also satisfy by June 30 of each year a Sinking Fund requirement which is equal to 1% of the total of all G&R Bonds outstanding on December 31 of the prior year. The Sinking Fund requirement can be satisfied by depositing cash with the Trustee which can be withdrawn later by substituting 60% of BVPA or retired G&R Bonds when they become available, or an amount not exceeding 60% of BVPA or the principal amount of retired G&R Bonds. The Company believes that, based upon currently scheduled redemptions and maturities, it will have sufficient retired G&R Bonds for the foreseeable future to satisfy the 18 requirements of the G&R Sinking Fund. Based upon this calculation for the year ended December 31, 1995, the Sinking Fund requirement is $25 million which will be satisfied by June 30, 1996. The Company is planning to satisfy this requirement in 1996 with retired G&R Bonds, property additions or cash. The G&R Mortgage also has a Maintenance Fund covenant which requires that the aggregate amount of property additions added subsequent to December 31, 1974 must be, as of the end of each calendar year subsequent to 1974, at least equal to the cumulative provision for depreciation (as defined in the G&R Mortgage) from December 31, 1974. The G&R Mortgage requires cash (or retired G&R Bonds) to be deposited to satisfy the Maintenance Fund requirement only when such cumulative provision for depreciation exceeds such aggregate amount of property additions. As of December 31, 1995, the amount of such cumulative property additions calculated pursuant to the G&R Mortgage was approximately $10.0 billion, including approximately $5.5 billion of property additions attributable to Shoreham. Also, as of December 31, 1995, the amount of the cumulative provision for depreciation, similarly calculated, was approximately $1.7 billion. The Company anticipates that the aggregate amount of property additions will continue to exceed the cumulative provision for depreciation. Unsecured Debt The Company's G&R Mortgage and its Restated Certificate of Incorporation do not contain any limitations upon the issuance of unsecured debt. The Company's unsecured debt consists of Debentures and certain tax-exempt securities. The Company's Debenture Indenture, dated as of November 1, 1986, as supplemented, and its Debenture Indenture, dated as of November 1, 1992, as supplemented, (together, the Debenture Indentures) each provide for the issuance of an unlimited amount of Debentures to be issued in amounts that may be authorized from time to time in one or more series. The Debentures are unsecured and rank pari passu with all other unsecured indebtedness of the Company subordinate to the obligations secured by the Company's G&R Mortgage. At December 31, 1995, there were approximately $2.3 billion of Debentures outstanding. As of December 31, 1995, the Company had outstanding approximately $917 million principal amount of promissory notes, securing: (i) $2 million of tax-exempt Industrial Development Revenue Bonds (IDRBs); (ii) approximately $215 million of tax-exempt Pollution Control Revenue Bonds (PCRBs); and (iii) $700 million of tax-exempt Electric Facility Revenue Bonds (EFRBs). Of these amounts, certain series are subject to periodic tenders. For additional information respecting tender provisions and other information on the Company's outstanding debt securities see Note 7 of Notes to Financial Statements for the Year Ended December 31, 1995. 19 Equity Securities Preferred Stock The Company's Restated Certificate of Incorporation provides that the Company may not issue additional preferred stock unless for any 12 consecutive calendar months within the 15 calendar months immediately preceding the calendar month within which such additional shares shall be issued, the net earnings of the Company available for the payment of interest charges on the Company's interest-bearing indebtedness, determined after provision for depreciation and all taxes, and in accordance with sound accounting practice, shall have been at least one and one-half times the aggregate of the annual interest charges on the interest-bearing indebtedness of the Company and annual dividend requirements on all shares of preferred stock to be outstanding immediately after the proposed issue of such shares of the preferred stock (the Earnings Ratio). The Company currently satisfies the Earnings Ratio and could issue up to approximately $450 million of preferred stock. When the proceeds from the sale of the preferred stock to be issued are used to redeem outstanding preferred stock, the requirement to satisfy the Earnings Ratio is not applicable, if the dividend requirement and the requirements for redemption in a voluntary liquidation of the preferred stock to be issued do not exceed the respective amounts for the preferred stock which is to be retired. Additional preferred stock may also be issued beyond amounts permitted under the Earnings Ratio with the approval of at least two-thirds of the votes entitled to be cast by the holders of the total number of shares of outstanding preferred stock. Default in the payment of dividends on any shares of preferred stock in an amount equivalent to or exceeding four full quarterly dividends for any series of preferred stock entitles all holders of shares of preferred stock, voting separately as a class and regardless of series, to elect a majority of the Board of Directors of the Company. The remaining Directors are elected by the holders of common stock. The right of holders of shares of preferred stock to elect a majority of the Board of Directors ceases when and if the Company ceases to be in default in the payment of its preferred stock dividends. At that time, the terms of office of the Directors of the Company elected by the holders of preferred stock terminate and the resulting vacancies are to be filled by the vote of the remaining common stock Directors. Preference Stock Issuance of preference stock, which is subordinate to the Company's preferred stock, but senior to its common stock, with respect to declaration and payment of dividends and the right to receive amounts payable on any dissolution, does not require satisfaction of a net earnings test or any other coverage requirement, unless established by the Board of Directors for one or more series of preference stock, prior to the issuance of such series. No preference stock has been issued by the Company, nor does the Company currently plan to issue any. 20 Common Stock The Company's common stock is listed on the New York and Pacific Stock Exchanges, and is traded under the symbol "LIL". The Board of Directors' current policy is to pay cash dividends on the common stock on a quarterly basis. However, before declaring any dividends, the Company's Board of Directors considers, among other factors, the Company's financial condition, its ability to comply with provisions of the Company's Restated Certificate of Incorporation and the availability of retained earnings, future earnings and cash. EXECUTIVE OFFICERS OF THE COMPANY: Current information regarding the Company's Executive Officers, all of whom serve at the will of the Board of Directors, follows: William J. Catacosinos: Dr. Catacosinos has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since January 1984, and as a Director since December 1978. He currently chairs the Executive Committee of the Company's Board of Directors. Dr. Catacosinos also served as President of the Company from March 1984 to January 1987 and from March 1994 to present. Dr. Catacosinos, 65, a resident of Mill Neck, Long Island, earned a bachelor of science degree, a masters degree in business administration and a doctoral degree in economics from New York University. Dr. Catacosinos is a member of the Boards of First National Bank of L.I., U.S. Life Corporation, the Long Island Association, the Business Alliance for a New New York, and a member of the Advisory Committee of the Huntington Township Chamber Foundation. He is the former Chairman and Chief Executive Officer of Applied Digital Data Systems, Inc., Hauppauge, New York; served as Chairman of the Board and Treasurer of Corometric Systems, Inc. of Wallingford, Connecticut; and served as Assistant Director at Brookhaven National Laboratory, Upton, New York. Dr. Catacosinos is a former member of the Boards of Utilities Mutual Insurance Company; Ketema, Inc.; Austin International Communications; and the German American Chamber of Commerce. Theodore A. Babcock: Treasurer since February 1994, and Assistant Corporate Secretary since January 1996, Mr. Babcock joined the Company in July 1992 as Assistant Treasurer. He previously spent five years in the AMBASE Corporation as an Assistant Vice President and was promoted in 1988 to Vice President and Treasurer. Prior to AMBASE, Mr. Babcock spent 11 years with the Associated Dry Goods Corporation where he was promoted to Assistant Treasurer and Director of Corporate Treasury Operations in 1984. Mr. Babcock, 41, received a bachelor of science degree in accounting from Manhattan College and a masters degree in finance from Iona College. James T. Flynn: Chief Operating Officer since March 1994 and Executive Vice President since April 1992, Mr. Flynn joined the Company in October 1986 as Vice President of Fossil Production. He later assumed the position of Group Vice President, Engineering and Operations. Before joining the Company, Mr. Flynn, 62, was General 21 Manager-Eastern Service Department for General Electric. His career began as a member of General Electric's Technical Marketing Program in 1957. He holds a bachelor of science degree in mechanical engineering from Bucknell University and is a Licensed Professional Engineer in the State of Pennsylvania. Joseph E. Fontana: Controller of the Company since October 1994, Mr. Fontana joined the Company in December 1992 as Director of Accounting Services. He held the position of Assistant Controller from February 1994 through September 1994. In his capacity as Controller, Mr. Fontana serves as the Chief Accounting Officer. Mr. Fontana is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. Before joining the Company, Mr. Fontana was a Senior Manager at the international accounting firm, Ernst & Young LLP. Mr. Fontana, 38, holds a bachelor of science degree in accounting from Westchester State College and is a Certified Public Accountant. Robert X. Kelleher: Vice President of Human Resources since July 1986, Mr. Kelleher joined the Company in 1959 and has held various managerial positions in the Finance, Accounting, Purchasing, Stores and Employee Relations organizations. He was Industrial Relations Manager from 1975 to 1979, Manager of the Employee Relations Department from 1979 to 1985 and Assistant Vice President of the Employee Relations Department from 1985 to 1986. Mr. Kelleher, 59, is a graduate of St. Francis College and the Human Resources Management and Executive Management Programs of Pennsylvania State University. Mr. Kelleher is a member of the American Compensation Association, Personnel Directors Council, Industrial Relations Research Institute, and Edison Electric Institute's Labor Relations Committee. John D. Leonard, Jr.: Vice President of Engineering and Construction since April 1994, Mr. Leonard joined the Company in 1984 as Vice President of Nuclear Operations. He continues to be responsible for nuclear issues. Mr. Leonard assumed additional duties as Vice President of Corporate Services from July 1989 through March 1994. Mr. Leonard was the Vice President and Assistant Chief Engineer for Design and Analysis at the New York Power Authority, from 1980 to 1984. Prior to this position, he served as a Resident Manager of the Fitzpatrick Nuclear Power Plant for approximately five years. Before accepting a position at the New York Power Authority, Mr. Leonard served as Corporate Supervisor of Operational Quality Assurance of the Virginia Electric Power Company from 1974 to 1976. In 1974, Mr. Leonard retired with the rank of Commander from the United States Navy, having commanded two nuclear-powered submarines in a career that spanned 20 years. He holds a bachelor of science degree from Duke University and a master of science degree from the Naval Post Graduate School. He is 63 and a Licensed Professional Engineer in the State of New York. Adam M. Madsen: Vice President of Corporate & Strategic Planning since 1984, Mr. Madsen, 59, holds a bachelors degree in electrical 22 engineering from Manhattan College and a master of science degree in nuclear engineering from Long Island University. He has been with the Company since 1961, serving in various engineering positions including Manager of Engineering from 1978 to 1984. Prior to that time, he held the position of Manager of the Planning Department. Since 1978, Mr. Madsen has been the Company's representative to the Planning Committee of the New York Power Pool. He is a member of the Northeast Power Coordinating Council's Executive Committee and the Council's Reliability Coordinating Committee. He also serves on the Board of Directors of the Empire State Electric Energy Research Company. Mr. Madsen is a Licensed Professional Engineer in the State of New York. Kathleen A. Marion: Vice President of Corporate Services since April 1994 and Corporate Secretary since April 1992, Ms. Marion has served as Assistant to the Chairman since April 1987. She was Assistant Corporate Secretary from April 1990 to 1992. Ms. Marion, 41, has a bachelor of science degree in business and finance from the State University of New York at Old Westbury. Arthur C. Marquardt: Senior Vice President of Gas Business Unit since March 1992, Mr. Marquardt joined the Company in January 1991. He held the position of Vice President of Strategic Business Planning from January 1991 through March 1992. He is Chairman of the New York Facilities Executive Committee, a Director of the Huntington Chamber of Commerce, the Huntington Chamber Foundation and the Long Island Builders Institute, and a member of the Family Service League Business Advisory Council. He has had extensive and varied business experience at Combustion Engineering Inc.; General Electric Company; Quadrex Corporation; and Pacific Nuclear Systems, Inc. where he was President and Chief Operating Officer. Mr. Marquardt, 49, received a bachelor of science degree in mechanical engineering from Tufts University. Brian R. McCaffrey: Vice President of Administration since March 1987, Mr. McCaffrey joined the Company in 1973. Mr. McCaffrey, 51, holds a bachelor of science degree in aerospace engineering from the University of Notre Dame. He also received a master of science degree in aerospace engineering from Pennsylvania State University and a master of science degree in nuclear engineering from Polytechnic University. He is a Licensed Professional Engineer in the State of New York. Prior to this assignment as Vice President, Mr. McCaffrey served in many positions in the nuclear organizations of the Company and positions in engineering capacities associated with gas turbine and fossil power station projects. Mr. McCaffrey is a member of the Executive Board of the Suffolk County Council Boy Scouts of America. Joseph W. McDonnell: Vice President of External Affairs since July 1992, Dr. McDonnell, joined the Company in 1984. Dr. McDonnell was Assistant to the Chairman from 1984 through 1988 when he was named Vice President of Communications. Prior to joining the Company, he was the Director of Strategic Planning and Business Administration for Applied Digital Data Systems, Inc. and Associate Director of the University Hospital at the State University of New York at Stony 23 Brook. Dr. McDonnell, 44, holds bachelor of arts and master of arts degrees in philosophy from the State University of New York at Stony Brook and a Ph.D in communications from the University of Southern California. Leonard P. Novello: Mr. Novello joined the Company in April 1995 as General Counsel. Before joining the Company, Mr. Novello was General Counsel at the international accounting firm of KPMG Peat Marwick. As General Counsel, Mr. Novello advised senior management on a variety of litigation and corporate issues and was responsible for all legal matters arising out of the firm's operations and its audit, tax and management consulting engagements. Prior to joining Peat Marwick in 1975 as an Associate General Counsel, Mr. Novello was associated with the New York law firm of Cravath, Swaine and Moore. Mr. Novello is active in professional associations and is a member of the Executive Committee of the Litigation Commercial and Federal Section of the New York State Bar Association, a member of the Professional Responsibility Committee of the Association of the Bar of the City of New York and is a Vice-President of the Federal Bar Council. He is also a member of the Executive Committee of the CPR Institute for Dispute Resolution. Mr. Novello, 55, has a bachelor's degree from the College of the Holy Cross and a juris doctorate from Fordham University. Anthony Nozzolillo: Senior Vice President of Finance and Chief Financial Officer of the Company since February 1994, Mr. Nozzolillo served as the Company's Treasurer from July 1992 to February 1994. He has been with the Company since 1972 serving in various positions including Manager of Financial Planning and Manager of Systems Planning. Mr. Nozzolillo is a former member of the Boards of Utilities Mutual Insurance Company. Mr. Nozzolillo, 47, holds a bachelor of science degree in electrical engineering from the Polytechnic Institute of Brooklyn and a master of business administration degree from Long Island University C.W. Post Campus. Richard Reichler: Deputy General Counsel and Vice President of Financial Planning and Taxation since December 1994, Mr. Reichler held the position of Assistant Vice President for Tax and Benefits Planning from October 1992 through December 1994. Prior to joining the Company, he was a partner in the international accounting firm of Ernst & Young LLP for twenty-three years. Mr. Reichler, 61, holds a bachelor of arts degree from Columbia College and a bachelor of law degree from Columbia University School of Law. Since 1989, he has taught various courses at Baruch College, including state and local taxation, corporate taxation and real estate taxation. He has authored several publications on tax and employee benefit topics and has served as a member of the Executive Committee of the Tax Section of the New York State Bar Association and as an Advisor to the Urban Development Corporation High Technology Advisory Council. William G. Schiffmacher: Vice President of Customer Relations since April 1994, Mr. Schiffmacher held the position of Vice President of 24 Electric Operations from July 1990 through March 1994. He joined the Company in 1965 after receiving a bachelor of electrical engineering degree from Manhattan College. Mr. Schiffmacher, 52, also holds a master of science degree in management engineering from Long Island University. He has held a variety of positions in the Company, including Manager of Electric System Operations, Manager of Electrical Engineering and Vice President of Engineering and Construction. Robert B. Steger: Vice President of Electric Operations since April 1994, Mr. Steger held the position of Vice President of Fossil Production from February 1990 through March 1994. He joined the Company in 1963 and has since held progressive operating and engineering positions including Manager of Electric Production-Fossil from 1985 through 1989. Mr. Steger, 59, holds a bachelor of mechanical engineering degree from Pratt Institute and is a Licensed Professional Engineer in the State of New York. William E. Steiger, Jr.: Vice President of Fossil Production since April 1994, Mr. Steiger, 52, held the position of Vice President of Engineering and Construction from July 1990 through March 1994. He has been with the Company since 1968. During his career with the Company, he has served, among other positions, as Lead Nuclear Engineer for Shoreham, Chief Operations Engineer for Shoreham, Plant Manager for Shoreham as well as Assistant Vice President of Nuclear Operations. Mr. Steiger, received a bachelor of science degree in marine engineering from the United States Merchant Marine Academy and a master of science degree in nuclear engineering from Long Island University. Edward J. Youngling: Senior Vice President of the Electric Business Unit since April 1994, Mr. Youngling held the position of Vice President of Customer Relations and Conservation from March 1993 through March 1994. He joined the Company in 1968 as an Assistant Engineer in the electric production department and has held various positions in the offices of fossil production, engineering and nuclear operations including service as Department Manager of Nuclear Engineering. In 1988, Mr. Youngling was named Vice President of Conservation and Load Management. In 1990, Mr. Youngling became Vice President of Customer Relations. The Office of Customer Relations and the Office of Conservation were merged in March 1994. Mr. Youngling, 51, holds a bachelor of science degree in mechanical engineering from Lehigh University. 25 CAPITAL REQUIREMENTS, LIQUIDITY AND CAPITAL PROVIDED: Information as to "Capital Requirements", "Liquidity" and "Capital Provided" appears in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading Liquidity and Capital Requirements and Capital Provided for the Year Ended December 31, 1995. ITEM 2. PROPERTIES The location and general character of the principal properties of the Company are described in Item 1, "Business" under the headings "Electric Operations" and "Gas Operations." ITEM 3. LEGAL PROCEEDINGS Shoreham Pursuant to the LIPA Act, LIPA is required to make payments-in-lieu-of-taxes (PILOTs) to the municipalities that impose real property taxes on Shoreham. Pursuant to the 1989 Settlement, the Company agreed to fund LIPA's obligation to make Shoreham PILOTs. The timing and duration of PILOTs under the LIPA Act are the subject of litigation entitled LIPA, et al. v. Shoreham-Wading River Central School District, et al., brought in Nassau County Supreme Court by LIPA against, among others, Suffolk County, the Town of Brookhaven and the Shoreham-Wading River Central School District. The Company was permitted to intervene in the lawsuit. On January 10, 1994, the Appellate Division, Second Department, affirmed a lower court's March 29, 1993 decision holding, in major part, that the Company is not obligated for any real property taxes that accrued after February 28, 1992, attributable to property that it conveyed to LIPA, that PILOTs commenced on March 1, 1992, that PILOTs are subject to refunds and that the LIPA Act does not provide for the termination of PILOTs. Generally, these holdings are favorable to the Company. In October 1995, the Court of Appeals granted the parties' motion for leave to appeal the lower court decision following an agreement between the parties to voluntarily dismiss outstanding causes of action. The proper amount of PILOTs is to be determined in pending litigation described immediately below. The costs of Shoreham included real property taxes imposed by, among others, the Town of Brookhaven on Shoreham and capitalized by the Company during construction. The Company had sought judicial review in New York Supreme Court, Suffolk County (Long Island Lighting Company v. The Assessor of the Town of Brookhaven, et al.) of the assessments upon which those taxes were based for the years 1976 through 1992 (excluding 1979). The Supreme Court consolidated the review of the tax years at issue into two phases: 1976 through 1983, excluding 1979, which had been settled (Phase I); and 1984 through 1992 (Phase II). In October 1992, the Supreme Court ruled that 26 Shoreham had been overvalued for real property tax purposes for Phase I. In May 1995, the New York Court of Appeals denied the request of the Town of Brookhaven and other respondents for leave to appeal this decision, which had been previously affirmed in an unanimous decision by the New York State Appellate Division, Second Department. Thereafter, in January 1996, the Company received approximately $81 million, including interest, from Suffolk County pursuant to this Phase I judgment. In the Phase II proceeding, the Company is seeking to recover over $500 million, plus interest, in property taxes paid on Shoreham for the years 1984-1992. In this proceeding, the taking of evidence has been completed and final briefs have been filed by the parties. The amount of the Company's recovery, if any, in the Phase II proceeding and the timing of all refunds cannot yet be determined. LIPA has been permitted to intervene in the proceeding for the 1991-92 tax year which under the Appellate Division's decision in LIPA, et al. v. Shoreham-Wading River Central School District, et al., discussed above, will partially establish LIPA's PILOT obligation. Pursuant to the Appellate Division's decision, LIPA's PILOT obligations will be determined either by agreement or in a separate proceeding challenging the Shoreham assessment for the 1992-93 tax year. Environmental On February 18, 1994, a lawsuit was filed in the United States District Court for the Eastern District of New York by the Town of Oyster Bay (the Town), against the Company and 19 other PRPs. The Town is seeking indemnification for remediation and investigation costs that have been or will be incurred for a federal Superfund site in Syosset, New York, which served as a Town-owned and operated landfill between 1954 and 1975. In a Record of Decision issued in September 1990, the EPA set forth a remedial design plan, the cost of which was estimated at $27 million and is reflected in the Town's lawsuit. In an Administrative Consent Decree entered into between the EPA and the Town in December 1990, the Town agreed to undertake remediation at the site. The Company is participating in a joint PRP defense effort with several other defendants. Liability, if imposed, would be joint and several. While the outcome of this matter is not certain, based upon the Company's past experience in similar matters and the number and financial condition of the corporate defendants named in the litigation, the Company does not believe that this proceeding will have a material adverse effect on its financial condition. Human Resources Pending before federal and state courts, the federal Equal Employment Opportunity Commission and the New York State Division of Human Rights are charges by individuals alleging that the Company discriminated against them, or that they were the subject of harassment, on various grounds. 27 The Civil Rights Bureau of the New York Attorney General's office has subpoenaed the Company for the production of documents to aid in its investigation as to whether the Company has engaged in discriminatory employment practices based upon age. No charges have been filed and the Attorney General has not made any further inquiry. The Company has estimated that any costs to the Company resulting from these matters will not have a material adverse effect on its financial condition. In May 1995, eight participants of the Company's Retirement Income Plan (RIP) filed a lawsuit against the Company, the RIP and Robert X. Kelleher, the Plan Administrator, in the United States District Court for the Eastern District of New York (Becher, et al. v. Long Island Lighting Company, et al.). In January 1996, the Court ordered that this action be maintained as a class action. This proceeding arose in connection with the plaintiffs' withdrawal, approximately twenty-five years ago, of contributions made to the Plan, thereby resulting in a reduction of their pension benefits. The plaintiffs are now seeking, among other things, to have these reduced benefits restored to their pension accounts. The Company's liability, if any, resulting from this proceeding cannot yet be determined. However, the Company maintains that the plaintiffs' claims are without merit and intends to vigorously defend such claims. Other Matters On January 13, 1993, the New York State Department of Law (DOL) informed the Company that the DOL's Antitrust Bureau opened an investigation into its Full Service Pilot Program and Contractor Advisory Council, two programs designed to increase the Company's residential natural gas sales. The DOL stated that the implementation of the Full Service Pilot Program and the practices of the Contractor Advisory Council may have anticompetitive effects in the gas-fired heating equipment installation and conversion business and that a preliminary investigation has raised questions of possible violations of the New York General Business Law and the Sherman Act. The DOL has not taken any further action in this matter. If required, the Company expects that it can demonstrate that the programs identified by the DOL for investigation are very limited in scope and do not involve any violations. The outcome of the investigation by the DOL, if adverse, is not expected to have a material effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 28 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS At January 31, 1996, the Company had 92,542 registered holders of record of common stock. The common stock of the Company is traded on the New York Stock Exchange and the Pacific Stock Exchange. Certain of the Company's preferred stock series are traded on the New York Stock Exchange. Information respecting the high and low sales prices and the dividends declared on the Company's common stock during the past two years is set forth in the table below. 1995 1994 Market Dividends Market Dividends Prices Declared Prices Declared Per Share Per share High Low High Low 1st Quarter $16 3/4 $13 1/4 $0.445 $24 1/4 $21 1/2 $0.445 2nd Quarter 17 1/8 14 3/8 0.445 22 7/8 17 1/2 0.445 3rd Quarter 17 3/4 15 3/8 0.445 19 3/8 15 0.445 4th Quarter 17 3/4 15 5/8 0.445 18 1/8 15 1/4 0.445 29
ITEM 6: SELECTED FINANCIAL DATA (In thousands of dollars except per share amounts) 1995 1994 1993 1992 1991 SUMMARY OF OPERATIONS Table 1 Revenues $ 3,075,128 $ 3,067,307 $ 2,880,995 $ 2,621,839 $ 2,547,729 Operating expenses 2,343,510 2,322,362 2,125,444 1,880,734 1,762,449 Operating income 731,618 744,945 755,551 741,105 785,280 Other income and (deductions) 43,703 52,719 70,874 66,330 40,482 Income before interest charges 775,321 797,664 826,425 807,435 825,762 Interest charges 472,035 495,812 529,862 505,461 520,224 Net income 303,286 301,852 296,563 301,974 305,538 Preferred stock dividend requirements 52,620 53,020 56,108 63,954 66,394 Earnings for Common Stock $ 250,666 $ 248,832 $ 240,455 $ 238,020 $ 239,144 Average common shares outstanding (000) 119,195 115,880 112,057 111,439 111,348 Earnings per Common Share $ 2.10 $ 2.15 $ 2.15 $ 2.14 $ 2.15 Common stock dividends declared per share $ 1.78 $ 1.78 $ 1.76 $ 1.72 $ 1.60 Common stock dividends paid per share $ 1.78 $ 1.78 $ 1.75 $ 1.71 $ 1.55 Book value per common share at December 31 $ 20.50 $ 20.21 $ 19.88 $ 19.58 $ 19.13 Common shares outstanding at December 31 (000) 119,655 118,417 112,332 111,600 111,365 Common shareowners of record at December 31 93,088 96,491 94,877 86,111 90,435 CAPITALIZATION RATIOS* Table 2 Long-term debt 61.8% 62.5% 65.0% 64.7% 63.9% Preferred stock 8.6 8.6 8.5 8.8 8.8 Common equity 29.6 28.9 26.5 26.5 27.3 Total 100.0% 100.0% 100.0% 100.0% 100.0% *Includes current maturities of long-term debt and current redemption requirements of preferred stock. (In thousands of dollars) OPERATIONS AND MAINTENANCE EXPENSE DETAILS Table 3 Payroll and employee benefits $ 440,721 $ 435,830 $ 418,766 $ 420,297 $ 403,983 Less - Charged to construction and other 165,733 155,766 130,432 131,447 121,911 Payroll and employee benefits charged to operations 274,988 280,064 288,334 288,850 282,072 Fuel and Purchased Power Fuel - electric operations 266,039 261,154 287,349 282,138 354,859 Fuel - gas operations 264,282 267,629 253,511 206,344 172,992 Purchased power costs 309,807 307,584 292,136 280,914 197,154 Fuel cost adjustments deferred (5,149) 11,619 (5,405) (27,612) 43,697 Total fuel and purchased power 834,979 847,986 827,591 741,784 768,702 All other 236,405 260,590 233,326 209,095 240,687 Total Operations and Maintenance Expense $ 1,346,372 $ 1,388,640 $ 1,349,251 $ 1,239,729 $ 1,291,461 FULL-TIME EMPLOYEES AT DECEMBER 31 5,688 5,947 6,215 6,438 6,538
30
(In thousands of dollars) ELECTRIC OPERATING INCOME Table 4 1995 1994 1993 1992 1991 REVENUES Residential $ 1,204,987 $ 1,202,124 $ 1,145,891 $ 1,045,799 $ 1,047,490 Commercial and industrial 1,194,014 1,196,422 1,132,487 1,076,302 1,070,098 Other system revenues 52,472 52,477 49,790 49,395 47,838 Total system revenues 2,451,473 2,451,023 2,328,168 2,171,496 2,165,426 Sales to other utilities 19,104 14,895 12,872 9,997 23,040 Other revenues 13,437 15,719 11,069 13,139 8,102 Total Revenues 2,484,014 2,481,637 2,352,109 2,194,632 2,196,568 OPERATING EXPENSES Operations - fuel and purchased power 570,697 568,738 579,032 559,583 593,656 Operations - other 293,184 310,438 306,116 294,909 296,798 Maintenance 106,031 107,573 111,765 105,341 127,446 Depreciation and amortization 121,980 111,996 106,149 104,034 104,172 Base financial component amortization 100,971 100,971 100,971 100,971 100,971 Rate moderation component amortization 21,933 197,656 88,667 (30,444) (228,572) Regulatory liability component amortization (79,359) (79,359) (79,359) (79,359) (79,359) 1989 Settlement credits amortization (9,214) (9,214) (9,214) (9,214) (9,214) Other regulatory amortization 155,532 (4,883) (17,082) (21,984) 10,375 Operating taxes 375,164 336,263 326,407 331,122 338,429 Federal income tax - current 14,596 10,784 6,324 530 515 Federal income tax - deferred and other 168,377 156,646 158,941 158,908 173,259 Total Operating Expenses 1,839,892 1,807,609 1,678,717 1,514,397 1,428,476 Electric Operating Income $ 644,122 $ 674,028 $ 673,392 $ 680,235 $ 768,092 (In thousands of dollars) GAS OPERATING INCOME Table 5 REVENUES Residential - space heating $ 323,729 $ 326,474 $ 310,109 $ 243,950 $ 190,976 - other 42,046 42,263 39,515 33,035 29,383 Commercial and industrial - space heating 130,964 126,092 106,140 90,363 70,938 - other 34,293 35,275 33,181 29,094 25,515 Total firm revenues 531,032 530,104 488,945 396,442 316,812 Interruptible revenues 32,837 26,804 24,028 19,658 21,686 Total system revenues 563,869 556,908 512,973 416,100 338,498 Off-system revenues, net 16,213 20,904 5,812 - - Other revenues 11,032 7,858 10,101 11,107 12,663 Total Revenues 591,114 585,670 528,886 427,207 351,161 OPERATING EXPENSES Operations - fuel 264,282 279,248 248,559 182,201 175,046 Operations - other 90,054 95,576 81,692 77,300 78,469 Maintenance 22,124 27,067 22,087 20,395 20,046 Depreciation and amortization 23,377 18,668 16,322 15,103 14,783 Other regulatory amortization 6,073 9,211 (962) (88) - Operating taxes 72,343 70,632 59,440 57,866 49,951 Federal income tax - deferred and other 25,365 14,351 19,589 13,560 (4,322) Total Operating Expenses 503,618 514,753 446,727 366,337 333,973 Gas Operating Income $ 87,496 $ 70,917 $ 82,159 $ 60,870 $ 17,188
31
1995 1994 1993 1992 1991 ELECTRIC SALES AND CUSTOMERS Table 6 SALES - MILLIONS OF KWH Residential 7,156 7,159 7,118 6,788 7,022 Commercial and industrial 8,336 8,394 8,257 8,181 8,322 Other system sales 460 457 449 471 469 Total system sales 15,952 16,010 15,824 15,440 15,813 Sales to other utilities 620 372 304 227 598 Total Sales 16,572 16,382 16,128 15,667 16,411 CUSTOMERS - MONTHLY AVERAGE Residential 915,162 908,490 905,997 902,885 898,974 Commercial and industrial 103,669 102,490 102,254 101,838 101,740 Other 4,549 4,583 4,553 4,593 4,540 TOTAL CUSTOMERS - MONTHLY AVERAGE 1,023,380 1,015,563 1,012,804 1,009,316 1,005,254 CUSTOMERS - AT DECEMBER 31 1,025,107 1,016,739 1,011,965 1,009,028 1,005,363 RESIDENTIAL kWh per customer 7,819 7,880 7,857 7,518 7,811 Revenue per kWh 16.84 16.79 16.10 15.41 14.92 COMMERCIAL AND INDUSTRIAL kWh per customer 80,410 81,901 80,750 80,333 81,797 Revenue per kWh 14.32 14.25 13.72 13.16 12.86 SYSTEM kWh per customer 15,588 15,765 15,624 15,297 15,730 Revenue per kWh 15.37 15.31 14.71 14.06 13.69 GAS SALES AND CUSTOMERS Table 7 SALES - THOUSANDS OF DTH Residential - space heating 35,336 35,693 37,191 35,089 29,687 - other 2,929 3,151 3,297 3,203 3,195 Commercial and industrial - space heating 16,170 15,679 14,366 13,662 11,636 - other 4,269 4,366 4,329 4,338 4,171 Total firm sales 58,704 58,889 59,183 56,292 48,689 Interruptible sales 9,176 6,914 5,920 5,090 4,538 Off-system sales 7,743 7,232 2,894 - - Total Sales 75,623 73,035 67,997 61,382 53,227 CUSTOMERS - MONTHLY AVERAGE Residential - space heating 245,452 239,857 233,882 227,834 220,562 - other 162,114 163,608 166,974 169,189 171,581 Commercial and industrial - space heating 35,027 33,776 32,783 31,666 30,453 - other 10,313 10,448 10,631 10,777 11,003 Total firm customers 452,906 447,689 444,270 439,466 433,599 Interruptible customers 623 576 542 531 472 TOTAL CUSTOMERS - MONTHLY AVERAGE 453,529 448,265 444,812 439,997 434,071 CUSTOMERS - AT DECEMBER 31 455,869 449,906 446,384 442,117 436,853 RESIDENTIAL dth per customer 93.9 96.3 101.0 96.4 83.9 Revenue per dth $ 9.56 $ 9.49 $ 8.64 $ 7.23 $ 6.70 COMMERCIAL AND INDUSTRIAL dth per customer 450.8 453.3 430.6 424.1 381.3 Revenue per dth $ 8.09 $ 8.05 $ 7.45 $ 6.64 $ 6.10 SYSTEM dth per customer 149.7 146.8 146.4 139.5 122.6 Revenue per dth $ 8.31 $ 8.46 $ 7.88 $ 6.78 $ 6.36
32
Table 8 ELECTRIC OPERATIONS 1995 1994 1993 1992 1991 ENERGY - MILLIONS OF KWH Net generation 10,744 10,034 10,514 10,592 13,570 Power purchased 7,143 7,640 7,023 6,438 4,236 Total Energy Available 17,887 17,674 17,537 17,030 17,806 System sales 15,952 16,010 15,824 15,440 15,813 Company use and unaccounted for 1,315 1,292 1,409 1,363 1,395 Total system energy requirements 17,267 17,302 17,233 16,803 17,208 Sales to other utilities 620 372 304 227 598 Total Energy Available 17,887 17,674 17,537 17,030 17,806 PEAK DEMAND - MW Station coincident demand 3,591 3,253 2,931 2,975 3,085 Power purchased - net 486 629 1,036 636 819 System Peak Demand 4,077 3,882 3,967 3,611 3,904 System Capablility - MW Company stations 3,957 4,063 4,063 4,091 4,078 Nine Mile Point 2 (18% share) 203 189 188 188 194 Firm purchases - net 713 616 548 432 423 Total Capability 4,873 4,868 4,799 4,711 4,695 FUEL CONSUMED FOR ELECTRIC OPERATIONS Oil - thousands of barrels 5,154 7,518 9,740 10,656 15,314 Gas - thousands of dth 69,826 44,308 36,269 34,475 32,924 Nuclear - thousands of MW days - thermal 169 203 175 124 154 FUEL MIX (PERCENTAGE OF TOTAL ENERGY AVAILABLE) Oil 17% 25% 34% 37% 50% Gas 36 23 19 19 18 Purchased power 40 43 40 38 25 Nuclear fuel 7 9 7 6 7 Total 100% 100% 100% 100% 100% Table 9 GAS OPERATIONS COMPANY REQUIREMENTS-THOUSANDS OF DTH System sales 67,880 65,803 65,103 61,382 53,227 Off-system sales 7,743 7,232 2,894 0 0 Company use and unaccounted for 2,054 2,516 1,905 3,577 2,412 Total Company Requirements 77,677 75,551 69,902 64,959 55,639 MAXIMUM DAY SENDOUT - DTH 564,874 585,227 485,896 448,726 435,050 SYSTEM CAPABILITY - DTH PER DAY Natural gas 592,335 579,897 561,584 561,584 507,344 LNG manufactured or LP gas 124,700 125,700 120,700 120,700 128,200 Total Capability 717,035 705,597 682,284 682,284 635,544 HEATING DEGREE DAYS (30 year average 4,969) 4,906 4,839 4,899 5,066 4,378
33
(In thousands of dollars) 1995 1994 1993 1992 1991 BALANCE SHEET Table 10 ASSETS Net utility plant $ 3,594,998 $ 3,498,346 $ 3,347,557 $ 3,161,148 $ 3,002,733 Regulatory Assets Base financial component 3,382,519 3,483,490 3,584,461 3,685,432 3,786,403 Rate moderation component 383,086 463,229 609,827 651,657 602,053 Shoreham post-settlement costs 968,999 922,580 777,103 586,045 378,386 Shoreham nuclear fuel 71,244 73,371 75,497 77,629 79,760 Unamortized cost of issuing securities 222,567 254,482 174,694 195,524 168,405 Postretirement benefits other than pensions 383,642 412,727 402,921 - - Regulatory tax asset 1,802,383 1,831,689 1,848,998 - - Other 230,663 250,804 247,858 190,008 131,143 Total Regulatory Assets 7,445,103 7,692,372 7,721,359 5,386,295 5,146,150 Nonutility property and other investments 16,030 24,043 23,029 20,730 9,788 Current assets 1,407,215 1,091,381 1,075,561 961,532 859,242 Deferred charges 21,023 172,768 286,005 323,418 681,347 Total Assets 12,484,369 $ 12,478,910 $ 12,453,511 $ 9,853,123 $ 9,699,260 CAPITALIZATION AND LIABILITIES Long-term debt $ 4,722,675 $ 5,162,675 $ 4,887,733 $ 4,755,733 $ 5,001,016 Unamortized discount on debt (16,075) (17,278) (17,393) (14,731) (14,850) 4,706,600 5,145,397 4,870,340 4,741,002 4,986,166 Preferred stock - redemption required 639,550 644,350 649,150 557,900 524,912 Preferred stock - no redemption required 63,934 63,957 64,038 154,276 154,371 Total Preferred Stock 703,484 708,307 713,188 712,176 679,283 Common stock 598,277 592,083 561,662 558,002 556,825 Premium on capital stock 1,114,508 1,101,240 1,010,283 998,089 993,509 Capital stock expense (50,751) (52,175) (50,427) (39,304) (40,216) Retained earnings 790,919 752,480 711,432 667,988 620,373 Total Common Shareowners' Equity 2,452,953 2,393,628 2,232,950 2,184,775 2,130,491 Total Capitalization 7,863,037 8,247,332 7,816,478 7,637,953 7,795,940 Regulatory Liabilities Regulatory liability component 277,757 357,117 436,476 515,835 595,194 1989 Settlement credits 136,655 145,868 155,081 164,294 173,507 Regulatory tax liability 116,060 111,218 114,748 - - Other 132,694 147,041 142,455 102,718 74,858 Total Regulatory Liabilities 663,166 761,244 848,760 782,847 843,559 Current liabilities 1,032,781 601,311 1,188,972 1,177,130 492,895 Deferred credits 2,476,249 2,365,401 2,166,145 237,893 559,559 Operating reserves 449,136 503,622 433,156 17,300 7,307 Total Capitalization and Liabilities $12,484,369 $ 12,478,910 $ 12,453,511 $ 9,853,123 $ 9,699,260 (In thousands of dollars) CONSTRUCTION EXPENDITURES* Table 11 Electric $ 145,472 $ 136,041 $ 137,583 $ 141,752 $ 129,643 Gas 79,536 120,019 124,859 104,028 89,950 Common 21,477 23,610 42,251 27,124 17,958 Total Construction Expenditures 246,485 $ 279,670 $ 304,693 $ 272,904 $ 237,551
*Includes non-cash allowance for other funds used during construction and excludes Shoreham post-settlement costs. 34 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis addresses matters of significance with regard to the Company and its financial condition, liquidity, capital requirements and results of operations for the last three years. OVERVIEW As the utility industry continues the transition to a more competitive marketplace, the pressure from customers and regulators to reduce rates on Long Island has intensified. This pressure to reduce rates has resulted in an attempt by the Long Island Power Authority (LIPA), an agency of the State of New York, to develop a plan to replace the Company as the primary electric and gas utility on Long Island. The Company's response to these challenges has been to continue a strategic plan designed to avoid future rate increases through an aggressive cost containment program, while maintaining a reliable electric and gas system. The Company believes that these efforts will allow it to improve its financial health and better position itself for the transition to a more competitive environment. SIGNIFICANT ACHIEVEMENTS DURING 1995 INCLUDED: o Cash generated from operations exceeded the Company's operating, construction and refunding requirements; o The extinguishment of the First Mortgage debt with cash on hand, resulting in an improvement in the Company's debt ratio; o Earnings per common share of $2.10, despite a lower allowed return on common equity and the modification of certain performance-based incentives related to the electric business; o The continuation of the Company's quarterly common stock dividend rate at 44 1/2 cents per share; o Continuation of the electric rate freeze for the second consecutive year; o A reduction in the Rate Moderation Component balance from $463 million at December 31, 1994 to $383 million at December 31, 1995; o The establishment of a record peak electric energy demand of 4,077 megawatts on August 4, 1995, surpassing the old record of 3,967 megawatts on July 9, 1993; o Receipt of a 3.2% gas rate increase effective December 1, 1995, which is the final of three gas rate increases under a three-year settlement between the Company and the Public Service Commission of 35 the State of New York; o The addition of over 6,500 new gas space heating customers, resulting from the continuation of the Company's gas expansion program; o A reduction in the level of construction expenditures and operations and maintenance expenses; o A reduction in staff levels through attrition while reducing overtime payments; o Receipt of final regulatory approval of the decommissioning of the Shoreham Nuclear Power Station. As part of its strategic effort to improve its competitive position, the Company, for the rate years ended November 30, 1995 and 1996, froze electric rates by focusing on cost reduction. The Company's cost reduction programs, which seek to maximize operating efficiencies as a means to reduce operating costs, resulted in reducing non-fuel operations and maintenance expenses by approximately $29 million from the 1994 amount. During 1995, the Company continued its policy of not replacing employees who decided to either retire or terminate employment with the Company. The benefits derived from internal process review programs and the Company's commitment to reallocate existing resources have allowed the Company to operate with increased efficiencies despite the loss, through attrition, of 857 employees or about 13% of it's workforce since 1990. In 1995, the Company's workforce was reduced by 259 employees or about 5%. In addition to reducing its operations and maintenance expense, the Company also reduced its capital expenditures by approximately $130 million in 1995, due primarily to the completion, in 1994, of the decommissioning of the Shoreham Nuclear Power Station (Shoreham). However, the Company's commitment to increase penetration in the gas home heating market on Long Island remains strong. In 1995, the Company invested approximately $50 million into its gas infrastructure to increase safety, reliability and availability of gas in order to attract new gas space heating customers. As a result of the above, the Company, for the second consecutive year, generated sufficient cash flow to meet all of its operating and construction requirements. This enhanced cash flow also allowed the Company to redeem all amounts outstanding under the First Mortgage with cash on hand. 36 LONG ISLAND POWER AUTHORITY PROPOSED PLAN During 1995, the Governor of the State of New York requested that the Long Island Power Authority (LIPA) develop a plan that, in addition to replacing the Company as the primary electric and gas utility on Long Island, would among other things, produce an electric rate reduction of at least 10%, provide a framework for long-term competition in power production and protect property taxpayers on Long Island. In response to this request, the Board of Trustees of LIPA established a committee (Evaluation Committee) to analyze various plans involving the Company's business operations and assets. In December 1995, after soliciting information and indications of interest from various parties in connection with a LIPA-facilitated financial restructuring/acquisition of the Company, the members of the Evaluation Committee and their advisors announced a proposed plan to restructure the Company and reduce electric rates on Long Island by 12% (Proposed Plan). The Proposed Plan, which has not been adopted by the LIPA Board or formally presented to the Company's Board of Directors for consideration, generally provides that: (i) the Company sell, subject to LIPA's approval, its gas business and electric generation assets; (ii) LIPA purchase the Company's transmission, distribution and Shoreham-related assets; (iii) LIPA enter into long-term power purchase agreements with the purchasers of the generation assets; (iv) LIPA enter into agreements with contractors to manage the transmission and distribution system; and (v) LIPA exercise its power of eminent domain over all or a portion of the Company's assets or securities in order to achieve its objectives if a negotiated agreement cannot be reached with the Company. The Company has indicated to LIPA that certain elements of the Proposed Plan raise significant concerns. Specifically, the Proposed Plan contains no information regarding the values or prices contemplated to be paid for the Company's assets, no financing commitments for any portion of the proposed transaction were disclosed and no indications that endorsements by certain State officials required to approve any transaction undertaken by LIPA have been obtained. In addition, based on the limited information currently available, the Company is unable to determine how the anticipated rate reduction would be achieved and how the reliability of the electric system, including storm restoration capabilities, would be maintained given the multiple entities that would be responsible for providing such service. Notwithstanding these concerns, the Company remains willing to cooperate with LIPA in developing a plan that is beneficial to the Company's investors, customers and employees. The Company is continuously assessing various other strategies in an effort to provide the greatest possible value to its constituents in light of the changing economic, regulatory and political challenges affecting the Company. Such strategies may include a review and modification of its operations to best meet the challenges of a competitive environment, a possible reorganization of the Company, potential joint ventures and/or possible business combinations with other entities. 37 The implementation of certain plans involving the Company's business operations and assets would be subject to, among other things, shareholder and regulatory approvals and could impact the Company's future financial results and operations. Accordingly, the Company is unable to determine what plan, if any, will be pursued by it and/or LIPA or whether any related transaction will be consummated. COMPETITIVE ENVIRONMENT The electric industry continues to undergo fundamental changes as regulators, elected officials and customers seek lower energy prices. These changes, which may have a significant impact on future financial performance of electric utilities, are being driven by a number of factors including a regulatory environment in which traditional cost-based regulation is seen as a barrier to lower energy prices. In 1995, both the Public Service Commission of the State of New York (PSC) and the Federal Energy Regulatory Commission (FERC) continued their separate initiatives with respect to developing a framework for a competitive electric marketplace. New York State Competitive Opportunities Proceedings In 1994, the PSC began the second phase of its Competitive Opportunities Proceedings to investigate issues related to the future of the regulatory process in an industry which is moving toward competition. The PSC's overall objective was to identify regulatory and ratemaking practices that would assist New York State utilities in the transition to a more competitive environment designed to increase efficiency in providing electricity while maintaining safe, affordable and reliable service. During 1995, the proceedings continued with the PSC adopting a series of principles which it will use to guide the transition of the electric utility industry in New York State from a rate-regulated cost of service model to a competitive market-driven model. The principles state, among other things, that: (i) consumers should have a reasonable opportunity to realize savings from competition; (ii) a basic level of reasonably priced service must be maintained; (iii) the integrity, safety and reliability of the system should not be jeopardized; and (iv) the current industry structure, in which most power plants are vertically integrated with natural monopoly transmission and distribution systems, should be thoroughly examined to ensure that it does not impede or obstruct the development of effective wholesale or retail competition. In addition, the principles state that utilities should have a reasonable opportunity to recover prudent and verifiable expenditures and commitments made pursuant to their legal obligations, consistent with these principles. In October 1995, the Energy Association, which is comprised of the Company and the six other investor-owned New York State utilities, filed a proposal designed to achieve the principles outlined by the PSC. The proposal, which is referred to as the "Wholesale Poolco Model", establishes a framework that will allow competition at the wholesale level. The plan would, among other things: (i) allow utilities, non-regulated generators 38 and other market participants to create a wholesale exchange that allows market forces to determine the price of wholesale electricity; (ii) establish an Independent System Operator (ISO) to coordinate the safe and reliable operation of the bulk power transmission system; (iii) increase customer choice by providing clear market price signals so customers can make informed decisions on the use of electricity; and (iv) separate the generation portion of a utility's business from its regulated transmission and distribution business. In this model, competing generating suppliers would bid energy sales into the market. The market clearing price for energy would be determined by the bid of the highest price unit needed to serve the load in a particular location. Regulated utility companies could purchase energy from the market, which would establish a half-hour locational spot market price for electricity, or the utility could seek to enter into bilateral energy agreements with other parties. Bilateral agreements would be administered independently of the wholesale exchange, but would be scheduled through the ISO. These bilateral agreements would be permitted among utility companies, generating companies and power marketers. In the Wholesale Poolco Model, the purchase of electricity by end use customers would still be bundled with transmission, distribution and customer service, all of which would be provided by regulated utilities. The support of the New York State utilities for the Wholesale Poolco Model is predicated on a number of factors, including: (i) a reasonable opportunity to fully recover all investments and expenditures made to provide reliable service under the existing regulatory compact; (ii) PSC support for the option of each utility to continue in the generation business; (iii) special treatment of nuclear plants based on their unique characteristics; and (iv) the adoption of a clearly defined transition plan to ensure that the interests of the customer and the investor are adequately protected. In December 1995, an Administrative Law Judge (ALJ) of the PSC issued a Recommended Decision (RD) to the PSC with respect to this Competitive Opportunities Proceedings. The ALJ recommended a competitive model which seeks to transition the electric utility industry in New York State to full retail competition through two stages. The first stage of this recommendation seeks to transition the industry from its current cost of service rate regulation to a competitive wholesale model similar to the Wholesale Poolco Model. This first stage would allow participants to become familiar with the operation of a deregulated, competitive generation market prior to the eventual movement to full retail competition in the second stage, through a model known as the Flexible Retail Poolco Model. The Flexible Retail Poolco Model contains many of the same attributes associated with the Wholesale Poolco Model, including: (i) an ISO to coordinate the safe and reliable operation of generation and transmission; (ii) open access to the transmission system, which would be regulated by FERC; and (iii) the continuation of a regulated distribution company to operate and maintain the distribution system. The principal difference between the models is that customers would have a choice among suppliers of 39 electricity in the Flexible Retail Poolco Model whereas in the Wholesale Poolco Model, the regulated entity would acquire electric energy from the spot energy sales exchange to sell to the customer. The Flexible Retail Poolco Model would also: (i) deregulate energy/customer services such as meter reading and customer billing; (ii) unbundle electricity into four components: generation, transmission, distribution, and energy/customer services; and (iii) provide customers with a choice among suppliers of electricity, and allow customers to acquire electricity either by long-term contracts or purchases on the spot market or a combination of the two. One of the most contentious issues of the Competitive Opportunities Proceedings has been the position taken by the various parties to the proceedings on the amount of recovery utilities should be permitted to collect from customers for so-called stranded investments. Stranded investments represent costs that utilities would have otherwise recovered through rates under traditional cost of service regulation that, under competition, utilities may not be able to recover since the market price for their product may be inadequate to recover these costs. The Staff of the PSC, for example, has indicated that utilities should not expect full recovery of stranded costs. The Energy Association has commented that utilities have a sound legal precedent confirmed by long-standing PSC policy to fully recover all prudently incurred costs, including stranded costs. The RD states that for recovery, stranded costs must be prudent, verifiable and unable to be reduced through mitigation measures. The RD states that recovery of stranded costs be predicated on the prudency of the costs incurred. The costs must be verifiable and the Company must show that it was unable to avoid incurring these costs. The RD states that a generic decision should address the definition, the method of measurement, the requirements for mitigation, a preferable recovery mechanism and a standard for the recovery of stranded investments. The calculation of the amount to be recovered from customers, however, should be left to individual rate cases or special proceedings that should begin during 1996. The RD further directs New York State investor-owned utilities to individually file, within six months of the PSC's order, a comprehensive long-term proposal addressing the significant components of the RD. It is not possible to predict the ultimate outcome of these proceedings, the timing thereof, or the amount, if any, of stranded costs that the Company would recover in a competitive environment. The outcome of these proceedings could adversely affect the Company's ability to apply Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation", which, pursuant to SFAS No. 101, "Accounting for Discontinuation of Application of SFAS No. 71" and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," could then require a significant write-down of assets, the amount of which cannot presently be determined. For a further discussion of SFAS No. 71 and SFAS No. 121, see Note 1 of Notes to Financial Statements. 40 The Electric Industry - Federal Regulatory Issues As a result of Congress' passage of the Public Utility Regulatory Policies Act of 1978 (PURPA), and the National Energy Policy Act of 1992 (NEPA), the once monopolistic electric utility industry now faces competition. PURPA's goal is to reduce the United States' dependence on foreign oil, encourage energy conservation and promote diversification of fuel supply. Accordingly, PURPA provided for the development of a new class of electric generators which rely on either cogeneration technology or alternate fuels. The utilities are obligated under PURPA to purchase the output of certain of these new generators, which are known as qualified facilities (QFs). NEPA sought to increase economic efficiency in the creation and distribution of power by relaxing restrictions on the entry of new competitors to the wholesale electric power market (i.e., sales to an entity for resale to the ultimate consumer). NEPA does so by creating exempt wholesale generators that can sell power in wholesale markets without the regulatory constraints placed on utility generators such as the Company. NEPA also expanded FERC's authority to grant access to utility transmission systems to all parties who seek wholesale wheeling for wholesale competition. Significant issues associated with the removal of restrictions on wholesale transmission system access have yet to be resolved and the potential impact on the Company's financial position cannot yet be determined. FERC is in the process of setting policy which will largely determine how wholesale competition will be implemented. FERC has declared that utilities must provide wholesale wheeling to others that is comparable to the service utilities provide themselves. FERC has issued policy statements concerning regional transmission groups, transmission information requirements and "good faith" requests for service and transmission pricing. In March 1995, FERC issued a Notice of Proposed Rulemaking (NOPR) which combined the issues of open transmission access and stranded cost recovery. The NOPR contained a strong endorsement of the right of the utilities to full recovery of stranded costs due to wholesale wheeling and retail-turned-wholesale wheeling arrangements. During the year, FERC has followed up on these issues through an extensive comment period, holding public hearings on pro-forma transmission tariffs, ancillary services, real-time information systems and power pooling issues. FERC recently announced its interest in exploring the role of an ISO in providing comparable transmission access. It is expected that FERC will issue a final order on open access in 1996. Utilities, including the Company, and numerous other interested parties are actively involved in these proceedings. It is not possible to predict the outcome of these proceedings or the effect, if any, on the financial condition of the Company. The Company participates in the wholesale electricity market primarily as a buyer, and in this regard should benefit if rules are adopted which result in lower wholesale prices for its retail customers. 41 The Company's Service Territory The changing utility regulatory environment has affected the Company in a number of ways. For example, PURPA's encouragement of the non-utility generator (NUG) industry has negatively impacted the Company. In 1995, the Company lost sales to NUGs totaling 366 gigawatt-hours (Gwh) representing a loss in electric revenues net of fuel (net revenues) of approximately $28 million, or 1.5% of the Company's net revenues. In 1994, the Company lost sales to NUGs totaling 237 Gwh or approximately $24 million of net revenues. The increase in lost net revenues resulted principally from the completion, in April 1995, of a QF located at the State University of New York at Stony Brook, New York (Stony Brook Project). The annual load loss due to this QF is estimated to be 188 Gwh. The Company estimates that in 1996, sales losses to NUGs will be 414 Gwh, or approximately 1.7% of projected net revenues, an increase reflecting 12 months of operation for the Stony Brook Project. The Company believes that load losses due to NUGs have stabilized. This belief is based on the fact that the Company's customer load characteristics, which lack a significant industrial base and related large thermal load, will mitigate load loss and thereby make cogeneration economically unattractive. Additionally, as mentioned above, the Company is required to purchase all the power offered by QFs which in 1995 and 1994 approximated 205 megawatts (MW). QFs have the choice of pricing sales to the Company at either the PSC's published estimates of the Company's long-range avoided costs (LRAC) or the Company's tariff rates, which are modified from time to time, reflecting the Company's actual avoided costs. Additionally, until repealed in 1992, New York State law set a minimum price of six cents per kilowatt-hour (kWh) for utility purchases of power from certain categories of QFs, considerably above the Company's avoided cost. The six cent minimum now only applies to contracts entered into before June 1992. The Company believes that the repeal of the six cent minimum, coupled with recent PSC updates which resulted in lower LRAC estimates, has significantly reduced the economic benefits of constructing new QFs. The Company estimates that purchases from QFs required by federal and state law cost the Company $53 million more than it would have cost had the Company generated this power in both 1995 and 1994. The Company has also experienced a revenue loss as a result of its policy of voluntarily providing wheeling of New York Power Authority (NYPA) power for economic development. The Company estimates that in 1995 and 1994 NYPA power displaced approximately 429 Gwh and 400 Gwh of annual energy sales, respectively. The net revenue loss associated with this amount of sales is approximately $30 million or 1.6% of the Company's 1995 net revenues and $28 million or 1.5% of the Company's 1994 net revenues. Currently, the potential loss of additional load is limited by conditions in the Company's transmission agreements with NYPA. Aside from NUGs, a number of customer groups are seeking to hasten consideration and implementation of full retail competition. For example, an energy consultant has petitioned the PSC, seeking alternate sources of power for Long Island school districts. The County of Nassau has also 42 petitioned the PSC to authorize retail wheeling for all classes of electric customers in the county. In addition, several towns and villages on Long Island are investigating municipalization, in which customers form a government-sponsored electric supply company. This is one form of competition likely to increase as a result of NEPA. The Town of Southampton and several other towns in the Company's service territory are considering the formation of a municipally owned and operated electric authority to replace the services currently provided by the Company. Suffolk County issued a request for proposal from suppliers for up to 200 MW of power which the County would then sell to its residential and commercial customers. The County has awarded the bid to two off-Long Island suppliers and has requested the Company to deliver the power. The Company has responded that it does not believe the County is eligible under present laws and regulations to purchase wholesale power and resell it to retail customers, and has declined to offer the requested retail wheeling service. The Company's geographic location and the limited electrical interconnections to Long Island serve to limit the accessibility of its transmission grid to potential competitors from off the system. The matters discussed above involve substantial social, economic, legal, environmental and financial issues. The Company is opposed to any proposal that merely shifts costs from one group of customers to another, that fails to enhance the provision of least-cost, efficiently-generated electricity or that fails to provide the Company's shareowners with an adequate return on and recovery of their investment. The Company is unable to predict what action, if any, the PSC or FERC may take regarding any of these matters, or the impact on the Company's financial condition if some or all of these matters are approved or implemented by the appropriate regulatory authority. Notwithstanding the outcome of the federal or state regulatory rate proceedings, or any other state action, the Company believes that, among other obligations, the State has a contractual obligation to allow the Company to recover its Shoreham-related assets. LIQUIDITY During 1995, cash generated from operations exceeded the Company's operating, construction and refunding requirements in addition to allowing for the early redemption of the Company's remaining First Mortgage Bonds. This positive cash flow is the result of: (i) the Company's continuing efforts to control both operations and maintenance (O&M) costs and construction expenditures; (ii) lower fuel costs; (iii) significantly lower costs incurred at Shoreham as a result of the completion of the plant's decommissioning in 1994; (iv) lower interest payments resulting from lower debt levels; and (v) the collection of previously deferred revenues. At December 31, 1995, the Company's cash and cash equivalents amounted to approximately $351 million, compared to $185 million at December 31, 1994. In addition, the Company has available for its use a $300 million revolving line of credit through October 1, 1996, provided by its 1989 Revolving Credit Agreement (1989 RCA). This line of credit is secured by a first 43 lien upon the Company's accounts receivable and fuel oil inventories. For a further discussion of the 1989 RCA, see Note 7 of Notes to Financial Statements. In January 1996, the Company received approximately $81 million, including interest, from Suffolk County pursuant to a judgment in the Company's favor that found that the Shoreham property was overvalued for property tax purposes between 1976 and 1983 (excluding 1979 which had previously been settled). The Company has petitioned the PSC to allow the Company to reduce the Rate Moderation Component (RMC) by the amount received, net of litigation costs incurred by the Company. The Company is also seeking recovery from Suffolk County for the overpayment of taxes on the Shoreham property for the years 1984 through 1992 in a separate proceeding which is currently pending before the New York Supreme Court. For a further discussion of this proceeding, see "Shoreham Related Litigation" below. The Company currently believes that it will not need to access the financial markets to retire its $415 million of maturing debt in 1996 as cash balances on hand at that time will be sufficient to support all Company requirements for 1996. However, the Company will avail itself of any tax-exempt financing made available to it by the New York State Energy Research and Development Authority (NYSERDA). With respect to the repayment of $251 million and $101 million of debt maturing in 1997 and 1998, respectively, the Company intends to use cash generated from operations to the maximum extent practicable. In 1990 and 1992, the Company received Revenue Agents' Reports disallowing certain deductions and credits claimed by the Company on its federal income tax returns for the years 1981 through 1989. The Revenue Agents' Reports reflect proposed adjustments to the Company's federal income tax returns for this period which, if sustained, would give rise to tax deficiencies totaling approximately $227 million. The Company believes that any such deficiencies as finally determined would be significantly less than the amounts proposed in the Revenue Agents' Reports. The Revenue Agents have also proposed investment tax credit (ITC) adjustments which, if sustained, would reduce the ITC carryforwards by approximately $96 million. The Company has protested some of the proposed adjustments which are presently under review by the Regional Appeals Office of the Internal Revenue Service. If this review does not result in a settlement that is satisfactory to the Company, the Company intends to seek a judicial review. The Company believes that its reserves are adequate to cover any tax deficiency that may ultimately be determined and that cash from operations will be sufficient to satisfy any settlement reached. The Company will exhaust its net operating loss carryforwards for alternative minimum tax purposes in 1996. As a result, it is anticipated that the Company will be required to pay approximately $80 million of alternative minimum tax in 1996. In addition, during 1996, the Company anticipates utilization of net operating loss carryforwards amounting to approximately $547 million and to fully utilize its remaining NOL for regular income tax purposes in 1997. 44 CAPITALIZATION The Company's capitalization, including current maturities of long-term debt and current redemption requirements of preferred stock, at December 31, 1995 and 1994, was $8.3 billion. At December 31, 1995 and 1994, the Company's capitalization ratios were as follows: 1995 1994 ------ ----- Long-term debt 61.8% 62.5% Preferred stock 8.6 8.6 Common shareowners' equity 29.6 28.9 ------ ----- 100.0% 100.0% ====== ====== In support of the Company's continuing goal to reduce its debt ratio, the Company, in 1995, retired at maturity, with cash on hand, $25 million of First Mortgage Bonds and voluntarily redeemed prior to maturity, the remaining $75 million of First Mortgage Bonds. With the retirement/ redemption of the First Mortgage Bonds, the lien of the First Mortgage was discharged leaving the Company's General and Refunding Bonds (G&R Bonds) as its only outstanding secured indebtedness. The Company currently anticipates that it will use cash on hand to satisfy the $415 million of G&R Bonds scheduled to mature in 1996. At such time, assuming a level of earnings consistent with 1995, the Company's debt ratio will be below 60%. During 1995, the Company received proceeds from the sale of $50 million of Electric Facilities Revenue Bonds (EFRBs) issued by NYSERDA. The proceeds from this offering were used to reimburse the Company's treasury for electric projects previously completed or under construction. INVESTMENT RATING The Company's securities are rated by Standard and Poor's Corporation (S&P), Moody's Investors Service (Moody's), Fitch Investors Service, L.P. (Fitch) and Duff and Phelps, Inc. (D&P). The rating agencies have been watching the electric utility industry closely and have expressed concern regarding the ability of high cost utilities, such as the Company, to recover all of their fixed costs in a competitive, deregulated marketplace. In 1995, Fitch lowered its credit ratings of the Company's securities one level. Both Fitch and S&P have placed the Company's securities on "Credit Watch" with "evolving or developing" implications. Credit Watch indicates a rating change is likely, and the evolving or developing status indicates ratings may be raised or lowered. Moody's continues to keep the Company's credit ratings under review for a possible downgrade. 45 Currently, only the Company's G&R Bonds meet or exceed minimum investment grade. At December 31, 1995, the ratings for each of the Company's principal securities were as follows: S&P Moody's Fitch D&P o G&R Bonds BBB- Baa3 BBB- BBB o Debentures BB+ Ba1 BB+ BB+ o Preferred Stock BB+ ba1 BB+ BB o Minimum Investment Grade BBB- Baa3 BBB- BBB- CAPITAL REQUIREMENTS AND CAPITAL PROVIDED Capital requirements and capital provided for 1995 and 1994 were as follows: (In millions of dollars) 1995 1994 CAPITAL REQUIREMENTS Construction* Electric $ 144 $ 135 Gas 79 119 Common 21 23 Total Construction 244 277 Refundings and Dividends Long-term debt 100 635 Preferred stock 5 5 Common stock dividends 211 205 Preferred stock dividends 53 53 Redemption costs - 2 Total Refundings and Dividends 369 900 Shoreham post-settlement costs 71 167 TOTAL CAPITAL REQUIREMENTS $ 684 $ 1,344 CAPITAL PROVIDED Cash generated from operations $ 772 $ 836 Long-term debt issued 49 331 Common stock issued 20 118 Financing costs - (4) Other investing activities 9 - (Increase) decrease in cash (166) 63 TOTAL CAPITAL PROVIDED $ 684 $ 1,344 * Excludes non-cash allowance for other funds used during construction. For further information, see the Statement of Cash Flows. 46 Based upon the availability of electricity provided by the Company's existing generating facilities, including its portion of energy generated at Nine Mile Nuclear Power Station, Unit 2 (NMP2), and by its ability to purchase power under firm contracts from other electric systems and certain non-Company owned facilities located within the Company's service territory, the Company believes it has adequate generating resources to meet its energy demands for the next several years. For 1996, total capital requirements (excluding common stock dividends) are estimated at $792 million, of which maturing debt is $415 million, construction requirements is $270 million, preferred stock dividends are $52 million, preferred stock sinking funds are $5 million and Shoreham post-settlement costs are $50 million (including $49 million for payments-in-lieu-of-taxes). The Company believes that cash generated from operations and cash on hand will be sufficient to meet all capital requirements in 1996. RATE MATTERS ELECTRIC In 1993, the Company filed an Electric Rate Plan (Plan) with the PSC for the three-year period which began December 1, 1994. The goals of this Plan included minimizing future electric rate increases in addition to providing for the continued recovery of the Company's regulatory assets while retaining consistency with the Rate Moderation Agreement's (RMA) objective of restoring the Company to financial health. As a result of the rate proceeding initiated by the filing of the Company's Plan, the PSC issued an Order for the rate year beginning December 1, 1994. The Order, which among other things, froze overall electric rates, reduced the Company's allowed return on common equity from 11.6% to 11.0% and modified or eliminated certain performance-based incentives. In addition, the PSC ordered that the rate proceeding be continued to allow the parties to develop a plan for achieving long-term rate stability at the prevailing rate levels, while, among other things, providing for the continuing recovery of the Shoreham-related assets. In its rate decision, the PSC reaffirmed its commitment to allow the Company to recover its Shoreham-related assets, noting that it is a crucial factor in the Company's ability to maintain its investment grade bond rating and to secure reasonably priced capital. The continuation of the rate proceeding will also enable the PSC to consider the Company's operations and its opportunities to achieve greater efficiency over the next several years. The Company filed a compliance filing under the terms of the Order to extend the overall rate freeze through the rate year which began December 1, 1995. The PSC has yet to issue an electric rate order in response to this filing. In February 1996, the PSC issued an order to show cause and instituted a proceeding to examine various opportunities to reduce the Company's current electric rates. Specifically, the Company has been directed to address the 47 following: (i) should all or a part of the $81 million Suffolk County property tax refund, as more fully discussed under the captions "Liquidity" and "Shoreham Related Litigation", be used to reduce current rates; (ii) should the return of the $26 million 1995 rate year net reconciliation credit to customers, as more fully discussed in Note 3 of Notes to Financial Statements, be accelerated; (iii) determine, upon review of the forecasts reflected in the September 1995 compliance filing for the rate year commencing December 1, 1995, whether adjustments to the forecasts can be reflected in rate reductions currently; and (iv) revisit the current mechanics of the Fuel Cost Adjustment (FCA) clause, as more fully discussed in Notes 1 and 3 of Notes to Financial Statements, to determine whether all or a portion of any fuel cost savings can be reflected in current customer bills. The Company has been directed to submit a response to the order to show cause addressing these items. Interested parties will have an opportunity to submit comments on the Company's filing, after which a hearing before an ALJ will be convened and the ALJ will determine further procedures. The Company is unable to predict the outcome of this proceeding and the impact, if any, that it may have on the Company's cash flow, financial condition or results of its operations. While no assurance can be given, the Company's objective is to continue the current rate freeze through the rate year ending November 30, 1997. For a further discussion respecting electric rates see Note 3 of Notes to Financial Statements. GAS In December 1993, the PSC approved a three-year gas rate settlement between the Company and the Staff of the PSC. The gas rate settlement provides that the Company receive, for each of the rate years beginning December 1, 1993, 1994 and 1995, annual gas rate increases of 4.7%, 3.8% and 3.2%, respectively. In the determination of the revenue requirements for the gas rate settlement, an allowed return on common equity of 10.1% was used. The gas rate decision also provides that earnings in excess of a 10.6% return on common equity be shared equally between the Company's firm gas customers and its shareowners. For a further discussion respecting gas rates see Note 3 of Notes to Financial Statements. ENVIRONMENT The Company is subject to federal, state and local laws and regulations dealing with air and water quality and other environmental matters. The Company continually monitors its activities in order to determine the impact of such activities on the environment and to ensure compliance with various environmental laws. Except as set forth below, no material proceedings have been commenced or, to the knowledge of the Company, are contemplated against the Company with respect to any matter relating to the protection of the environment. 48 The New York State Department of Environmental Conservation (NYSDEC) has required the Company and other New York State utilities to investigate and, where necessary, remediate their former manufactured gas plant (MGP) sites. Currently, the Company is the owner of six pieces of property on which the Company or certain of its predecessor companies is believed to have produced manufactured gas. The Company expects to enter into an Administrative Consent Order (ACO) with the NYDEC in 1996 regarding the management of environmental activities at these properties. Although the exact amount of the Company's clean-up costs cannot yet be determined, based on the findings of investigations at two of these six sites, preliminary estimates indicate that it will cost approximately $35 million to clean up all of these sites over the next five to ten years. Accordingly, the Company had recorded a $35 million liability and a corresponding regulatory asset to reflect its belief that the PSC will provide for the future recovery of these costs through rates as it has for other New York State utilities. The Company has notified its former and current insurance carriers that it seeks to recover from them certain of these investigation and clean-up costs. However, the Company is unable to predict the amount of insurance recovery, if any, that it may obtain. In addition, there are several other sites within the Company's service territory that were former MGP sites. Research is underway to determine their relationship, if any, to the Company or its predecessor companies. Operations at these facilities in the late 1800's and early 1900's may have resulted in the disposal of certain waste products on these sites. The Company has been notified by the Environmental Protection Agency (EPA) that it is one of many potentially responsible parties (PRPs) that may be liable for the remediation of three licensed treatment, storage and disposal sites to which the Company may have shipped waste products and which have subsequently become environmentally contaminated. At one site, located in Philadelphia, Pennsylvania, and operated by Metal Bank of America, the Company and nine other PRPs, all of which are public utilities, have entered into an ACO with the EPA to conduct a Remedial Investigation and Feasibility Study (RI/FS). Under a PRP participant agreement, the Company is responsible for 8.2% of the costs associated with this RI/FS which has been completed and is currently being reviewed by the EPA. The Company's total share of costs to date is approximately $0.5 million. The level of remediation required will be determined when the EPA issues its decision. Based on information available to date, the Company currently anticipates that the total cost to remediate this site will be between $14 million and $30 million. The Company has recorded a liability of $1.1 million representing its estimated share of the additional cost to remediate this site. With respect to the other two sites, located in Kansas City, Kansas and Kansas City, Missouri, the Company is investigating allegations that it had made agreements for disposal of polychlorinated biphenyls (PCBs) or items containing PCBs at these sites. The EPA has provided the Company with documents indicating that the Company was responsible for less than 1% of the total weight of the PCB-containing equipment, oil and materials that were shipped to the Missouri site. The EPA has not yet completed compiling documents for the Kansas site. The Company is currently unable to determine its share, if any, of the cost to remediate these two sites or the impact, if any, on the Company's financial position. 49 In addition, the Company was notified that it is a PRP at a Superfund Site in Farmingdale, New York. Portions of the site are allegedly contaminated with PCBs, solvents and metals. The Company was also notified by other PRPs that it should be responsible for expenses in the amount of approximately $0.1 million associated with removing PCB-contaminated soils from a portion of the site which formerly contained electric transformers. The Company is currently unable to determine its share of the cost to remediate this site or the impact, if any, on the Company's financial position. The Connecticut Department of Environmental Protection (DEP) and the Company have signed an ACO which will require the Company to address leaks from an electric transmission cable located under the Long Island Sound (Sound Cable). The Sound Cable is jointly owned by the Company and the Connecticut Light and Power Company, a subsidiary of Northeast Utilities. Specifically, the order requires the Company to evaluate existing procedures and practices for cable maintenance, operations and fluid spill response procedures and to propose alternatives to minimize fluid spill occurrences and their impact on the environment. Alternatives to be evaluated range from improving existing monitoring and maintenance practices to removal and replacement of the Sound Cable. The Company is currently unable to determine the costs it will incur to complete the requirements of the ACO or to comply with any additional DEP requirements. In addition, the Company has been served with a subpoena from the U.S. Attorney for the District of Connecticut to supply certain written information regarding releases of fluid from the Sound Cable, as well as associated operating and maintenance practices. Since the investigation is in its preliminary stages, the Company is unable to determine the likelihood of a criminal proceeding being initiated at this time. However, the Company believes all activities associated with the response to releases from the Sound Cable were consistent with legal and regulatory requirements. The Company believes that all significant costs incurred with respect to environmental investigations and remediation activities will be recoverable through rates. CONSERVATION SERVICES The Company's 1995 Demand Side Management (DSM) Plan (1995 DSM Plan) focused on promoting energy efficient load growth while minimizing the impact that conservation programs have on increasing the Company's electric rates. The 1995 DSM Plan reflected the Company's goal to educate its customers on the benefits of energy efficiency while reducing the reliance on cash subsidies. The PSC approved funding for the Company's 1995 DSM Plan at $12 million, as compared to $19 million and $33 million in 1994 and 1993, respectively. In addition, the PSC established an incremental annualized energy savings goal of 70 Gwh, including a monetary penalty to the Company if 80% of the threshold was not achieved. The Company was successful in exceeding the penalty threshold identified by the PSC. In 1996, the Company plans to continue its pursuit of energy efficiency and peak load reduction while maintaining the strategy of controlling electric 50 rates. Through careful management of DSM expenditures and the delivery of targeted DSM programs, the Company plans to offer cost-effective DSM programs that will appeal to a variety of customers. The 1996 DSM Plan will continue to focus on customer education and information and to promote efficient load growth in both the residential and commercial sectors. In addition, the Company will place an increased emphasis on programs which facilitate the attraction, expansion and retention of major commercial/industrial customers. These programs will act to position the Company as a business partner, helping to improve the economic climate on Long Island. At the same time, these programs will help to improve the Company's competitiveness as an energy provider. SHOREHAM RELATED LITIGATION Pursuant to the LIPA Act, LIPA is required to make payments-in-lieu-of-taxes (PILOTs) to the municipalities that impose real property taxes on Shoreham. Pursuant to the 1989 Settlement, the Company agreed to fund LIPA's obligation to make Shoreham PILOTs. The timing and duration of PILOTs under the LIPA Act are the subject of litigation brought in Nassau County Supreme Court by LIPA against, among others, Suffolk County, the Town of Brookhaven and the Shoreham-Wading River Central School District. The Company was permitted to intervene in the lawsuit. On January 10, 1994, the Appellate Division, Second Department, affirmed a lower court's March 29, 1993 decision holding, in major part, that the Company is not obligated for any real property taxes that accrued after February 28, 1992, attributable to property that it conveyed to LIPA, that PILOTs commenced on March 1, 1992, that PILOTs are subject to refunds and that the LIPA act does not provide for the termination of PILOTs. Generally, these holdings are favorable to the Company. In October 1995, the Court of Appeals granted the parties motion for leave to appeal the lower court decision following an agreement between the parties to voluntarily dismiss outstanding causes of action. The proper amount of PILOTs is to be determined in pending litigation described below. The costs of Shoreham included real property taxes imposed by, among others, the Town of Brookhaven on Shoreham and capitalized by the Company during construction. The Company had sought judicial review in New York Supreme Court, Suffolk County of the assessments upon which those taxes were based for the years 1976 through 1992 (excluding 1979). The Supreme Court consolidated the review of the tax years at issue into two phases: 1976 through 1983, excluding 1979, which had been settled (Phase I); and 1984 through 1992 (Phase II). In October 1992, the Supreme Court ruled that Shoreham had been overvalued for real property tax purposes for Phase I. In May 1995, the New York Court of Appeals denied the request of the Town of Brookhaven and other respondents for leave to appeal this decision, which had been previously affirmed in an unanimous decision by the New York State Appellate Division, Second Department. Thereafter, in January 1996, the Company received approximately $81 million, including interest, from Suffolk County pursuant to this Phase I judgment. In the Phase II proceeding, the Company is seeking to recover over $500 million, plus interest, in property taxes paid on Shoreham for the years 1984-1992. In this proceeding, the taking of evidence has been completed and final briefs have been filed by the parties. The amount of the 51 Company's recovery, if any, in the Phase II proceeding and the timing of all refunds cannot yet be determined. LIPA has been permitted to intervene in the proceeding for the 1991-92 tax year which under the Appellate Division's decision discussed above, will partially establish LIPA's PILOT obligation. Pursuant to the Appellate Division's decision, LIPA's PILOT obligations will be determined either by agreement or in a separate proceeding challenging the Shoreham assessment for the 1992-93 tax year. 52 RESULTS OF OPERATIONS EARNINGS Earnings for the years 1995, 1994 and 1993 were as follows: (In millions of dollars and shares except earnings per share) 1995 1994 1993 Net income $ 303.3 $ 301.8 $ 296.6 Preferred stock dividend requirements 52.6 53.0 56.1 Earnings for Common Stock $ 250.7 $ 248.8 $ 240.5 Average common shares outstanding 119.2 115.9 112.1 Earnings per Common Share $ 2.10 $ 2.15 $ 2.15 The Company's 1995 earnings per common share were lower than 1994 earnings per common share as a result of the PSC's current electric rate order, effective December 1, 1994, that lowered the allowed return on common equity from 11.6% to 11.0% and modified certain performance-based incentives. These two actions had the effect of reducing the Company's earnings by 15 cents per common share compared to the previous year. The effects of the electric rate order were mitigated by a significant reduction in operating costs which were achieved by a comprehensive cost containment program. Earnings per common share for the gas business were higher in 1995 when compared to 1994 due to cost containment measures and a write-off in 1994 of previously deferred storm costs. The higher level of earnings in the gas business also helped to mitigate the adverse effects of the electric rate order. Earnings per common share for 1994 equaled that of 1993. The electric business achieved a higher level of earnings which were offset by a decrease in the gas business earnings. REVENUES Total revenues, including revenues from the recovery of fuel costs, were $3.1 billion for each of the years ended December 31, 1995 and 1994, and $2.9 billion for the year ended December 31, 1993. Electric Revenues Revenues from the Company's electric operations totaled $2.5 billion for the years ended December 31, 1995 and 1994, compared to $2.4 billion in 1993. The Company's electric rates have not increased since December 1, 1993, when the Company received an electric rate increase of 4.0%. Given the absence of any electric rate increases combined with operating in a mature 53 market, electric revenues have remained relatively flat over the last two years. The December 1993 rate increase provided $69 million of additional electric revenues in 1994 when compared to 1993. For a further discussion on electric rates, see Notes 1 and 3 of Notes to Financial Statements. Total electric sales volumes were 16,572 million kilowatt hour (kWh) in 1995, 16,382 million kWh in 1994 and 16,128 million kWh in 1993. The increase in 1995 sales when compared to 1994 is attributable primarily to higher sales for resale. System sales for 1995, when compared to 1994, were negatively impacted by a 174 million kWh reduction in customer usage due to the effects of weather. Partially offsetting this reduction was a 116 million kWh increase in system load over 1994. The 116 million kWh growth occurred despite the loss of the Stony Brook Project. The increase in system sales for 1994, when compared to 1993, was primarily the result of warmer weather experienced in the comparable summer months. In each of the years 1995, 1994 and 1993, residential sales accounted for 45% of total system sales, while commercial and industrial sales accounted for 52% of the total, with sales to public authorities representing 3%. Gas Revenues Revenues from the Company's gas operations for the years 1995, 1994 and 1993 were $591 million, $586 million and $529 million, respectively. In December 1993, the PSC approved a three-year gas rate settlement between the Company and the Staff of the PSC. The gas rate settlement provided the Company with annual gas rate increases of 4.7%, 3.8% and 3.2% for the rate years beginning December 1, 1993, 1994 and 1995, respectively. These rate increases provided $21 million in additional revenues for 1995 as compared to 1994, and $25 million in additional revenues for 1994 as compared to 1993. A decrease of $24 million in the recoveries of gas fuel expenses more than offset the additional revenues provided by the annual gas rate increase in 1995. The decrease in the recovery of gas fuel expenses in 1995 was primarily due to lower average gas prices when compared to 1994. The recoveries of gas fuel expenses in 1994 when compared to 1993, increased by $33 million primarily due to increased billed sales volumes and higher average gas prices. The Company has a weather normalization clause to mitigate the impact on revenues of experiencing weather that is warmer or colder than normal. In 1993, the Company began selling gas to businesses off the Company's system. These off-system gas sales revenues totaled $24 million, $26 million and $8 million for the years 1995, 1994 and 1993, respectively. Profits realized from off-system sales are allocated 85% to firm gas customers and 15% to shareowners. For 1995, firm gas sales volumes decreased by less than 1% when compared to 1994 even though the 1995 heating season was much warmer than the 1994 heating season. The impact of the warmer weather was ameliorated by the addition of over 6,500 new gas space heating customers during 1995, 54 resulting from the continuation of the Company's gas expansion program. In 1994, the Company added over 7,000 gas space heating customers. OPERATING EXPENSES Fuel and Purchased Power Fuel and purchased power expenses for the years 1995, 1994 and 1993 were as follows: (In millions of dollars) 1995 1994 1993 Fuel for Electric Operations Oil $ 98 $ 145 $ 180 Gas 149 101 93 Nuclear 14 15 13 Purchased power 310 308 293 Total 571 569 579 Gas fuel 264 279 249 Total $ 835 $ 848 $ 828 During 1995, the Company refitted an additional steam generating unit to enable it to burn either oil or natural gas, bringing the total number of steam units capable of burning natural gas to seven. Of these seven, five are dual-fired, having the capability of burning either natural gas or oil. As a result, the Company, over the past three years, has increased the amount of energy generated with natural gas, thereby displacing more costly energy generated with oil or purchased from others. Electric fuel expense for 1995 increased slightly from 1994 as a result of increased electric sales volumes. For 1994, fuel expense for electric generation decreased relative to 1993 as a result of an increase in the amount of energy generated with more economical natural gas. Electric fuel and purchased power mix for the years 1995, 1994 and 1993 were as follows: (In thousands of MWH) 1995 1994 1993 MWH % MWH % MWH % Oil 3,099 17% 4,480 25% 5,894 34% Gas 6,344 36 4,056 23 3,329 19 Nuclear 1,301 7 1,498 9 1,291 7 Purchased power 7,143 40 7,640 43 7,023 40 Total 17,887 100% 17,674 100% 17,537 100% The Company has reduced oil consumption by purchasing more economical power from other systems, by increased generation with natural gas, by using energy 55 generated at NMP2 and by purchasing energy supplied by cogenerators and independent power producers (IPPs) as required by New York State law. The total barrels of oil consumed for electric operations were 5.2 million, 7.5 million, and 9.7 million for the years 1995, 1994 and 1993, respectively. Cogenerators and IPPs provided approximately 10% of the total energy made available by the Company in 1995 and approximately 9% in both 1994 and 1993. The increase in purchased power expenses in 1995 and 1994 is primarily attributable to purchases from the 136 MW facility in Holtsville, New York, owned by NYPA, and constructed for the benefit of the Company. Gas system fuel expenses decreased in 1995 by $15 million when compared with 1994, despite higher sales volumes, because of a decline in the average price of gas. In 1994, these expenses increased by $30 million when compared with 1993, primarily due to the costs associated with the Company's off-system gas sales which began in 1993. Operations and Maintenance Expenses Operations and maintenance (O&M) expenses, excluding fuel and purchased power, were $511 million, $541 million and $522 million, for the years 1995, 1994 and 1993, respectively. The decrease in O&M for 1995 was primarily due to the continuation of the Company's cost containment efforts which resulted in lower production costs, lower transmission and distribution costs and lower administrative and general expenses. O&M expenses increased in 1994 when compared to 1993 due to the write-off of previously deferred storm costs associated with gas operations, an increase in costs associated with the Company's gas expansion program, the recognition of certain costs which exceeded the Company's insurance recoveries, and an increase in employee benefit costs. Rate Moderation Component The rate moderation component reflects the difference between the Company's revenue requirements under conventional ratemaking and the revenues provided by its electric rate structure. In 1995, 1994 and 1993, the Company recorded non-cash charges to income of approximately $22 million, $198 million and $89 million, respectively, representing the amortization of the RMC. In 1995, the operation of the Fuel Moderation Component (FMC) as discussed in Note 3 of Notes to Financial Statements, resulted in credits to the RMC of $87 million which more than offset the accretion of the RMC resulting from revenues under the current electric rate structure being less than revenue requirements under conventional ratemaking. For the years 1994 and 1993, revenues under the rate structure in effect in those years, were greater than that required by conventional ratemaking resulting in the amortization of the RMC. In addition, the RMC amortization for the years 1994 and 1993 increased as a result of the FMC, which totaled $83 million and $45 million for 1994 and 1993, respectively. For a further discussion on the RMC, see Note 3 of Notes to Financial Statements. Other Regulatory Amortization In 1995, the net total of other regulatory amortization was a non-cash charge 56 to income of $161.6 million, compared to $4.3 million in 1994. This change is primarily attributable to the operation of the revenue reconciliation mechanism and increased amortization of the LRPP deferrals, as more fully discussed in Note 3 of Notes to Financial Statements. The revenue reconciliation mechanism, as established under the LRPP, eliminates the impact on earnings of experiencing electric sales that are above or below adjudicated levels, by providing a fixed annual net margin level (defined as sales revenue, net of fuel and gross receipts taxes). The difference between the actual and adjudicated net margin sales level is deferred on a monthly basis during the year. During 1995, the Company recorded a non-cash charge to income of approximately $64 million representing a net margin level in excess of that provided for in rates. In 1994, the Company recorded non-cash income of approximately $51 million as the actual net margin level was below that which was provided for in rates. The increase in the amortization of the LRPP deferrals in 1995 totaled $34 million. In 1994, other regulatory amortization was higher than 1993 as a result of the amortization of the 1992 rate year LRPP deferrals which began in August 1993, the operation of the interest deferral mechanism and an increase in amortization expense related to Shoreham post-settlement costs. These items were partially offset by higher net margin revenues. Operating Tax Operating tax were $448 million, $407 million and $386 million for the years 1995, 1994 and 1993, respectively. The increase in operating tax of approximately $41 million in 1995 when compared to 1994 is primarily attributable to increased property taxes. The increase of $21 million in 1994 when compared to 1993 is primarily attributable to higher gross receipts taxes resulting from increased revenues, higher property taxes, additional payroll taxes and higher dividend taxes. Federal Income Taxes Federal income taxes were $206 million, $177 million and $172 million for the years 1995, 1994 and 1993, respectively. The increase in federal income taxes in 1995 when compared to 1994 is primarily attributable to higher earnings and the amortization of a tax rate increase which had previously been deferred. INTEREST EXPENSE The reductions in interest expense in 1995 when compared to 1994 and in 1994 when compared to 1993 are primarily attributable to lower outstanding debt levels. The Company's strategy is to apply available cash balances toward the satisfaction of debt whenever practicable. Accordingly, in 1995, the Company used approximately $75 million of cash on hand to redeem, prior to maturity, the remaining outstanding First Mortgage Bonds. During 1994, the Company used approximately $200 million of cash on hand and the proceeds from the issuance of 5.1 million shares of common stock to reduce debt levels by approximately $300 million. The lower interest expense in 1994 also reflects the satisfaction of $175 million of debt which matured in November 1993 with the use of cash on hand. 57 SELECTED FINANCIAL DATA Additional information respecting revenues, expenses, electric and gas operating income and operations data and balance sheet information for the last five years is provided in Tables 1 through 11 of Selected Financial Data. Information with regard to the Company's business segments for the last three years is provided in Note 11 of Notes to Financial Statements. 58 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Statement of Income for each of the three years in the period ended December 31, 1995. 60 Balance Sheet at December 31, 1995 and 1994. 61 Statement of Retained Earnings for each of the three years in the period ended December 31, 1995. 63 Statement of Capitalization at December 31, 1995 and 1994. 63 Statement of Cash Flows for each of the three years in the period ended December 31, 1995. 65 Notes to Financial Statements. 66 Report of Independent Auditors. 105 Financial Statement Schedules - The following Financial Statement Schedule is submitted as part of Item 14, "Exhibits, Financial Statement Schedules and Reports on Form 8-K," of this Annual Report. (All other Financial Statement Schedules are omitted because they are not applicable, or the required information appears in the Financial Statements or the Notes thereto. - -Valuation and Qualifying Accounts (Schedule II) 114
59 FINANCIAL STATEMENTS BALANCE SHEET (In thousands of dollars) ASSETS at December 31 1995 1994 UTILITY PLANT Electric $ 3,786,540 $ 3,657,178 Gas 1,086,145 994,742 Common 244,828 232,346 Construction work in progress 100,521 129,824 Nuclear fuel in process and in reactor 16,456 23,251 5,234,490 5,037,341 Less - Accumulated depreciation and amortization 1,639,492 1,538,995 Total Net Utility Plant 3,594,998 3,498,346 REGULATORY ASSETS Base financial component (less accumulated amortization of $656,311 and $555,340) 3,382,519 3,483,490 Rate moderation component 383,086 463,229 Shoreham post-settlement costs 968,999 922,580 Shoreham nuclear fuel 71,244 73,371 Unamortized cost of issuing securities 222,567 254,482 Postretirement benefits other than pensions 383,642 412,727 Regulatory tax asset 1,802,383 1,831,689 Other 230,663 250,804 Total Regulatory Assets 7,445,103 7,692,372 NONUTILITY PROPERTY AND OTHER INVESTMENTS 16,030 24,043 CURRENT ASSETS Cash and cash equivalents 351,453 185,451 Special deposits 63,412 27,614 Customer accounts receivable (less allowance for doubtful accounts of $24,676 and $23,365) 282,218 245,125 LRPP receivable 69,558 54,512 Other accounts receivable 107,387 14,030 Accrued unbilled revenues 184,440 164,379 Materials and supplies at average cost 63,595 74,777 Fuel oil at average cost 32,090 37,723 Gas in storage at average cost 53,076 68,447 Deferred tax asset 191,000 213,996 Prepayments and other current assets 8,986 5,327 Total Current Assets 1,407,215 1,091,381 DEFERRED CHARGES 21,023 172,768 TOTAL ASSETS $ 12,484,369 $ 12,478,910 See Notes to Financial Statements. 60 (In thousands of dollars) CAPITALIZATION AND LIABILITIES at December 31 1995 1994 CAPITALIZATION Long-term debt $ 4,722,675 $ 5,162,675 Unamortized discount on debt (16,075) (17,278) 4,706,600 5,145,397 Preferred stock - redemption required 639,550 644,350 Preferred stock - no redemption required 63,934 63,957 Total Preferred Stock 703,484 708,307 Common stock 598,277 592,083 Premium on capital stock 1,114,508 1,101,240 Capital stock expense (50,751) (52,175) Retained earnings 790,919 752,480 Total Common Shareowners' Equity 2,452,953 2,393,628 Total Capitalization 7,863,037 8,247,332 REGULATORY LIABILITIES Regulatory liability component 277,757 357,117 1989 Settlement credits 136,655 145,868 Regulatory tax liability 116,060 111,218 Other 132,694 147,041 Total Regulatory Liabilities 663,166 761,244 CURRENT LIABILITIES Current maturities of long-term debt 415,000 25,000 Current redemption requirements of preferred stock 4,800 4,800 Accounts payable and accrued expenses 260,879 241,775 Accrued taxes (including federal income tax of $28,736 and $28,340) 60,498 58,133 Accrued interest 158,325 149,929 Dividends payable 57,899 57,367 Class Settlement 45,833 35,833 Customer deposits 29,547 28,474 Total Current Liabilities 1,032,781 601,311 DEFERRED CREDITS Deferred federal income tax 2,337,732 2,204,023 Class Settlement 129,809 151,604 Other 8,708 9,774 Total Deferred Credits 2,476,249 2,365,401 OPERATING RESERVES Pensions and other postretirement benefits 396,490 453,016 Claims and damages 52,646 50,606 Total Operating Reserves 449,136 503,622 COMMITMENTS AND CONTINGENCIES - - TOTAL CAPITALIZATION AND LIABILITIES $ 12,484,369 $12,478,910 See Notes to Financial Statements. 61
STATEMENT OF INCOME (In thousands of dollars except per share amounts) For year ended December 31 1995 1994 1993 REVENUES Electric $ 2,484,014 $ 2,481,637 $ 2,352,109 Gas 591,114 585,670 528,886 Total Revenues 3,075,128 3,067,307 2,880,995 OPERATING EXPENSES Operations - fuel and purchased power 834,979 847,986 827,591 Operations - other 383,238 406,014 387,808 Maintenance 128,155 134,640 133,852 Depreciation and amortization 145,357 130,664 122,471 Base financial component amortization 100,971 100,971 100,971 Rate moderation component amortization 21,933 197,656 88,667 Regulatory liability component amortization (79,359) (79,359) (79,359) 1989 Settlement credits amortization (9,214) (9,214) (9,214) Other regulatory amortization 161,605 4,328 (18,044) Operating taxes 447,507 406,895 385,847 Federal income tax - current 14,596 10,784 6,324 Federal income tax - deferred and other 193,742 170,997 178,530 Total Operating Expenses 2,343,510 2,322,362 2,125,444 Operating Income 731,618 744,945 755,551 OTHER INCOME AND (DEDUCTIONS) Rate moderation component carrying charges 25,274 32,321 40,004 Other income and deductions, net 34,400 35,343 38,997 Class Settlement (21,669) (22,730) (23,178) Allowance for other funds used during construction 2,898 2,716 2,473 Federal income tax - deferred and other 2,800 5,069 12,578 Total Other Income and (Deductions) 43,703 52,719 70,874 Income Before Interest Charges 775,321 797,664 826,425 INTEREST CHARGES Interest on long-term debt 412,512 437,751 466,538 Other interest 63,461 62,345 67,534 Allowance for borrowed funds used during construction (3,938) (4,284) (4,210) Total Interest Charges 472,035 495,812 529,862 NET INCOME 303,286 301,852 296,563 Preferred stock dividend requirements 52,620 53,020 56,108 EARNINGS FOR COMMON STOCK $ 250,666 $ 248,832 $ 240,455 AVERAGE COMMON SHARES OUTSTANDING (000) 119,195 115,880 112,057 EARNINGS PER COMMON SHARE $ 2.10 $ 2.15 $ 2.15 DIVIDENDS DECLARED PER COMMON SHARE $ 1.78 $ 1.78 $ 1.76 See Notes to Financial Statements.
62
STATEMENT OF RETAINED EARNINGS (In thousands of dollars) 1995 1994 1993 Balance at January 1 $ 752,480 $ 711,432 $ 667,988 Net income for the year 303,286 301,852 296,563 1,055,766 1,013,284 964,551 Deductions Cash dividends declared on common stock 212,181 207,794 197,236 Cash dividends declared on preferred stock 52,647 53,046 55,861 Other 19 (36) 22 BALANCE AT DECEMBER 31 $ 790,919 $ 752,480 $ 711,432 See Notes to Financial Statements.
STATEMENT OF CAPITALIZATION Shares Outstanding (In thousands of dollars) At December 31 1995 1994 1995 1994 COMMON SHAREOWNERS' EQUITY Common stock, $5.00 par value 119,655,441 118,416,606 $ 598,277 $ 592,083 Premium on capital stock 1,114,508 1,101,240 Capital stock expense (50,751) (52,175) Retained earnings 790,919 752,480 TOTAL COMMON SHAREOWNERS' EQUITY 2,452,953 2,393,628 PREFERRED STOCK - REDEMPTION REQUIRED Par value $100 per share 7.40% Series L 171,500 182,000 17,150 18,200 8.50% Series R 37,500 75,000 3,750 7,500 7.66% Series CC 570,000 570,000 57,000 57,000 Less - Sinking fund requirement 4,800 4,800 73,100 77,900 Par value $25 per share 7.95% Series AA 14,520,000 14,520,000 363,000 363,000 $1.67 Series GG 880,000 880,000 22,000 22,000 $1.95 Series NN 1,554,000 1,554,000 38,850 38,850 7.05% Series QQ 3,464,000 3,464,000 86,600 86,600 6.875% Series UU 2,240,000 2,240,000 56,000 56,000 566,450 566,450 Total Preferred Stock - Redemption Required 639,550 644,350 PREFERRED STOCK - NO REDEMPTION REQUIRED Par value $100 per share 5.00% Series B 100,000 100,000 10,000 10,000 4.25% Series D 70,000 70,000 7,000 7,000 4.35% Series E 200,000 200,000 20,000 20,000 4.35% Series F 50,000 50,000 5,000 5,000 5 1/8% Series H 200,000 200,000 20,000 20,000 5 3/4% Series I - Convertible 19,336 19,569 1,934 1,957 Total Preferred Stock - No Redemption Required 63,934 63,957 TOTAL PREFERRED STOCK $ 703,484 $ 708,307 See Notes to Financial Statements.
63
(In thousands of dollars) At December 31 Maturity Interest Rate Series 1995 1994 FIRST MORTGAGE BONDS June 1, 1995 4.55% O $ - $ 25,000 March 1, 1996 5 1/4% P - 40,000 April 1, 1997 5 1/2% Q - 35,000 Total First Mortgage Bonds - 100,000 GENERAL AND REFUNDING BONDS May 1, 1996 8 3/4% 415,000 415,000 February 15, 1997 8 3/4% 250,000 250,000 April 15, 1998 7 5/8% 100,000 100,000 May 15, 1999 7.85% 56,000 56,000 April 15, 2004 8 5/8% 185,000 185,000 May 15, 2006 8.50% 75,000 75,000 July 15, 2008 7.90% 80,000 80,000 May 1, 2021 9 3/4% 415,000 415,000 July 1, 2024 9 5/8% 375,000 375,000 Total General and Refunding Bonds 1,951,000 1,951,000 DEBENTURES July 15, 1999 7.30% 397,000 397,000 January 15, 2000 7.30% 36,000 36,000 July 15, 2001 6.25% 145,000 145,000 March 15, 2003 7.05% 150,000 150,000 March 1, 2004 7.00% 59,000 59,000 June 1, 2005 7.125% 200,000 200,000 March 1, 2007 7.50% 142,000 142,000 July 15, 2019 8.90% 420,000 420,000 November 1, 2022 9.00% 451,000 451,000 March 15, 2023 8.20% 270,000 270,000 Total Debentures 2,270,000 2,270,000 AUTHORITY FINANCING NOTES Industrial Development Revenue Bonds December 1, 2006 7.50% 1976 A,B 2,000 2,000 Pollution Control Revenue Bonds December 1, 2006 7.50% 1976 A 28,375 28,375 December 1, 2009 7.80% 1979 B 19,100 19,100 October 1, 2012 8 1/4% 1982 17,200 17,200 March 1, 2016 4.70% 1985 A,B 150,000 150,000 Electric Facilities Revenue Bonds September 1, 2019 7.15% 1989 A,B 100,000 100,000 June 1, 2020 7.15% 1990 A 100,000 100,000 December 1, 2020 7.15% 1991 A 100,000 100,000 February 1, 2022 7.15% 1992 A,B 100,000 100,000 August 1, 2022 6.90% 1992 C,D 100,000 100,000 November 1, 2023 5.00% 1993 A 50,000 50,000 November 1, 2023 5.05% 1993 B 50,000 50,000 October 1, 2024 4.95% 1994 A 50,000 50,000 August 1, 2025 5.00% 1995 A 50,000 - Total Authority Financing Notes 916,675 866,675 Unamortized Discount on Debt (16,075) (17,278) Total 5,121,600 5,170,397 Less Current Maturities 415,000 25,000 TOTAL LONG-TERM DEBT 4,706,600 5,145,397 TOTAL CAPITALIZATION $7,863,037 $ 8,247,332 See Notes to Financial Statements.
64
STATEMENT OF CASH FLOWS (In thousands of dollars) For year ended December 31 1995 1994 1993 OPERATING ACTIVITIES Net Income $ 303,286 $ 301,852 $ 296,563 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 145,357 130,664 122,471 Base financial component amortization 100,971 100,971 100,971 Rate moderation component amortization 21,933 197,656 88,667 Regulatory liability component amortization (79,359) (79,359) (79,359) 1989 Settlement credits amortization (9,214) (9,214) (9,214) Other regulatory amortization 161,605 4,328 (18,044) Rate moderation component carrying charges (25,274) (32,321) (40,004) Amortization of cost of issuing and redeeming securities 39,589 46,237 52,063 Class Settlement 21,669 22,730 23,178 Provision for doubtful accounts 17,751 19,542 18,555 Federal income tax - deferred and other 190,942 165,928 165,952 Other 61,576 46,531 9,228 Changes in operating assets and liabilities Accounts receivable (67,213) (17,353) (65,898) Class Settlement (33,464) (30,235) (25,302) Accrued unbilled revenues (20,061) 5,663 (26,870) Accounts payable and accrued expenses 19,100 (44,598) (8,800) Other (77,194) 6,727 (22,144) Net Cash Provided by Operating Activities 772,000 835,749 582,013 INVESTING ACTIVITIES Construction and nuclear fuel expenditures (243,586) (276,954) (302,220) Shoreham post-settlement costs (70,589) (167,367) (207,114) Other investing activities 8,019 (1,349) (934) Net Cash Used in Investing Activities (306,156) (445,670) (510,268) FINANCING ACTIVITIES Proceeds from issuance of securities 68,726 449,434 1,305,802 Redemption of securities (104,800) (639,858) (1,165,600) Common stock dividends paid (211,630) (205,086) (195,794) Preferred stock dividends paid (52,667) (52,927) (56,727) Other financing activities 529 (4,723) (20,379) Net Cash Used in Financing Activities (299,842) (453,160) (132,698) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 166,002 $ (63,081) $ (60,953) Cash and cash equivalents at January 1 $ 185,451 $ 248,532 $ 309,485 Net increase (decrease) in cash and cash equivalents 166,002 (63,081) (60,953) CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 351,453 $ 185,451 $ 248,532 Interest paid, before reduction for the allowance for borrowed funds used during constuction $ 427,988 $ 446,340 $ 469,978 Federal income tax - paid $ 14,200 $ 10,780 $ 6,000 Federal income tax - refunded $ - $ - $ 1,000 See Notes to Financial Statements.
65 NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Long Island Lighting Company (the Company) was incorporated in 1910 under the Transportation Corporations Law of the State of New York and supplies electric and gas service in Nassau and Suffolk Counties and to the Rockaway Peninsula in Queens County, all on Long Island, New York. The Company's service territory covers an area of approximately 1,230 square miles. The population of the service area, according to the Company's 1995 estimate, is about 2.7 million persons, including approximately 98,000 persons who reside in Queens County within the City of New York. The Company serves approximately 1 million electric customers of which approximately 915,000 are residential. The Company receives approximately 49% of its electric revenues from residential customers, 48% from commercial/ industrial customers and the balance from sales to other utilities and public authorities. The Company also serves approximately 453,000 gas customers, 408,000 of which are residential, accounting for 62% of the gas revenues, with the balance of the gas revenues made up by the commercial/industrial customer class. The Company believes that its current customer base is stable. The Company's geographic location and the limited electrical interconnections to Long Island serve to limit the accessibility of the transmission grid to potential competitors from off the system. In addition, the Company does not expect any new major independent power producers (IPPs) or cogenerators to be built on Long Island in the foreseeable future. One of the reasons supporting this conclusion is based on the Company's belief that the composition and distribution of the Company's remaining commercial and industrial customers would make it difficult for large electric projects to operate economically. Furthermore, under federal law, the Company is required to buy energy from qualified producers at the Company's avoided cost. Current long-range avoided cost estimates for the Company have significantly reduced the economic advantage to entrepreneurs seeking to compete with the Company and with existing IPPs. REGULATION The Company's accounting records are maintained in accordance with the Uniform Systems of Accounts prescribed by the Public Service Commission of the State of New York (PSC) and the Federal Energy Regulatory Commission (FERC). Its financial statements reflect the ratemaking policies and actions of these commissions in conformity with generally accepted accounting principles for rate-regulated enterprises. ACCOUNTING FOR THE EFFECTS OF RATE REGULATION GENERAL The Company is subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of 66 Regulation". This statement recognizes the economic ability of regulators, through the ratemaking process, to create future economic benefits and obligations affecting rate-regulated companies. The Company records these future economic benefits and obligations as regulatory assets and liabilities. Regulatory assets represent probable future revenues to the Company associated with previously incurred costs that are expected to be recovered from customers. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are expected to be refunded to customers through the ratemaking process. Regulatory assets net of regulatory liabilities amounted to approximately $6.8 billion and $6.9 billion at December 31, 1995 and 1994, respectively. In order for a rate-regulated entity to continue to apply the provisions of SFAS No. 71, it must continue to meet the following three criteria: (i) the enterprise's rates for regulated services provided to its customers must be established by an independent third-party regulator; (ii) the regulated rates must be designed to recover the specific enterprise's costs of providing the regulated services; and (iii) in view of the demand for the regulated services and the level of competition, it is reasonable to assume that rates set at levels that will recover the enterprise's costs can be charged to and collected from customers. Based upon the Company's evaluation of the three criteria discussed above in relation to its operations, the effect of competition on its ability to recover its costs, including its allowed return on common equity and the regulatory environment in which the Company operates, the Company believes that SFAS No. 71 continues to apply to the Company's electric and gas operations. The Company formed its conclusion based upon several factors including: (i) the Company's continuing ability to earn its allowed return on common equity for both its electric and gas operations; and (ii) the PSC's continued affirmation of its commitment to the Company's full recovery of the Shoreham Nuclear Power Station (Shoreham) related assets and all other prudently incurred costs. Notwithstanding the above, rate regulation is undergoing significant change as regulators and customers seek lower prices for electric and gas service. As discussed more fully in Note 10, the PSC has initiated Competitive Opportunities Proceedings seeking ways to transition the electric industry to full retail competition, the outcome of which could result in significant changes in the way the Company will be regulated in the future. In the event that regulation significantly changes the opportunity for the Company to recover its costs in the future, all or a portion of the Company's operations may no longer meet the criteria discussed above. In that event, all or a portion of the Company's existing regulatory assets and liabilities would be written-off. For additional information respecting the Company's Shoreham-related assets, see Note 10. Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which amends SFAS No. 71. Under SFAS No. 121, costs which were capitalized, because it was probable that future recovery would be allowed by the regulator, must be charged against current period earnings if it appears 67 that the criterion for capitalization no longer applies. The carrying amount of the asset would be reduced by disallowed costs. SFAS No. 121 also provides for the restoration of previously disallowed costs that are subsequently allowed by a regulator. The adoption of SFAS No. 121 is not expected to have an effect on the Company's financial position or results of operations. Discussed below are the Company's significant regulatory assets and regulatory liabilities. Base Financial Component and Rate Moderation Component Pursuant to the 1989 Settlement, as more fully discussed in Note 2, the Company recorded a regulatory asset known as the Financial Resource Asset (FRA). The FRA is designed to provide the Company with sufficient cash flows to assure its financial recovery. The FRA has two components, the Base Financial Component (BFC) and the Rate Moderation Component (RMC). The BFC represents the present value of the future net-after-tax cash flows which the Rate Moderation Agreement (RMA), one of the constituent documents of the 1989 Settlement, provided the Company for its financial recovery. The BFC was granted rate base treatment under the terms of the RMA and is included in the Company's revenue requirements through an amortization included in rates over forty years on a straight-line basis which began July 1, 1989. The RMC reflects the difference between the Company's revenue requirements under conventional ratemaking and the revenues resulting from the implementation of the rate moderation plan provided for in the RMA. The RMC is currently adjusted, on a monthly basis, for the Company's share of certain Nine Mile Point Nuclear Power Station, Unit 2 (NMP2) operations and maintenance expenses, fuel credits resulting from the Company's electric fuel cost adjustment clause and gross receipts tax adjustments related to the FRA. For a further discussion of the 1989 Settlement and FRA, see Notes 2 and 3. Shoreham Post-Settlement Costs The balance consists of Shoreham decommissioning costs, fuel disposal costs, payments-in-lieu-of-taxes, carrying charges and other costs. These costs are being capitalized and amortized and recovered through rates over a forty year period on a straight-line remaining life basis which began July 1, 1989. For a further discussion of Shoreham post-settlement costs, see Note 2. Shoreham Nuclear Fuel The balance principally reflects the unamortized portion of Shoreham nuclear fuel which was reclassified from Nuclear Fuel in Process and in Reactor at the time of the 1989 Settlement. This amount is being amortized and recovered through rates over a forty-year period on a straight-line remaining life basis which began July 1, 1989. Unamortized Cost of Issuing Securities The balance represents the unamortized premiums or discounts and expenses 68 related to the issues of long-term debt that have been retired prior to maturity and the costs associated with the early redemption of those issues. In addition, this balance includes the unamortized capital stock expense and redemption costs related to certain series of preferred stock that have been refinanced. These costs are amortized and recovered through rates over the shorter of the life of the redeemed issue or the new issue as provided by the PSC. Postretirement Benefits Other Than Pensions The Company defers as a regulatory asset the difference between postretirement benefit expense recorded in accordance with SFAS No. 106 and postretirement benefit expense reflected in current rates. Pursuant to a PSC order, the ongoing annual SFAS No. 106 benefit expense must be phased into and fully reflected in rates by November 30, 1997, ending with the accumulated deferred asset being recovered in rates over the next fifteen-year period. For a further discussion of SFAS No. 106, see Note 8. Regulatory Tax Asset and Regulatory Tax Liability The Company has recorded a regulatory tax asset for amounts that it will collect in future rates for the portion of its deferred tax liability that has not yet been recognized for ratemaking purposes. The regulatory tax asset is comprised principally of the tax effect of the difference in the cost basis of the BFC for financial and tax reporting purposes, depreciation differences not normalized and the allowance for equity funds used during construction. The regulatory tax liability is primarily attributable to deferred taxes previously recognized at rates higher than current enacted tax law, unamortized investment tax credits and tax credit carryforwards. Regulatory Liability Component Pursuant to the 1989 Settlement, certain tax benefits attributable to the Shoreham abandonment are to be shared between customers and shareowners. A regulatory liability of approximately $794 million was recorded in June 1989 to preserve an amount equivalent to the customer tax benefits attributable to the Shoreham abandonment. This amount is being amortized over a ten-year period on a straight-line basis which began July 1, 1989. 1989 Settlement Credits The balance represents the unamortized portion of an adjustment of the book write-off to the negotiated 1989 Settlement amount. A portion of this amount is being amortized over a ten-year period which began on July 1, 1989. The remaining portion is not currently being recognized for ratemaking purposes. UTILITY PLANT Additions to and replacements of utility plant are capitalized at original cost, which includes material, labor, indirect costs associated with an addition or replacement and an allowance for the cost of funds used during construction. The cost of renewals and betterments relating to units of 69 property is added to utility plant. The cost of property replaced, retired or otherwise disposed of is deducted from utility plant and, generally, together with dismantling costs less any salvage, is charged to accumulated depreciation. The cost of repairs and minor renewals is charged to maintenance expense. Mass properties (such as poles, wire and meters) are accounted for on an average unit cost basis by year of installation. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The Uniform Systems of Accounts defines the Allowance For Funds Used During Construction (AFC) as the net cost of borrowed funds used for construction purposes and a reasonable rate of return upon the utility's equity when so used. AFC is not an item of current cash income. AFC is computed monthly using a rate permitted by FERC on a portion of construction work in progress. The average annual AFC rate, without giving effect to compounding, was 9.36%, 9.18% and 9.73% for the years 1995, 1994 and 1993, respectively. DEPRECIATION The provisions for depreciation result from the application of straight-line rates to the original cost, by groups, of depreciable properties in service. The rates are determined by age-life studies performed annually on depreciable properties. Depreciation for electric properties was equivalent to approximately 3.0% of respective average depreciable plant costs for each of the years 1995, 1994 and 1993. Depreciation for gas properties was equivalent to approximately 2.0% of respective average depreciable plant costs for each of the years 1995, 1994 and 1993. CASH AND CASH EQUIVALENTS Cash equivalents are highly liquid investments with maturities of three months or less when purchased. The carrying amount approximates fair value because of the short maturity of these investments. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values for the Company's long-term debt and redeemable preferred stock are based on quoted market prices, where available. The fair values for all other long-term debt and redeemable preferred stock are estimated using discounted cash flow analyses which is based upon the Company's current incremental borrowing rate for similar types of securities. REVENUES Revenues are based on cycle billings rendered to certain customers monthly and others bi-monthly. The Company also accrues electric and gas revenues for services rendered to customers but not billed at month-end. The Company's electric rate structure as discussed in Note 3, provides for a revenue reconciliation mechanism which eliminates the impact on earnings of experiencing electric sales that are above or below the levels reflected in rates. The Company's gas structure provides for a weather normalization clause which 70 reduces the impact on revenues of experiencing weather which is warmer or colder than normal. FUEL COST ADJUSTMENTS The Company's electric and gas tariffs include fuel cost adjustment (FCA) clauses which provide for the disposition of the difference between actual fuel costs and the fuel costs allowed in the Company's base tariff rates (base fuel costs). The Company defers these differences to future periods in which they will be billed or credited to customers, except for base electric fuel costs in excess of actual electric fuel costs, which are currently credited to the RMC as incurred. FEDERAL INCOME TAX The Company provides deferred federal income tax with respect to certain items of income and expense that are reported in different years for federal income tax purposes and financial statement purposes and with respect to items with different bases for financial and tax reporting purposes, as discussed in Note 9. The Company defers the benefit of 60% of pre-1982 gas and pre-1983 electric and 100% of all other investment tax credits, with respect to regulated properties, when realized on its tax returns. Accumulated deferred investment tax credits are amortized ratably over the lives of the related properties. For ratemaking purposes, the Company provides deferred federal income tax with respect to certain differences between income before income tax and taxable income. Also, certain accumulated deferred federal income tax are deducted from rate base and amortized or otherwise applied as a reduction in federal income tax expense in future years. RESERVES FOR CLAIMS AND DAMAGES Losses arising from claims against the Company, including workers' compensation claims, property damage, extraordinary storm costs and general liability claims, are partially self-insured. Reserves for these claims and damages are based on, among other things, experience, risk of loss and the ratemaking practices of the PSC. Extraordinary storm losses incurred by the Company are partially insured by various commercial insurance carriers. These insurance carriers provide partial insurance coverage for individual storm losses to the Company's transmission and distribution system between $15 million and $35 million. Storm losses which are outside of this range, as well as the uninsured layers within this range, are self-insured by the Company. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 71 RECLASSIFICATIONS Certain prior year amounts have been reclassified in the financial statements to conform with the current year presentation. 72 NOTE 2. THE 1989 SETTLEMENT On February 28, 1989, the Company and the State of New York entered into the 1989 Settlement resolving certain issues relating to the Company and providing, among other matters, for the financial recovery of the Company and for the transfer of Shoreham to the Long Island Power Authority (LIPA), an agency of the State of New York, for its subsequent decommissioning. Upon the effectiveness of the 1989 Settlement, in June 1989, the Company recorded the FRA on its Balance Sheet and the retirement of its investment of approximately $4.2 billion, principally in Shoreham. The FRA has two components, the BFC and the RMC. For a further discussion of the FRA, see Note 1. On February 29, 1992, the Company transferred ownership of Shoreham to LIPA. Pursuant to the 1989 Settlement, the Company was required to reimburse LIPA for all of its costs associated with the decommissioning of Shoreham. Effective May 1, 1995, the Nuclear Regulatory Commission (NRC) terminated LIPA's possession - -only license for Shoreham. The termination signified the NRC's approval that decommissioning was complete and that the site is suitable for unrestricted use. At December 31, 1995, Shoreham post-settlement costs totaled approximately $1.052 billion, consisting of $487 million of property taxes and payments-in-lieu-of-taxes, and $565 million of decommissioning costs, fuel disposal costs and all other costs incurred at Shoreham after June 30, 1989. The PSC has determined that all costs associated with Shoreham which are prudently incurred by the Company subsequent to the effectiveness of the 1989 Settlement are decommissioning costs. The RMA provides for the recovery of such costs through electric rates over the balance of a forty-year period ending 2029. 73 NOTE 3. RATE MATTERS ELECTRIC In 1993, the Company filed an Electric Rate Plan (Plan) with the PSC for the three-year period which began December 1, 1994. The goals of this Plan included minimizing future electric rate increases in addition to providing for the continued recovery of the Company's regulatory assets while retaining consistency with the Rate Moderation Agreement's (RMA) objective of restoring the Company to financial health. As a result of the rate proceeding initiated by the filing of the Company's Plan, the PSC issued an Order, in 1995, for the rate year beginning December 1, 1994, which among other things, froze overall electric rates, reduced the Company's allowed return on common equity from 11.6% to 11.0%, and modified or eliminated certain performance-based incentives as discussed below under the heading "Modifications to the LILCO Ratemaking and Performance Plan". In addition, the PSC ordered that the rate proceeding be continued to allow the parties to develop a plan for achieving long-term rate stability, while, among other things, providing for the continuing recovery of the Shoreham-related assets. In its rate decision, the PSC reaffirmed its commitment to allow the Company to recover its Shoreham-related assets, noting that it is a crucial factor in the Company's ability to maintain its investment grade bond rating and to secure reasonably priced capital. The continuation of the rate proceeding will also enable the PSC to consider the Company's operations and its opportunities for greater efficiency over the next several years. In 1995, the Company, through a compliance filing, requested a continuation of the rate freeze for the rate year beginning December 1, 1995. The PSC has yet to issue an electric rate order in response to this filing. In February 1996, the PSC issued an order to show cause and instituted a proceeding to examine various opportunities to reduce the Company's current electric rates. Specifically, the Company has been directed to address the following: (i) should all or a part of the $81 million Suffolk County property tax refund that the Company received in January 1996, pursuant to a judgment in the Company's favor that found that the Shoreham property was overvalued for property tax purposes between 1976 and 1983 (excluding 1979 which had previously been settled), be used to reduce current rates; (ii) should the return of the $26 million 1995 rate year net reconciliation credit to customers, as more fully discussed below, be accelerated; (iii) determine, upon review of the forecasts reflected in the September 1995 compliance filing for the rate year commencing December 1, 1995, whether adjustments to the forecasts can be reflected in rate reductions currently; and (iv) revisit the current mechanics of the Fuel Cost Adjustment (FCA) clause, as more fully discussed in Note 1, to determine whether all or a portion of any fuel cost savings can be reflected in current customer bills. The Company has been directed to submit a response to the order to show cause addressing these items. Interested parties will have an opportunity to submit comments on the Company's filing, after which a hearing before an ALJ will be convened and the ALJ will determine further procedures. The Company 74 is unable to predict the outcome of this proceeding and the impact, if any, that it may have on the Company's cash flow, financial condition or results of its operations. While no assurances can be given, the Company's objective is to continue the current rate freeze through the rate year ending November 30, 1997. Rate Moderation Component The RMA, one of the constituent documents of the 1989 Settlement, provides for the full recovery of the RMC. The RMC balance represents deferred revenues to be collected from customers which result from the difference between conventional revenue requirements and revenues provided for under the 1989 Settlement and subsequent rate orders. Prior to December 31, 1992, the RMC had increased as the difference between revenues resulting from the implementation of the rate moderation plan provided for in the RMA and revenue requirements under conventional ratemaking, together with a carrying charge computed at the Company's allowed return on common equity, was deferred. The RMC had provided the Company with a substantial amount of non-cash earnings from the effective date of the 1989 Settlement through December 31, 1992. For the period December 31, 1992 through December 31, 1994, the RMC balance had decreased as revenues resulting from the operation of the rate moderation plan exceeded revenue requirements under conventional ratemaking. During 1995, the Company was able to reduce the RMC balance by approximately $80 million by applying credits generated by the operation of the Company's Fuel Moderation Component Mechanism (FMC), as described below, and by crediting certain deferred customer benefits to the RMC, as prescribed by the PSC. The FMC and deferred customer benefits, which amounted to $87 million and $86 million, respectively, more than offset the accretion of the RMC resulting from revenues under the current electric rate order being less than the Company's revenue requirements under conventional ratemaking. The FMC mechanism, which is included in the Company's FCA clause, allows the Company to collect the higher of the base cost of fuel included in electric rates or the actual cost of fuel. The actual cost of fuel consumed for electric generation for 1995 was approximately $87 million below the base cost of fuel, enabling the Company to use this excess to credit and thus reduce the RMC balance. For the years ended December 31, 1994 and 1993, the Company credited the RMC balance $83 million and $45 million, respectively, as a result of the operation of the FMC mechanism. To assist in the recovery of the RMC balance, the Company, as authorized by the PSC, has credited the RMC with $86 million of deferred customer benefits, as noted above. These credits consisted principally of: (i) deferred amounts collected in rates that because of the Company's cost containment programs had not been expended for enhanced reliability and production operations and maintenance expenses during the term of the LRPP; (ii) net litigation proceeds related to the construction of Shoreham; and (iii) proceeds from the sale of sulfur dioxide emissions credits. For the years ended December 31, 1994 and 1993, the Company credited the RMC balance with deferred customer benefits totaling $5.1 million and $10.1 million, respectively. 75 Modifications to the Lilco Ratemaking and Performance Plan In November 1991, the PSC approved the Lilco Ratemaking and Performance Plan (LRPP). The LRPP contained three major components: (i) revenue reconciliation; (ii) expense attrition and reconciliation; and (iii) performance-based incentives. In its latest electric rate order, the PSC has continued the three major components of the LRPP with modifications to the expense attrition and reconciliation mechanism and the performance-based incentives. The revenue reconciliation mechanism remains unchanged. Revenue reconciliation provides a mechanism that eliminates the impact of experiencing sales that are above or below adjudicated levels by providing a fixed annual net margin level (defined as sales revenues, net of fuel expenses and gross receipts taxes). The difference between actual and adjudicated net margin levels are deferred on a monthly basis during the rate year. The expense attrition and reconciliation component permits the Company to make adjustments for certain expenses recognizing that these cost increases are unavoidable due to inflation and changes outside the control of the Company. Pursuant to the current electric rate order, which became effective December 1, 1994, the Company is permitted to reconcile expenses for property taxes only, whereas under the original LRPP the Company was able to reconcile expenses for wage rates, property taxes, interest costs and demand side management (DSM) costs. The original LRPP had also provided for the deferral and amortization of certain cost variances for enhanced reliability, production operations and maintenance expenses and the application of an inflation index to other expenses. Under the current rate order, these deferrals have been eliminated and any unamortized balances were credited to the RMC during 1995. The modified performance-based incentive programs include the DSM program, the customer service performance program and the transmission and distribution reliability program. Under these revised programs, the Company is subject to a maximum penalty of 38 basis points of the allowed return on common equity and can earn up to 4 basis points under the customer service program. This 4 basis point incentive can only be used to offset a penalty under the transmission and distribution reliability program. Under the original LRPP, the Company was allowed to earn up to 40 basis points or forfeit up to 18 basis points under these incentive programs. The partial passthrough fuel incentive program remains unchanged. Under this incentive, the Company can earn or forfeit up to 20 basis points of the allowed return on common equity. For the rate year ended November 30, 1995, the Company earned 19 basis points, or approximately $4.0 million, net of tax effects, as a result of its performance under all incentive programs. In each of the rate years ended November 30, 1994 and 1993, the Company earned 50 and 49 basis points, respectively, or approximately $9.2 million, net of tax effects, under the incentive programs in effect at those times. The deferred balances resulting from the net margin expense reconciliations, 76 and earned performance-based incentives are netted at the end of each rate year and, as established under the LRPP and continuing under the current rate order, the first $15 million of the total deferral is used to increase or decrease the RMC balance. Deferrals in excess of the $15 million, upon approval of the PSC, are refunded to or recovered from the customers through the FCA mechanism over a 12-month period. For the rate year ended November 30, 1995, the amount to be returned to customers resulting from the revenue and expense reconciliations, performance-based incentive programs and associated carrying charges totaled $41 million. In accordance with the current electric rate order, and as established under the LRPP, the first $15 million of the deferral will be used to reduce the RMC. The remaining balance of $26 million is expected to be returned to the customers through the FCA over a 12-month period. For the rate years ended November 30, 1994 and 1993, the Company recorded deferred charges of approximately $79 million and $63 million, respectively. The first $15 million of the rate year ended November 30, 1993 was applied as an increase to the RMC while the remaining deferrals of $48 million were recovered from customers through the FCA. It is anticipated that the first $15 million of deferrals for the rate year ended November 30, 1994 will be reclassified to increase the RMC balance upon approval by the PSC of the Company's pending reconciliation filing and that the remaining $64 million will be recovered from customers through the FCA. Another provision of the LRPP, which is continuing under the current rate structure, is a mechanism whereby earnings in excess of the allowed return on common equity, excluding the impacts of the various incentive and/or penalty programs, are used to reduce the RMC. For the rate year ended November 30, 1995, the Company earned $3.3 million, net of tax effects, in excess of its allowed return on common equity which was fully applied as a reduction to the RMC. In 1994, the Company did not earn in excess of its allowed return on common equity, while for the rate year ended November 30, 1993, the Company earned $8.9 million, net of tax effects, in excess of the allowed return on common equity which was shared equally between customers (by a reduction to the RMC) and shareowners. Under the modified mechanism currently in effect, all excess earnings are allocated to customers via a reduction to the RMC. GAS In December 1993, the PSC approved a three-year gas rate settlement between the Company and the Staff of the PSC. The gas rate settlement provides that the Company receive, for each of the rate years beginning December 1, 1993, 1994 and 1995, annual gas rate increases of 4.7%, 3.8% and 3.2%, respectively. In the determination of the revenue requirements for the gas rate settlement, an allowed return on common equity of 10.1% was used. The gas rate decision also provides that earnings in excess of a 10.6% return on common equity be shared equally between the Company's firm gas customers and its shareowners. For the rate years ended November 30, 1995, and 1994, the Company earned approximately $1.5 million and $9.2 million, net of tax effects, respectively, in excess of the 10.6% return on common equity. The firm gas customers' portion of these excess earnings amounting to $0.8 million and $4.6 million, net of tax effects, respectively, has been deferred. The PSC has granted the Company permission to retain the customers' portion of the 1994 rate year excess earnings through the term of 77 the gas rate settlement agreement and apply such excess earnings to the recovery of deferred Postretirement Benefits Other Than Pensions or manufactured gas plant (MGP) site cleanup costs. For a further discussion of Postretirement Benefits Other Than Pensions and MGP costs, see Notes 8 and 10, respectively. The Company has requested that the same treatment be granted for the disposition of the customer's portion of the 1995 rate year excess earnings which amounted to $1.5 million. 78 NOTE 4. THE CLASS SETTLEMENT The Class Settlement, which became effective on June 28, 1989, resolved a civil lawsuit against the Company brought under the federal Racketeer Influenced and Corrupt Organizations Act. The lawsuit, which the Class Settlement resolved, had alleged that the Company made inadequate disclosures before the PSC concerning the construction and completion of nuclear generating facilities. The Class Settlement provides the Company's electric customers with rate reductions aggregating $390 million. Upon its effectiveness, the Company recorded its liability for the Class Settlement on a present value basis at $170 million and simultaneously recorded a charge to income (net of tax effects of $57 million) of approximately $113 million. The Class Settlement provides the Company's electric customers with reductions that are being reflected as adjustments to their monthly electric bills over a ten-year period which began on June 1, 1990. The remaining reductions to customers bills, amounting to approximately $247 million as of December 31, 1995, consists of approximately $17 million for the five-month period beginning January 1, 1996, $50 million for the 12-month period beginning June 1, 1996 and $60 million for each of the 12-month periods beginning June 1, 1997, 1998 and 1999, respectively. 79 NOTE 5. NINE MILE POINT NUCLEAR POWER STATION, UNIT 2 The Company has an 18% undivided interest in NMP2, located near Oswego, New York which is operated by Niagara Mohawk Power Corporation (NMPC). Ownership of NMP2 is shared by five cotenants: the Company (18%), NMPC (41%), New York State Electric & Gas Corporation (18%), Rochester Gas and Electric Corporation (14%) and Central Hudson Gas & Electric Corporation (9%). At December 31, 1995, the Company's utility plant investment in NMP2 included in rate base was $740 million, net of accumulated depreciation of $153 million. Generation from NMP2 and operating expenses incurred by NMP2 are shared in the same proportions as the cotenants' respective ownership interests. The Company's share of operating expenses is included on its Statement of Income. The Company is required to provide its respective share of financing for any capital additions to NMP2. Nuclear fuel costs associated with NMP2 are being amortized on the basis of the quantity of heat produced for the generation of electricity. NMPC has contracted with the United States Department of Energy for the disposal of spent nuclear fuel. The Company reimburses NMPC for its 18% share of the cost under the contract at a rate of $1.00 per megawatt hour of net generation less a factor to account for transmission line losses. For 1995, 1994 and 1993, this totaled $1.2 million, $1.4 million, and $1.0 million, respectively. NMPC expects to commence the decommissioning of NMP2 in 2026, shortly after the cessation of plant operations, using a method which provides for the removal of all equipment and structures and the release of the property for unrestricted use. In 1995, NMPC completed a decommissioning study for NMP2 (1995 study) which is currently under evaluation by the Company and the other cotenants. The Company's share of decommissioning costs under the 1995 study is estimated to be $418 million in 2026 dollars ($145 million in 1995 dollars). Previously, the Company's share of decommissioning costs was $234 million in 2026 dollars, which was based upon a 1989 study which was updated to reflect a change in the NRC minimum decommissioning funding requirement. The increase included in the 1995 study is primarily due to the inclusion of nuclear fuel storage charges and costs for continuing care of the nuclear site. The Company's share of the estimated decommissioning costs, based upon the 1989 study, is currently being provided for in electric rates and is being charged to operations as depreciation expense over the expected service life of NMP2. The Company believes that the incremental decommissioning costs identified in the 1995 study will also be recoverable through rates. The amount of decommissioning costs recorded as depreciation expense in 1995, 1994 and 1993 was $2.3 million, $1.6 million and $1.7 million, respectively. The accumulated decommissioning costs collected in rates through December 31, 1995, 1994 and 1993 amounted to $11.0 million, $8.7 million and $7.1 million, respectively. The Company has established trust funds for the decommissioning of the contaminated portion of the NMP2 plant. It is currently estimated that the cost to decommission the contaminated portion of the plant will be approximately 77% of the total decommissioning costs. These funds comply with regulations issued by the NRC and FERC governing the funding of nuclear plant decommissioning costs. The Company's policy is to make contributions to the funds based upon the amount of decommissioning costs collected in 80 rates. As of December 31, 1995, the balance in these funds, including reinvested net earnings, was approximately $10.3 million. These amounts are included on the Company's Balance Sheet in Special deposits. The trust funds investment consists of U.S. Treasury debt securities and cash equivalents. The carrying amounts of these instruments approximate fair market value. The Financial Accounting Standards Board issued an exposure draft in 1996 entitled "Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets". If the provisions of the exposure draft were adopted, the Company would be required to change its current accounting practices for decommissioning costs as follows: (i) the Company's share of the total estimated decommissioning costs would be accounted for as a liability, based on discounted future cash flows; (ii) the recognition of the liability for decommissioning costs would result in a corresponding increase to the cost of the nuclear plant rather than as depreciation expense; and (iii) investment earnings on the assets dedicated to the external decommissioning trust fund would be recorded as investment income rather than as an increase to accumulated depreciation. The Company cannot presently predict the impact, if any, that this exposure draft will have on the Company's financial condition. 81 NOTE 6. CAPITAL STOCK COMMON STOCK The Company has 150,000,000 shares of authorized common stock, of which 119,655,441 were issued and outstanding at December 31, 1995. The Company has 1,707,443 shares reserved for sale through its Employee Stock Purchase Plan, 3,812,382 shares committed to the Automatic Dividend Reinvestment Plan and 112,798 shares reserved for conversion of the Series I Convertible Preferred Stock at a rate of $17.15 per share. PREFERRED STOCK The Company has 7,000,000 authorized shares, cumulative preferred stock, par value $100 per share and 30,000,000 authorized shares, cumulative preferred stock, par value $25 per share. Dividends on preferred stock are paid in preference to dividends on common stock or any other stock ranking junior to preferred stock. Preferred Stock Subject to Mandatory Redemption The aggregate fair value of redeemable preferred stock with mandatory redemptions at December 31, 1995 and 1994 amounted to approximately $598 million and $564 million, respectively, compared to their carrying amounts of $644 million and $649 million, respectively. For a further discussion on the fair value of the securities discussed above, See Note 1. Each year the Company is required to redeem certain series of preferred stock through the operation of sinking fund provisions as follows: Redemption Number Redemption Series Provision Beginning of Shares Price L July 31, 1979 10,500 $100 R December 15, 1982 37,500 100 NN March 1, 1999 77,700 25 UU October 15, 1999 112,000 25 In addition, the Company has the non-cumulative option to double the number of shares to be redeemed pursuant to the sinking fund provisions in any year for the preferred stock series NN and UU. The aggregate par value of preferred stock required to be redeemed through sinking funds in 1996 is $4.8 million, $1.1 million in 1997 and 1998 and $5.8 million in 1999 and 2000. 82 The Company is also required to redeem all shares of certain series of preferred stock which are not subject to sinking fund requirements. The mandatory redemption requirements for these series are as follows: Redemption Number of Redemption Series Date Shares Amounts $1.67 Series GG March 1, 1999 880,000 $ 22,000,000 7.95% Series AA June 1, 2000 14,520,000 363,000,000 7.05% Series QQ May 1, 2001 3,464,000 86,600,000 7.66% Series CC August 1, 2002 570,000 57,000,000 Preferred Stock Not Subject to Mandatory Redemption The Company has the option to redeem certain series of its preferred stock. For the series subject to optional redemption at December 31, 1995, the call prices were as follows: Series Call Price 5.00% Series B $101 4.25% Series D 102 4.35% Series E 102 4.35% Series F 102 5 1/8% Series H 102 5 3/4% Series I - Convertible 100 PREFERENCE STOCK At December 31, 1995, none of the authorized 7,500,000 shares of nonparticipating preference stock, par value $1 per share, which ranks junior to preferred stock, were outstanding. 83 NOTE 7. LONG-TERM DEBT G&R MORTGAGE During 1995, the Company retired the remaining $100 million of First Mortgage Bonds with cash on hand. As a result, the lien of the First Mortgage has been discharged making the General and Refunding Bonds (G&R Bonds) the Company's only outstanding secured indebtedness. The G&R Mortgage is a lien on substantially all of the Company's properties. The annual G&R Mortgage sinking fund requirement for 1995, due not later than June 30, 1996, is estimated at $25 million. The Company expects to satisfy this requirement with retired G&R Bonds, plant additions or with cash on hand, or any combination thereof. 1989 REVOLVING CREDIT AGREEMENT The Company has available through October 1, 1996, $300 million under its 1989 Revolving Credit Agreement (1989 RCA). This line of credit is secured by a first lien upon the Company's accounts receivable and fuel oil inventories. At December 31, 1995, no amounts were outstanding under the 1989 RCA. The Company has agreed to pay a fee of one quarter of one percent per annum on the unused portion. The 1989 RCA may be extended for one-year periods upon the acceptance by the lending banks of a request by the Company, which must be delivered to the lending banks prior to April 1 of each year. It is the Company's intent to request an extension prior to April 1, 1996. AUTHORITY FINANCING NOTES Authority Financing Notes are issued by the Company to the New York State Energy Research and Development Authority (NYSERDA) to secure certain tax-exempt Industrial Development Revenue Bonds, Pollution Control Revenue Bonds (PCRBs) and Electric Facilities Revenue Bonds (EFRBs) issued by NYSERDA. Certain of these bonds are subject to periodic tender, at which time their interest rates may be subject to redetermination. 84 Tender requirements of Authority Financing Notes at December 31, 1995 were as follows: (In thousands of dollars) Interest Rate Series Principal Tendered PCRBs 8 1/4% 1982 $ 17,200 Tendered every three years, next tender October 1997 4.70% 1985 A,B 150,000 Tendered annually on March 1 EFRBs 5.00% 1993 A 50,000 Tendered weekly 5.05% 1993 B 50,000 Tendered weekly 4.95% 1994 A 50,000 Tendered weekly 5.00% 1995 A 50,000 Tendered weekly The 1995, 1994 and 1993 EFRBs and the 1985 PCRBs are supported by letters of credit pursuant to which the letter of credit banks have agreed to pay the principal, interest and premium, if applicable, in the aggregate, up to approximately $381 million in the event of default. The obligation of the Company to reimburse the letter of credit banks is unsecured. The expiration dates for these letters of credit are as follows: Series Expiration Date PCRBs 1985 A,B March 16, 1999 EFRBs 1993 A,B November 17, 1996 1994 A October 26, 1997 1995 A August 24, 1998 Prior to expiration, the Company is required to obtain either an extension of the letters of credit or a substitute credit facility. If neither can be obtained, the authority financing notes supported by letters of credit must be redeemed. In 1996, the Company amended the letter of credit for the PCRBs to extend the stated expiration date to March 16, 1999. 85 FAIR VALUES OF LONG-TERM DEBT The carrying amounts and fair values of the Company's long-term debt at December 31 were as follows: (In thousands of dollars) 1995 FAIR CARRYING VALUE AMOUNT General and Refunding Bonds $1,968,173 $1,951,000 Debentures 2,245,138 2,270,000 Authority Financing Notes 928,967 916,675 Total $5,142,278 $5,137,675 1994 First Mortgage Bonds $ 95,688 $ 100,000 General and Refunding Bonds 1,844,289 1,951,000 Debentures 1,867,510 2,270,000 Authority Financing Notes 829,651 866,675 Total $4,637,138 $5,187,675 For a further discussion on the fair value of the securities listed above, see Note 1. MATURITY SCHEDULE The total long-term debt maturing in each of the next five years is as follows: 1996, $415 million; 1997, $251 million; 1998, $101 million; 1999, $454 million; and 2000, $37 million. 86 NOTE 8. RETIREMENT BENEFIT PLANS PENSION PLANS The Company maintains a defined benefit pension plan which covers substantially all employees (Primary Plan), a supplemental plan which covers officers and certain key executives (Supplemental Plan) and a retirement plan which covers the Board of Directors (Directors' Plan). The Company also maintains 401(k) plans for its union and non-union employees to which it does not contribute. Primary Plan The Company's funding policy is to contribute annually to the Primary Plan a minimum amount consistent with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) plus such additional amounts, if any, as the Company may determine to be appropriate from time to time. Pension benefits are based upon years of service and compensation. The Primary Plan's funded status and amounts recognized on the Balance Sheet at December 31, 1995 and 1994 were as follows: (In thousands of dollars) 1995 1994 Actuarial present value of benefit obligation Vested benefits $ 518,487 $ 467,962 Nonvested benefits 54,305 50,385 Accumulated Benefit Obligation $ 572,792 $ 518,347 Plan assets at fair value $ 685,300 $ 597,200 Actuarial present value of projected benefit obligation 662,360 592,339 Projected benefit obligation less than plan assets 22,940 4,861 Unrecognized net obligation 77,831 84,577 Unrecognized net gain (97,285) (90,335) Net Prepaid (Accrued) Pension Cost $ 3,486 $ (897) 87 Periodic pension cost for the Primary Plan included the following components: (In thousands of dollars) 1995 1994 1993 Service cost - benefits earned during the period $ 15,385 $ 16,465 $ 14,481 Interest cost on projected benefit obligation and service cost 45,987 43,782 41,865 Actual return on plan assets (102,099) (12,431) (54,010) Net amortization and deferral 57,665 (31,633) 10,025 Net Periodic Pension Cost $ 16,938 $ 16,183 $ 12,361 Assumptions used in accounting for the Primary Plan were as follows: 1995 1994 1993 Discount rate 7.25% 7.75% 7.25% Rate of future compensation increases 5.00% 5.00% 5.00% Long-term rate of return on assets 7.50% 7.50% 7.50% The Primary Plan assets at fair value include cash, cash equivalents, group annuity contracts, bonds and listed equity securities. In 1993, the PSC issued an Order which addressed the accounting and ratemaking treatment of pension costs in accordance with SFAS No. 87, "Employers' Accounting for Pensions". Under the Order, the Company is required to recognize any deferred net gains or losses over a ten-year period rather than using the corridor approach method. This change in the annual pension cost calculation reduced pension expense by $4.6 million in the year of adoption, 1993. The Company believes that this method of accounting for financial reporting purposes results in a better matching of revenues and the Company's pension cost. The Company defers differences between pension rate allowance and pension expense under the Order. In addition, the PSC requires the Company to measure the difference between the pension rate allowance and the annual pension contributions contributed into the pension fund. Supplemental Plan The Supplemental Plan, the cost of which is borne by the Company's shareowners, provides supplemental death and retirement benefits for officers and other key executives without contribution from such employees. The Supplemental Plan is a non-qualified plan under the Internal Revenue Code. Death benefits are currently provided by insurance. The provision for plan benefits, which are unfunded, totaled approximately $2.3 million in both 1995 and 1994, and $2.8 million in 1993. Directors' Plan The Directors' Plan provides benefits to directors who are not officers of the Company. Directors who have served in that capacity for more than five years qualify as participants under the plan. The Directors' Plan is a non-qualified plan under the Internal Revenue Code. The provision for retirement benefits, which are unfunded, totaled approximately $114,000, 88 $148,000, and $150,000 in 1995, 1994 and 1993, respectively. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In addition to providing pension benefits, the Company provides certain medical and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for these benefits if they reach retirement age after working for the Company for a minimum of five years. These and similar benefits for active employees are provided by the Company or by insurance companies whose premiums are based on the benefits paid during the year. Effective January 1, 1993, the Company adopted the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", which requires the Company to recognize the expected cost of providing postretirement benefits when employee services are rendered rather than when paid. As a result, the Company, in 1993, recorded an accumulated postretirement benefit obligation and a corresponding regulatory asset of approximately $376 million. Additionally, as a result of adopting SFAS No. 106, the Company's postretirement benefit cost for 1993 increased by $28 million above the amount that would have been recorded under the pay-as-you-go method. In 1993, the PSC issued an Order which required that the effects of implementing SFAS No. 106 be phased into rates. The Order requires the Company to defer as a regulatory asset the difference between postretirement benefit expense recorded for accounting purposes in accordance with SFAS No. 106 and the postretirement benefit expense reflected in rates. The ongoing annual postretirement benefit expense will be phased into and fully reflected in rates within a five-year period from the year of adoption, which began December 1, 1993, with the accumulated regulatory asset being recovered in rates over a 15-year period, beginning December 1, 1997. In addition, the Company is required to recognize any deferred net gains or losses over a ten-year period. In 1994, the Company established Voluntary Employee's Beneficiary Association (VEBA) trusts for union and non-union employees for the funding of incremental costs collected in rates for postretirement benefits. For the years ended December 31, 1995 and 1994, the Company funded the trusts with approximately $50 million and $2 million, respectively. 89 Accumulated postretirement benefit obligation other than pensions at December 31 was as follows: (In thousands of dollars) 1995 1994 Retirees $ 135,497 $ 159,590 Fully eligible plan participants 52,028 57,788 Other active plan participants 142,035 133,030 Accumulated postretirement benefit obligation $ 329,560 $ 350,408 Plan assets (53,646) (2,200) Accumulated postretirement benefit obligation in excess of plan assets 275,914 348,208 Unrecognized net gain 100,335 73,936 Accrued Postretirement Benefit Cost $ 376,249 $ 422,144 At December 31, 1995, the Plan assets at fair value include cash and cash equivalents of $53.5 million and listed equity securities of the Company representing $0.1 million. At December 31, 1994, the Plan assets at fair value include cash and cash equivalents of approximately $2.2 million. Periodic postretirement benefit cost other than pensions for the years were as follows: 1995 1994 1993 Service cost - benefits earned during the period $ 9,082 $ 11,275 $ 12,980 Interest cost on projected benefit obligation and service cost 22,412 25,713 29,531 Actual return on plan assets (1,034) - - Amortization of net gain (14,699) (5,213) - Periodic Postretirement Benefit Cost $ 15,761 $ 31,775 $ 42,511 Assumptions used to determine the postretirement benefit obligation were as follows: 1995 1994 1993 Discount rate 7.25% 7.75% 7.25% Rate of future compensation increases 5.00% 5.00% 5.00% Long-term rate of return on assets 7.50% - - The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation at December 31, 1995 and 1994 were 8.5% and 9.0%, respectively, gradually declining to 6.0% in 2001 and thereafter. A one percentage point increase in the health care cost trend rate would increase the accumulated postretirement benefit obligation as of December 31, 1995 and 1994 by approximately $36 million and $44 million, respectively, and the sum of the service and interest costs in 1995 and 1994 by $4 million and $6 million, respectively. 90 NOTE 9. FEDERAL INCOME TAX At December 31, the significant components of the Company's deferred tax assets and liabilities calculated under the provisions of SFAS No. 109 were as follows: (In thousands of dollars) 1995 1994 Deferred Tax Assets Net operating loss carryforwards $ 338,921 $ 552,917 Reserves not currently deductible 66,825 86,267 Tax depreciable basis in excess of book 41,428 48,557 Nondiscretionary excess credits 29,826 31,933 Credit carryforwards 149,545 142,329 Other 125,246 89,763 Total Deferred Tax Assets $ 751,791 $ 951,766 Deferred Tax Liabilities 1989 Settlement $ 2,155,418 $ 2,174,729 Accelerated depreciation 628,475 608,302 Call premiums 50,062 56,324 Rate case deferrals 28,971 55,598 Other 35,597 46,840 Total Deferred Tax Liabilities 2,898,523 2,941,793 Net Deferred Tax Liability $ 2,146,732 $ 1,990,027 SFAS No. 109 requires utilities to establish regulatory assets and liabilities for the portion of its deferred tax assets and liabilities that have not yet been recognized for ratemaking purposes. The major components of these regulatory assets and liabilities are as follows: (In thousands of dollars) 1995 1994 Regulatory Assets 1989 Settlement $ 1,666,744 $ 1,672,820 Plant items 149,520 169,743 Other (13,881) (10,874) Total Regulatory Assets $ 1,802,383 $ 1,831,689 Regulatory Liabilities Carryforward credits $ 82,330 $ 75,114 Other 33,730 36,104 Total Regulatory Liabilities $ 116,060 $ 111,218 91 The federal income tax amounts included in the Statement of Income differ from the amounts which result from applying the statutory federal income tax rate to income before income tax. The table below sets forth the reasons for such differences. (In thousands of dollars) 1995 1994 1993 Income before federal income tax $ 508,824 $ 478,564 $ 468,839 Statutory federal income tax rate 35% 35% 35% Statutory federal income tax $ 178,088 $ 167,497 $ 164,094 Additions (reductions) in federal income tax Excess of book depreciation over tax depreciation 18,588 14,745 12,437 1989 Settlement 4,213 4,213 4,256 Interest capitalized 2,218 2,449 3,443 Tax credits (1,025) (2,058) (5,586) Rate case adjustments 3,752 (4,779) (1,285) Allowance for funds used during construction (2,392) (2,450) (2,304) Other items 2,096 (2,905) (2,779) Total Federal Income Tax Expense $ 205,538 $ 176,712 $ 172,276 Effective Federal Income Tax Rate 40.4% 36.9% 36.7% The Company's net operating loss (NOL) carryforwards for federal income tax purposes are estimated to be approximately $968 million at December 31, 1995. The Company anticipates that it will fully utilize its NOL carryforwards by the end of 1997, however, should they not be utilized they will expire in the years 2004 through 2007. The Company currently has tax credit carryforwards of approximately $150 million. This balance is composed of investment tax credit (ITC) carryforwards, net of the 35% reduction required by the Tax Reform Act of 1986, totaling approximately $142 million and research and development credits totaling approximately $8 million. The credit carryforwards will expire in the years 1998 through 2010. For financial reporting purposes, a valuation allowance was not required to offset the deferred tax assets related to these carryforwards. Realization is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, the Company believes it is more likely than not that all of the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. In 1990 and 1992, the Company received Revenue Agents' Reports disallowing certain deductions and credits claimed by the Company on its federal income tax returns for the years 1981 through 1989. The Revenue Agents' Reports reflect proposed adjustments to the Company's federal income tax returns for this period which, if sustained, would give rise to tax deficiencies totaling approximately $227 million. The Company believes that any such deficiencies as finally determined would be significantly less than the amounts proposed in the Revenue Agents' Reports. The Revenue Agents have 92 also proposed ITC adjustments which, if sustained, would reduce the ITC carryforwards by approximately $96 million. The Company has protested some of the proposed adjustments which are presently under review by the Regional Appeals Office of the Internal Revenue Service. If this review does not result in a settlement that is satisfactory to the Company, the Company intends to seek a judicial review. The Company believes that its reserves are adequate to cover any tax deficiency that may ultimately be determined and that cash from operations will be sufficient to satisfy any settlement reached. 93 NOTE 10. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company has entered into substantial commitments for gas supply, purchased power and transmission facilities. The costs associated with these commitments are recovered from customers through provisions in the Company's rate tariffs. The Company expended approximately $1 million in 1995 to meet continuous emission monitoring requirements and to meet Phase I nitrogen oxide (NOx) reduction requirements under the federal Clean Air Act (CAA). Subject to requirements that are expected to be promulgated in forthcoming regulations, the Company estimates that it may be required to expend approximately $50 to 60 million (net of NOx credit sales) by 2003 to meet Phase II and Phase III Nox reduction requirements and approximately $24 million by 1999 to meet potential requirements for the control of hazardous air pollutants from power plants. The Company believes that all of the above costs will be recoverable through rates. CONTINGENCIES LONG ISLAND POWER AUTHORITY PROPOSED PLAN During 1995, the Governor of the State of New York requested that the Long Island Power Authority (LIPA) develop a plan that, in addition to replacing the Company as the primary electric and gas utility on Long Island, would among other things, produce an electric rate reduction of at least 10%, provide a framework for long-term competition in power production and protect property taxpayers on Long Island. In response to this request, the Board of Trustees of LIPA established a committee (Evaluation Committee) to analyze various plans involving the Company's business operations and assets. In December 1995, after soliciting information and indications of interest from various parties in connection with a LIPA-facilitated financial restructuring/acquisition of the Company, the members of the Evaluation Committee and their advisors announced a proposed plan to restructure the Company and reduce electric rates on Long Island by 12% (Proposed Plan). The Proposed Plan, which has not been adopted by the LIPA Board or formally presented to the Company's Board of Directors for consideration, generally provides that: (i) the Company sell, subject to LIPA's approval, its gas business and electric generation assets; (ii) LIPA purchase the Company's transmission, distribution and Shoreham-related assets; (iii) LIPA enter into long-term power purchase agreements with the purchasers of the generation assets; (iv) LIPA enter into agreements with contractors to manage the transmission and distribution system; and (v) LIPA exercise its power of eminent domain over all or a portion of the Company's assets or securities in order to achieve its objectives if a negotiated agreement cannot be reached with the Company. The Company has indicated to LIPA that certain elements of the Proposed Plan raise significant concerns. Specifically, the Proposed Plan contains no information regarding the values or prices contemplated to be paid for the Company's assets, no financing commitments for any portion of the 94 proposed transaction were disclosed and no indications that endorsements by certain State officials required to approve any transaction undertaken by LIPA have been obtained. In addition, based on the limited information currently available, the Company is unable to determine how the anticipated rate reduction would be achieved and how the reliability of the electric system, including storm restoration capabilities, would be maintained given the multiple entities that would be responsible for providing such service. Notwithstanding these concerns, the Company remains willing to cooperate with LIPA in developing a plan that is beneficial to the Company's investors, customers and employees. The Company is continuously assessing various other strategies in an effort to provide the greatest possible value to its constituents in light of the changing economic, regulatory and political challenges affecting the Company. Such strategies may include a review and modification of its operations to best meet the challenges of a competitive environment, a possible reorganization of the Company, potential joint ventures and/or possible business combinations with other entities. The implementation of certain plans involving the Company's business operations and assets would be subject to, among other things, shareholder and regulatory approvals and could impact the Company's future financial results and operations. Accordingly, the Company is unable to determine what plan, if any, will be pursued by it and/or LIPA or whether any related transaction will be consummated. COMPETITIVE ENVIRONMENT The electric industry continues to undergo fundamental changes as regulators, elected officials and customers seek lower energy prices. These changes, which may have a significant impact on future financial performance of electric utilities, are being driven by a number of factors including a regulatory environment in which traditional cost-based regulation is seen as a barrier to lower energy prices. In 1995, both the Public Service Commission of the State of New York (PSC) and the Federal Energy Regulatory Commission (FERC) continued their separate initiatives with respect to developing a framework for a competitive electric marketplace. New York State Competitive Opportunities Proceedings In 1994, the PSC began the second phase of its Competitive Opportunities Proceedings to investigate issues related to the future of the regulatory process in an industry which is moving toward competition. The PSC's overall objective was to identify regulatory and ratemaking practices that would assist New York State utilities in the transition to a more competitive environment designed to increase efficiency in providing electricity while maintaining safe, affordable and reliable service. During 1995, the proceedings continued with the PSC adopting a series of principles which it will use to guide the transition of the electric utility industry in New York State from a rate-regulated cost of service model to a competitive market-driven model. The principles state, among other things, that: (i) consumers should have a reasonable opportunity to realize savings from competition; (ii) a basic level of reasonably priced service must be maintained; (iii) the integrity, safety and reliability of 95 the system should not be jeopardized; and (iv) the current industry structure, in which most power plants are vertically integrated with natural monopoly transmission and distribution systems, should be thoroughly examined to ensure that it does not impede or obstruct the development of effective wholesale or retail competition. In addition, the principles state that utilities should have a reasonable opportunity to recover prudent and verifiable expenditures and commitments made pursuant to their legal obligations, consistent with these principles. In October 1995, the Energy Association, which is comprised of the Company and the six other investor-owned New York State utilities, filed a proposal designed to achieve the principles outlined by the PSC. The proposal, which is referred to as the "Wholesale Poolco Model", establishes a framework that will allow competition at the wholesale level. The plan would, among other things: (i) allow utilities, non-regulated generators and other market participants to create a wholesale exchange that allows market forces to determine the price of wholesale electricity; (ii) establish an Independent System Operator (ISO) to coordinate the safe and reliable operation of the bulk power transmission system; (iii) increase customer choice by providing clear market price signals so customers can make informed decisions on the use of electricity; and (iv) separate the generation portion of a utility's business from its regulated transmission and distribution business. In this model, competing generating suppliers would bid energy sales into the market. The market clearing price for energy would be determined by the bid of the highest price unit needed to serve the load in a particular location. Regulated utility companies could purchase energy from the market, which would establish a half-hour locational spot market price for electricity, or the utility could seek to enter into bilateral energy agreements with other parties. Bilateral agreements would be administered independently of the wholesale exchange, but would be scheduled through the ISO. These bilateral agreements would be permitted among utility companies, generating companies and power marketers. In the Wholesale Poolco Model, the purchase of electricity by end use customers would still be bundled with transmission, distribution and customer service, all of which would be provided by regulated utilities. The support of the New York State utilities for the Wholesale Poolco Model is predicated on a number of factors, including: (i) a reasonable opportunity to fully recover all investments and expenditures made to provide reliable service under the existing regulatory compact; (ii) PSC support for the option of each utility to continue in the generation business; (iii) special treatment of nuclear plants based on their unique characteristics; and (iv) the adoption of a clearly defined transition plan to ensure that the interests of the customer and the investor are adequately protected. In December 1995, an Administrative Law Judge (ALJ) of the PSC issued a Recommended Decision (RD) to the PSC with respect to this Competitive Opportunities Proceedings. The ALJ recommended a competitive model which seeks to transition the electric utility industry in New York State to full retail competition through two stages. The first stage of this recommendation seeks to transition the industry from its current cost of service rate regulation to a competitive wholesale model similar to the Wholesale Poolco Model. This first stage would allow participants to 96 become familiar with the operation of a deregulated, competitive generation market prior to the eventual movement to full retail competition in the second stage, through a model known as the Flexible Retail Poolco Model. The Flexible Retail Poolco Model contains many of the same attributes associated with the Wholesale Poolco Model, including: (i) an ISO to coordinate the safe and reliable operation of generation and transmission; (ii) open access to the transmission system, which would be regulated by FERC; and (iii) the continuation of a regulated distribution company to operate and maintain the distribution system. The principal difference between the models is that customers would have a choice among suppliers of electricity in the Flexible Retail Poolco Model whereas in the Wholesale Poolco Model, the regulated entity would acquire electric energy from the spot energy sales exchange to sell to the customer. The Flexible Retail Poolco Model would also: (i) deregulate energy/customer services such as meter reading and customer billing; (ii) unbundle electricity into four components: generation, transmission, distribution, and energy/customer services; and (iii) provide customers with a choice among suppliers of electricity, and allow customers to acquire electricity either by long-term contracts or purchases on the spot market or a combination of the two. One of the most contentious issues of the Competitive Opportunities Proceedings has been the position taken by the various parties to the proceedings on the amount of recovery utilities should be permitted to collect from customers for so-called stranded investments. Stranded investments represent costs that utilities would have otherwise recovered through rates under traditional cost of service regulation that, under competition, utilities may not be able to recover since the market price for their product may be inadequate to recover these costs. The Staff of the PSC, for example, has indicated that utilities should not expect full recovery of stranded costs. The Energy Association has commented that utilities have a sound legal precedent confirmed by long-standing PSC policy to fully recover all prudently incurred costs, including stranded costs. The RD states that for recovery, stranded costs must be prudent, verifiable and unable to be reduced through mitigation measures. The RD states that recovery of stranded costs be predicated on the prudency of the costs incurred. The costs must be verifiable and the Company must show that it was unable to avoid incurring these costs. The RD states that a generic decision should address the definition, the method of measurement, the requirements for mitigation, a preferable recovery mechanism, and a standard for the recovery of stranded investments. The calculation of the amount to be recovered from customers, however, should be left to individual rate cases or special proceedings that should begin during 1996. The RD further directs New York State investor-owned utilities to individually file, within six months of the PSC's order, a comprehensive long-term proposal addressing the significant components of the RD. It is not possible to predict the ultimate outcome of these proceedings, the timing thereof, or the amount, if any, of stranded costs that the Company would recover in a competitive environment. The outcome of these proceedings could adversely affect the Company's ability to apply Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the 97 Effects of Certain Types of Regulation", which, pursuant to SFAS No. 101, "Accounting for Discontinuation of Application of SFAS No. 71" and SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," could then require a significant write-down of assets, the amount of which cannot presently be determined. For a further discussion of SFAS No. 71 and SFAS No. 121, see Note 1. The Electric Industry - Federal Regulatory Issues As a result of Congress' passage of the Public Utility Regulatory Policies Act of 1978 (PURPA), and the National Energy Policy Act of 1992 (NEPA), the once monopolistic electric utility industry now faces competition. PURPA's goal is to reduce the United States' dependence on foreign oil, encourage energy conservation and promote diversification of fuel supply. Accordingly, PURPA provided for the development of a new class of electric generators which rely on either cogeneration technology or alternate fuels. The utilities are obligated under PURPA to purchase the output of certain of these new generators, which are known as qualified facilities (QFs). NEPA sought to increase economic efficiency in the creation and distribution of power by relaxing restrictions on the entry of new competitors to the wholesale electric power market (i.e., sales to an entity for resale to the ultimate consumer). NEPA does so by creating exempt wholesale generators that can sell power in wholesale markets without the regulatory constraints placed on utility generators such as the Company. NEPA also expanded FERC's authority to grant access to utility transmission systems to all parties who seek wholesale wheeling for wholesale competition. Significant issues associated with the removal of restrictions on wholesale transmission system access have yet to be resolved and the potential impact on the Company's financial position cannot yet be determined. FERC is in the process of setting policy which will largely determine how wholesale competition will be implemented. FERC has declared that utilities must provide wholesale wheeling to others that is comparable to the service utilities provide themselves. FERC has issued policy statements concerning regional transmission groups, transmission information requirements and "good faith" requests for service and transmission pricing. In March 1995, FERC issued a Notice of Proposed Rulemaking (NOPR) which combined the issues of open transmission access and stranded cost recovery. The NOPR contained a strong endorsement of the right of the utilities to full recovery of stranded costs due to wholesale wheeling and retail-turned-wholesale wheeling arrangements. During the year, FERC has followed up on these issues through an extensive comment period, holding public hearings on pro-forma transmission tariffs, ancillary services, real-time information systems and power pooling issues. FERC recently announced its interest in exploring the role of an ISO in providing comparable transmission access. It is expected that FERC will issue a final order on open access in 1996. Utilities, including the Company, and numerous other interested parties are actively involved in these proceedings. It is not possible to predict the outcome of these proceedings or the effect, if any, on the financial condition of the Company. The Company participates in the wholesale electricity market primarily as a buyer, and 98 in this regard should benefit if rules are adopted which result in lower wholesale prices for its retail customers. The Company's Service Territory The changing utility regulatory environment has affected the Company in a number of ways. For example, PURPA's encouragement of the non-utility generator (NUG) industry has negatively impacted the Company. In 1995, the Company lost sales to NUGs totaling 366 gigawatt-hours (Gwh) representing a loss in electric revenues net of fuel (net revenues) of approximately $28 million, or 1.5% of the Company's net revenues. In 1994, the Company lost sales to NUGs totaling 237 Gwh or approximately $24 million of net revenues. The increase in lost net revenues resulted principally from the completion, in April 1995, of a QF located at the State University of New York at Stony Brook, New York (Stony Brook Project). The annual load loss due to this QF is estimated to be 188 Gwh. The Company estimates that in 1996, sales losses to NUGs will be 414 Gwh an increase reflecting 12 months of operation for the Stony Brook Project or approximately 1.7% of projected net revenues. The Company believes that load losses due to NUGs have stabilized. This belief is based on the fact that the Company's customer load characteristics, which lack a significant industrial base and related large thermal load, will mitigate load loss and thereby make cogeneration economically unattractive. Additionally, as mentioned above, the Company is required to purchase all the power offered by QFs which in 1995 and 1994 approximated 205 megawatts (MW). QFs have the choice of pricing sales to the Company at either the PSC's published estimates of the Company's long-range avoided costs (LRAC) or the Company's tariff rates, which are modified from time to time, reflecting the Company's actual avoided costs. Additionally, until repealed in 1992, New York State law set a minimum price of six cents per kilowatt-hour (kWh) for utility purchases of power from certain categories of QFs, considerably above the Company's avoided cost. The six cent minimum now only applies to contracts entered into before June 1992. The Company believes that the repeal of the six cent minimum, coupled with recent PSC updates which resulted in lower LRAC estimates, has significantly reduced the economic benefits of constructing new QFs. The Company estimates that purchases from QFs required by federal and state law cost the Company $53 million more than it would have cost had the Company generated this power in both 1995 and 1994. The Company has also experienced a revenue loss as a result of its policy of voluntarily providing wheeling of New York Power Authority (NYPA) power for economic development. The Company estimates that in 1995 and 1994 NYPA power displaced approximately 429 Gwh and 400 Gwh of annual energy sales, respectively. The net revenue loss associated with this amount of sales is approximately $30 million or 1.6% of the Company's 1995 net revenues and $28 million or 1.5% of the Company's 1994 net revenues. Currently, the potential loss of additional load is limited by conditions in the Company's transmission agreements with NYPA. Aside from NUGs, a number of customer groups are seeking to hasten consideration and implementation of full retail competition. For example, an energy consultant has petitioned the PSC, seeking alternate sources of power for Long Island school districts. The County of Nassau has also petitioned the PSC to authorize retail wheeling for all classes of electric 99 customers in the county. In addition, several towns and villages on Long Island are investigating municipalization, in which customers form a government-sponsored electric supply company. This is one form of competition likely to increase as a result of NEPA. The Town of Southampton and several other towns in the Company's service territory are considering the formation of a municipally owned and operated electric authority to replace the services currently provided by the Company. Suffolk County issued a request for proposal from suppliers for up to 200 MW of power which the County would then sell to its residential and commercial customers. The County has awarded the bid to two off-Long Island suppliers and has requested the Company to deliver the power. The Company has responded that it does not believe the County is eligible under present laws and regulations to purchase wholesale power and resell it to retail customers, and has declined to offer the requested retail wheeling service. The Company's geographic location and the limited electrical interconnections to Long Island serve to limit the accessibility of its transmission grid to potential competitors from off the system. The matters discussed above involve substantial social, economic, legal, environmental and financial issues. The Company is opposed to any proposal that merely shifts costs from one group of customers to another, that fails to enhance the provision of least-cost, efficiently-generated electricity or that fails to provide the Company's shareowners with an adequate return on and recovery of their investment. The Company is unable to predict what action, if any, the PSC or FERC may take regarding any of these matters, or the impact on the Company's financial condition if some or all of these matters are approved or implemented by the appropriate regulatory authority. Notwithstanding the outcome of the state or federal regulatory rate proceedings, or any other state action, the Company believes that, among other obligations, the State has a contractual obligation to allow the Company to recover its Shoreham-related assets. ENVIRONMENT The Company is subject to federal, state and local laws and regulations dealing with air and water quality and other environmental matters. The Company continually monitors its activities in order to determine the impact of such activities on the environment and to ensure compliance with various environmental laws. Except as set forth below, no material proceedings have been commenced or, to the knowledge of the Company, are contemplated against the Company with respect to any matter relating to the protection of the environment. The New York State Department of Environmental Conservation (NYSDEC) has required the Company and other New York State utilities to investigate and, where necessary, remediate their former manufactured gas plant (MGP) sites. Currently, the Company is the owner of six pieces of property on which the Company or certain of its predecessor companies is believed to have produced manufactured gas. The Company expects to enter into an Administrative Consent Order (ACO) with the NYDEC in 1996 regarding the management of environmental activities at these properties. Although the exact amount of the Company's clean-up costs, cannot yet be determined, based on the findings of investigations at two of these six sites, preliminary estimates indicate that it will cost approximately $35 million 100 to clean up all of these sites over the next five to ten years. Accordingly, the Company had recorded a $35 million liability and a corresponding regulatory asset to reflect its belief that the PSC will provide for the future recovery of these costs through rates as it has for other New York State utilities. The Company has notified its former and current insurance carriers that it seeks to recover from them certain of these investigation and clean-up costs. However, the Company is unable to predict the amount of insurance recovery, if any, that it may obtain. In addition, there are several other sites within the Company's service territory that were former MGP sites. Research is underway to determine their relationship, if any, to the Company or its predecessor companies. Operations at these facilities in the late 1800's and early 1900's may have resulted in the disposal of certain waste products on these sites. The Company has been notified by the Environmental Protection Agency (EPA) that it is one of many potentially responsible parties (PRPs) that may be liable for the remediation of three licensed treatment, storage and disposal sites to which the Company may have shipped waste products and which have subsequently become environmentally contaminated. At one site, located in Philadelphia, Pennsylvania, and operated by Metal Bank of America, the Company and nine other PRPs, all of which are public utilities, have entered into an ACO with the EPA to conduct a Remedial Investigation and Feasibility Study (RI/FS). Under a PRP participant agreement, the Company is responsible for 8.2% of the costs associated with this RI/FS which has been completed and is currently being reviewed by the EPA. The Company's total share of costs to date is approximately $0.5 million. The level of remediation required will be determined when the EPA issues its decision. Based on information available to date, the Company currently anticipates that the total cost to remediate this site will be between $14 million and $30 million. The Company has recorded a liability of $1.1 million representing its estimated share of the additional cost to remediate this site. With respect to the other two sites, located in Kansas City, Kansas and Kansas City, Missouri, the Company is investigating allegations that it had made agreements for disposal of polychlorinated biphenyls (PCBs) or items containing PCBs at these sites. The EPA has provided the Company with documents indicating that the Company was responsible for less than 1% of the total weight of the PCB-containing equipment, oil and materials that were shipped to the Missouri site. The EPA has not yet completed compiling documents for the Kansas site. The Company is currently unable to determine its share, if any, of the cost to remediate these two sites or the impact, if any, on the Company's financial position. In addition, the Company was notified that it is a PRP at a Superfund Site in Farmingdale, New York. Portions of the site are allegedly contaminated with PCBs, solvents and metals. The Company was also notified by other PRPs that it should be responsible for expenses in the amount of approximately $0.1 million associated with removing PCB-contaminated soils from a portion of the site which formerly contained electric transformers. The Company is currently unable to determine its share of the cost to remediate this site or the impact, if any, on the Company's financial position. The Connecticut Department of Environmental Protection (DEP) and the Company have signed an ACO which will require the Company to address leaks 101 from an electric transmission cable located under the Long Island Sound (Sound Cable). The Sound Cable is jointly owned by the Company and the Connecticut Light and Power Company, a subsidiary of Northeast Utilities. Specifically, the order requires the Company to evaluate existing procedures and practices for cable maintenance, operations and fluid spill response procedures and to propose alternatives to minimize fluid spill occurrences and their impact on the environment. Alternatives to be evaluated range from improving existing monitoring and maintenance practices to removal and replacement of the Sound Cable. The Company is currently unable to determine the costs it will incur to complete the requirements of the ACO or to comply with any additional DEP requirements. In addition, the Company has been served with a subpoena from the U.S. Attorney for the District of Connecticut to supply certain written information regarding releases of fluid from the Sound Cable, as well as associated operating and maintenance practices. Since the investigation is in its preliminary stages, the Company is unable to determine the likelihood of a criminal proceeding being initiated at this time. However, the Company believes all activities associated with the response to releases from the Sound Cable were consistent with legal and regulatory requirements. The Company believes that all significant costs incurred with respect to environmental investigations and remediation activities will be recoverable through rates. NUCLEAR PLANT INSURANCE The NRC requires the owners of nuclear facilities to maintain certain types of insurance. For property damage at each nuclear generating site, the NRC requires a minimum of $1.06 billion of coverage. With respect to third party liability and property damage, the NRC requires nuclear plant owners to carry $200 million in primary coverage. Pursuant to these requirements, the Company carries property insurance and third-party bodily injury and property liability insurance for its 18% share in NMP2. The annual premiums for this coverage are not material. The third-party liability and property damage insurance policies also include retroactive premiums under certain circumstances. The retroactive premium is related to the NRC's requirement that nuclear facility owners, in addition to carrying $200 million in primary coverage, also participate in a Secondary Financial Protection Fund (Fund). Under the Price Anderson Act, that assessment related to the Fund could be up to $79.3 million per nuclear incident in any one year at any nuclear unit, but not in excess of $10 million in payments per year for each incident. The Price Anderson Act also limits liability for third-party bodily injury and third-party property damage arising out of a nuclear occurrence at each unit to $8.9 billion. The Company is liable for its share of any retroactive premium assessment levied against the NMP2 owners. 102 NOTE 11. SEGMENTS OF BUSINESS Identifiable assets by segment include net utility plant, regulatory assets, materials and supplies, accrued unbilled revenues, gas in storage, fuel and deferred charges. Assets utilized for overall Company operations consist primarily of cash and cash equivalents, accounts receivable and unamortized cost of issuing securities.
(In millions of dollars) For year ended December 31 1995 1994 1993 OPERATING REVENUES Electric $ 2,484 $ 2,481 $ 2,352 Gas 591 586 529 Total $ 3,075 $ 3,067 $ 2,881 OPERATING EXPENSES (excludes federal income tax) Electric $ 1,657 $ 1,640 $ 1,514 Gas 478 500 427 Total $ 2,135 $ 2,140 $ 1,941 OPERATING INCOME (before federal income tax) Electric $ 827 $ 842 $ 838 Gas 113 85 102 Total operating income 940 927 940 AFC (7) (7) (7) Other income and deductions (38) (45) (56) Interest charges 476 500 534 Federal income tax 206 177 172 Net Income $ 303 $ 302 $ 297 DEPRECIATION AND AMORTIZATION Electric $ 122 $ 112 $ 106 Gas 23 19 16 Total $ 145 $ 131 $ 122 CONSTRUCTION AND NUCLEAR FUEL EXPENDITURES* Electric $ 162 $ 155 $ 171 Gas 84 125 134 Total $ 246 $ 280 $ 305
* Includes non-cash allowance for other funds used during construction and excludes Shoreham post-settlement costs. (In millions of dollars) At December 31 1995 1994 1993 IDENTIFIABLE ASSETS Electric $ 9,964 $ 10,264 $ 10,377 Gas 1,180 1,181 956 Total identifiable assets 11,144 11,445 11,333 Assets utilized for overall Company operations 1,340 1,034 1,121 Total Assets $ 12,484 $ 12,479 $ 12,454 103 NOTE 12. QUARTERLY FINANCIAL INFORMATION (Unaudited)
(In thousands of dollars except earnings per common share) 1995 1994 OPERATING REVENUES For the quarter ended March 31 $ 791,188 $ 872,143 June 30 653,824 626,310 September 30 875,794 913,440 December 31 754,322 655,414 OPERATING INCOME For the quarter ended March 31 $ 180,875 $ 183,865 June 30 143,246 139,478 September 30 239,561 276,965 December 31 167,936 144,637 NET INCOME For the quarter ended March 31 $ 70,299 $ 69,620 June 30 41,392 24,787 September 30 131,221 168,872 December 31 60,374 38,573 EARNINGS FOR COMMON STOCK For the quarter ended March 31 $ 57,127 $ 56,348 June 30 28,220 11,516 September 30 118,069 155,620 December 31 47,250 25,348 EARNINGS PER COMMON SHARE For the quarter ended March 31 $ .48 $ .50 June 30 .24 .10 September 30 .99 1.32 December 31 .39 .21
104 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Shareowners and Board of Directors of Long Island Lighting Company We have audited the accompanying balance sheet of Long Island Lighting Company and the related statement of capitalization as of December 31, 1995 and 1994 and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Long Island Lighting Company at December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Melville, New York February 7, 1996 /S/ Ernst & Young LLP --------------------- Ernst & Young LLP 105 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information required by Item 10 as to the Company's Executive Officers is set forth in Item 1, "Business" under the heading "Executive Officers of the Company" above. Information required by Item 10 as to the Company's Directors may be found in the Company's proxy statement for its annual meeting to be held on May 9, 1996 (the Annual Meeting). Such proxy statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by Item 11 may be found in the Company's proxy statement for the Annual Meeting. Such proxy statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by Item 12 may be found in the Company's proxy statement for the Annual Meeting. Such proxy statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by Item 13 may be found in the Company's proxy statement for the Annual Meeting. Such proxy statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) List of Financial Statements Statement of Income for each of the three years in the period ended December 31, 1995. Balance Sheet at December 31, 1995 and 1994. Statement of Retained Earnings for each of the three years in the period ended December 31, 1995. Statement of Capitalization at December 31, 1995 and 1994. 106 Statement of Cash Flows for each of the three years in the period ended December 31, 1995. Notes to Financial Statements. (2) List of Financial Statement Schedules Valuation and Qualifying Accounts (Schedule II) 107 (3) List of Exhibits Exhibits listed below which have been filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, and which were filed as noted below, are hereby incorporated by reference and made a part of this report with the same effect as if filed herewith. 3(a) Restated Certificate of Incorporation of the Company dated November 11, 1993 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1993.) (b) By-laws of the Company as amended on May 28, 1991 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1991.) 4(a) General and Refunding Indenture dated as of June 1, 1975 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1991.) Twenty-seven Supplemental Indentures to the General and Refunding Indenture dated as of June 1, 1975, as follows: Previously Filed As An Supplemental Indenture Exhibit To The Company's Number Date Form Date ------ ---- ---- ---- First 06/1/75 10-K 12/31/87 Second 09/1/75 10-K 12/31/87 Third 06/1/76 10-K 12/31/87 Fourth 12/1/76 10-K 12/31/87 Fifth 05/1/77 10-K 12/31/87 Sixth 04/1/78 10-K 12/31/87 Seventh 03/1/79 10-K 12/31/87 Eighth 02/1/80 10-K 12/31/87 Ninth 03/1/81 10-K 12/31/87 Tenth 07/1/81 10-K 12/31/87 Eleventh 07/1/81 10-K 12/31/87 Twelfth 12/1/81 10-K 12/31/87 Thirteenth 12/1/81 10-K 12/31/87 Fourteenth 06/1/82 10-K 12/31/87 Fifteenth 10/1/82 10-K 12/31/87 Sixteenth 04/1/83 10-K 12/31/87 Seventeenth 05/1/83 10-K 12/31/87 Eighteenth 09/1/84 10-K 12/31/87 Nineteenth 10/1/84 10-K 12/31/87 Twentieth 06/1/85 10-K 12/31/87 Twenty-first 04/1/86 10-K 12/31/87 Twenty-second 02/1/91 10-K 12/31/90 Twenty-third 05/1/91 10-K 12/31/91 Twenty-fourth 07/1/91 10-K 12/31/91 Twenty-fifth 05/1/92 10-K 12/31/92 Twenty-sixth 07/1/92 10-K 12/31/92 Twenty-seventh 06/1/94 10-K 12/31/94 108 4(b) Debenture Indenture dated as of November 1, 1986 from the Company to The Connecticut Bank and Trust Company, National Association, as Trustee (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1986). Seven Supplemental Indentures to the Debenture Indenture dated as of November 1, 1986, filed as follows: Previously Filed As An Supplemental Indenture Exhibit To The Company's ---------------------- ------------------------ Number Date Form Date ------ ---- ---- ---- First 11/1/86 10-K 12/31/86 Second 04/1/86 10-K 12/31/89 Third 07/1/86 10-K 12/31/89 Fourth 07/1/92 10-K 12/31/92 Fifth 11/1/92 10-K 12/31/92 Sixth 06/1/93 10-K 12/31/92 Seventh 07/1/93 10-K 12/31/92 4(c) Debenture Indenture dated as of November 1, 1992 from the Company to Chemical Bank, as Trustee (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1992). Four Supplemental Indentures to the Debenture Indenture dated as of November 1, 1992, filed as follows: Previously Filed As An Supplemental Indenture Exhibit To The Company's ---------------------- ----------------------- Number Date Form Date ------ ---- ---- ---- First 01/1/93 10-K 12/31/92 Second 03/1/93 10-K 12/31/92 Third 03/1/93 10-K 12/31/92 Fourth 03/1/93 10-K 12/31/92 10(a) Sound Cable Project Facilities and Marketing Agreement dated as of August 26, 1987 between the Company and the Power Authority of the State of New York (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1987). 10(b) Transmission Agreement by and between the Company and Consolidated Edison Company of New York, Inc. dated as of March 31, 1989 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989). 10(c) Contract for the sale of Firm Power and Energy by and between the Company and the State of New York dated as of April 26, 1989 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989). 10(d) Capacity Supply Agreement dated as of December 13, 1991 between the Company and the Power Authority of the State of New York (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1991). 109 10(e) Nine Mile Point Nuclear Station Unit 2 Operating Agreement dated as of January 1, 1993 by and between the Company, New York State Electric & Gas Corporation, Rochester Gas and Electric Corporation and Central Hudson Gas and Electric Corporation (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1993). 10(f) Settlement Agreement on Issues Related to Nine Mile Two Nuclear Plant dated as of June 6, 1990 by and between the Company, the Staff of the Department of Public Service and others (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1990). 10(g) Settlement Agreement -- LILCO Issues dated as of February 28, 1989 by and between the Company and the State of New York (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1988). 10(h) Amended and Restated Asset Transfer Agreement by and between the Company and the Long Island Power Authority dated as of June 16, 1988 as amended and restated on April 14, 1989 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989). 10(i) Memorandum of Understanding concerning proposed agreements on power supply for Long Island dated as of June 16, 1988 by and between the Company and New York Power Authority as amended May 24, 1989 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989). 10(j) Rate Moderation Agreement submitted by the staff of the New York State Public Service Commission on March 16, 1989 and supported by the Company (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989). 10(k) Site Cooperation and Reimbursement Agreement dated as of January 24, 1990 by and between the Company and Long Island Power Authority (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989). 10(l) Stipulation of settlement of federal Racketeer Influenced and Corrupt Organizations Act Class Action and False Claims Action dated as of February 27, 1989 among the attorneys for the Company, the ratepayer class, the United States of America and the individual defendants named therein (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1988). 10(m) Revolving Credit Agreement dated as of June 27, 1989, between the Company and the banks and co-agents listed therein, with the Exhibits thereto (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989) and as amended by the First Amendment dated as of October 13, 1989 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1990) and as amended by the Second Amendment dated as of March 5, 1992 and as modified by a Waiver dated November 5, 1992 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1992). 10(n) Indenture of Trust dated as of December 1, 1989 by and between New York State Energy Research and Development Authority (NYSERDA) and The Connecticut National Bank, as Trustee, relating to the 1989 EFRBs (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989). Participation Agreement dated as of December 1, 1989 by and between NYSERDA and the Company relating to the 1989 EFRBs (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989). 10(o) Indenture of Trust dated as of May 1, 1990 by and between NYSERDA and The Connecticut National Bank, as Trustee, relating to the 1990 EFRBs (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1990). Participation Agreement dated as of May 1, 1990 by and between NYSERDA and the Company relating to the 1990 EFRBs (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1990). 10(p) Indenture of Trust dated as of January 1, 1991 by and between NYSERDA and The Connecticut National Bank, as Trustee, relating to the 1991 EFRBs (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1990). Participation Agreement dated as of January 1, 1991 by and between NYSERDA and the Company relating to the 1991 EFRBs (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1990). 10(q) Indenture of Trust dated as of February 1, 1992 by and between NYSERDA and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 1992 EFRBs, Series A (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1991). 110 Participation Agreement dated as of February 1, 1992 by and between NYSERDA and the Company relating to the 1992 EFRBs, Series A (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1991). 10(r) Indenture of Trust dated as of February 1, 1992 by and between NYSERDA and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 1992 EFRBs, Series B (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1991). Participation Agreement dated as of February 1, 1992 by and between NYSERDA and the Company relating to the 1992 EFRBs, Series B (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1991). 10(s) Indenture of Trust dated as of August 1, 1992 by and between NYSERDA and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 1992 EFRBs, Series C (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1992). Participation Agreement dated as of August 1, 1992 by and between NYSERDA and the Company relating to the 1992 EFRBs, Series C (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1992). 10(t) Indenture of Trust dated as of August 1, 1992 by and between NYSERDA and IBJ Schroder Bank and Trust Company, as Trustee, relating to the 1992 EFRBs, Series D (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1992). Participation Agreement dated as of August 1, 1992 by and between NYSERDA and the Company relating to the 1992 EFRBs, Series D (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1992). 10(u) Indenture of Trust dated as of November 1, 1993 by and between NYSERDA and Chemical Bank, as Trustee, relating to the 1993 EFRBs, Series A (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1993). Participation Agreement dated as of November 1, 1993 by and between NYSERDA and the Company relating to the 1993 EFRBs, Series A (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1993). 10(v) Indenture of Trust dated as of November 1, 1993 by and between NYSERDA and Chemical Bank, as Trustee, relating to the 1993 EFRBs, Series B (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1993). Participation Agreement dated as of November 1, 1993 by and between NYSERDA and the Company relating to the 1993 EFRBs, Series B (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1993). 10(w) Indenture of Trust dated as of October 1, 1994 by and between NYSERDA and Chemical Bank, as Trustee, relating to the 1994 EFRBs, Series A (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1994). Participation Agreement dated as of October 1, 1994 by and between NYSERDA and the Company relating to the 1994 EFRBs, Series A (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31 1994). *10(x) Indenture of Trust dated as of August 1, 1995 by and between NYSERDA and Chemical Bank, as Trustee, relating to the 1995 EFRBs, Series A. 111 Participation Agreement dated as of August 1, 1995 by and between NYSERDA and the Company relating to the 1995 EFRBs, Series A. 10(y) Supplemental Death and Retirement Benefits Plan as amended and restated effective May 1, 1995 (filed as an Exhibit to the Company's Form 10-Q for the Quarterly Period Ended September 30, 1995) and related Trust Agreement, which Trust Agreement was filed as Exhibit 10(q) to the Company's Form 10-K for the Year Ended December 31, 1990. 10(z) Executive Agreements and Management Contracts (1) Executive Employment Agreement dated as of January 30, 1984 by and between William J. Catacosinos and the Company, as amended by amendments dated March 20, 1987 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1986), December 22, 1989 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989), and December 2, 1991 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1991), which amendment was restated by an amendment dated as of December 2, 1991, and amendments dated as of May 31, 1995 and August 4, 1995 (filed as Exhibits to the Company's Form 10-Q for the Quarterly Period Ended September 30, 1995); an Executive Employment Agreement dated as of August 4, 1995 (filed as an Exhibit to the Company's Form 10-Q for the Quarterly Period ended September 30, 1995). (2) Executive Employment Agreement dated as of November 21, 1994 by and between the Company and Theodore A. Babcock, (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1994) which agreement is substantially the same as Executive Employment Agreement by and between the Company and (1) James T. Flynn, (2) Joseph E. Fontana, (3) Robert X. Kelleher, (4) John D. Leonard, Jr., (5) Adam M. Madsen, (6) Kathleen A. Marion, (7) Arthur C. Marquardt, (8) Brian R. McCaffrey, (9) Joseph W. McDonnell, (10) Leonard P. Novello dated as of April 1, 1995, (11) Anthony Nozzolillo, (12) Richard Reichler, (13) William G. Schiffmacher, (14) Robert B. Steger, (15) William E. Steiger, and (16) Edward J. Youngling. (3) Indemnification Agreement by and between the Company and Theodore A. Babcock dated as of February 23, 1994 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1994), which agreement is substantially the same as Indemnification Agreement by and between the Company and (1) James T. Flynn dated as of November 25, 1987, (2) Joseph E. Fontana dated as of October 20, 1994, (3) Robert X. Kelleher dated as of November 25, 1987, (4) John D. Leonard, Jr. dated as of November 25, 1987, (5) Adam M. Madsen dated as of November 25, 1987, (6) Kathleen A. Marion dated as of May 30, 1990, (7) Arthur C. Marquardt dated as of January 21, 1991, (8) Brian R. McCaffrey dated as of November 25, 1987, (9) Joseph W. McDonnell dated as of March 18, 1988, (10) Leonard P. Novello dated as of April 1, 1995, (11) Anthony Nozzolillo dated as of July 29, 1992, (12) Richard Reichler dated as of September 30, 1993, (13) William Schiffmacher dated as of November 25, 1987, (14) Robert B. Steger dated as of February 20, 1990, (15) William E. Steiger, Jr. dated as of March 1, 1989, and (16) Edward J. Youngling dated as of November 4, 1988. (4) Indemnification Agreement by and between the Company and Vicki L. Fuller dated as of January 3, 1994, (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1994) which agreement is substantially the same as Indemnification Agreement by and between the Company and (1) A. James Barnes dated as of January 31, 1992, (2) George Bugliarello dated as of May 30, 1990, (3) Renso L. Caporali dated as of April 17, 1992, (4) William J. Catacosinos dated as of November 19, 1987, (5) Peter O. Crisp dated as of April 23, 1992, (6) Katherine D. Ortega dated as of April 20, 1993, (7) Basil A. Paterson dated as of November 19, 1987, (8) Richard L. Schmalensee dated as of February 8, 1992, (9) George J. Sideris dated as of November 30, 1987, 112 (10) John H. Talmage dated as of November 19, 1987, and (11) Phyllis A. Vineyard dated as of November 19, 1987. (5) Indemnification Agreement by and between the Company and Lionel M. Goldberg dated as of April 20, 1993, (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1993), which agreement is substantially the same as Indemnification Agreements by and between the Company and Eben W. Pyne dated as of April 20, 1993, and Winfield E. Fromm dated as of April 12, 1994. (6) Long Island Lighting Company Officers' and Directors' Protective Trust dated as of April 18, 1988 as Amended and Restated as of September 1, 1994 by and between the Company and Clarence Goldberg, as Trustee (filed as an Exhibit to the Company's Form 10-Q for the Quarterly period Ended September 30, 1994). (7) Long Island Lighting Company's Retirement Plan for Directors dated as of February 2, 1990 (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1989). (8) Trust Agreement for Officers dated March 20, 1987 by and between the Company and Clarence Goldberg as Trustee (filed as an Exhibit to the Company's Form 10-K for the Year Ended December 31, 1988). *(9) Consulting Agreement dated as of May 24, 1995 by and between the Company and Winfield E. Fromm, which agreement is substantially the same as Consulting Agreements dated as of May 24, 1995 by and between the Company and Lionel M. Goldberg and Eben W. Pyne. *23 Consent of Ernst & Young LLP, Independent Auditors. *24(a) Power of Attorney executed by William J. Catacosinos, dated February 9, 1996, which power of attorney is substantially the same as powers of attorney executed by (1) A. James Barnes, dated February 11, 1996, (2) George Bugliarello, dated February 21, 1996, Renso L. Caporali, dated February 9, 1996, (4) Peter O. Crisp, dated February 12, 1996, (5) Vicki L. Fuller, dated February 23, 1996, (6) Katherine D. Ortega, dated February 23, 1996, (7) Basil A. Paterson, dated February 23, 1996, (8) Richard L. Schmalensee, dated February 10, 1996, (9) George L. Sideris, dated February 11, 1996, (10) John H. Talmage, dated February 9, 1996, and (11) Phyllis S. Vineyard, dated February 23, 1996. *24(b) Certificate as to Corporate Power of Attorney. *24(c) Certified copy of Resolution of Board of Directors authorizing signature pursuant to Power of Attorney. *27 Financial Data Schedule. Financial Statements of subsidiary companies accounted for by the equity method have been omitted because such subsidiaries do not constitute significant subsidiaries. (b) Reports on Form 8-K No reports on Form 8-K were filed in the fourth quarter of 1995. *Filed herewith. 113 LONG ISLAND LIGHTING COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Thousands of Dollars)
Column A Column B Column C Column D Column E Additions Charged Balance at Charged to to other Balance at Description beginning costs and accounts- Deductions- end of of period expenses describe describe period Year ended December 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts $23,365 $17,752 $16,441 (1) $24,676 Year ended December 31, 1994 Deducted from asset accounts: Allowance for doubtful accounts $23,889 $19,542 $20,066 (1) $23,365 Year ended December 31, 1993 Deducted from asset accounts: Allowance for doubtful accounts $24,375 $18,555 $19,041 (1) $23,889
(1) Uncollectible accounts written off, net of recoveries. 114 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date Signature and Title WILLIAM J. CATACOSINOS* William J. Catacosinos, Principal Executive Officer, President and Chairman of the Board of Directors /S/ JOSEPH E. FONTANA Joseph E. Fontana, Controller Principal Accounting Officer A. JAMES BARNES* A. James Barnes, Director GEORGE BUGLIARELLO* George Bugliarello, Director RENSO L. CAPORALI* Renso L. Caporali, Director PETER O. CRISP* Peter O. Crisp, Director VICKI L. FULLER* Vicki L. Fuller, Director KATHERINE D. ORTEGA* Katherine D. Ortega, Director BASIL A. PATERSON* Basil A. Paterson, Director RICHARD L. SCHMALENSEE* Richard L. Schmalensee, Director GEORGE J. SIDERIS* George J. Sideris, Director JOHN H. TALMAGE* John H. Talmage, Director PHYLLIS S. VINEYARD* Phyllis S. Vineyard, Director /S/ ANTHONY NOZZOLILLO Anthony Nozzolillo (Individually, as Senior Vice President February 26, 1996 and Principal Financial Officer and as attorney-in-fact for each of the persons indicated) 115 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LONG ISLAND LIGHTING COMPANY Date: February 26, 1996 By: /s/ ANTHONY NOZZOLILLO - ----- ----------------- ----------------------------- ANTHONY NOZZOLILLO Principal Financial Officer Original powers of attorney, authorizing Kathleen A. Marion and Anthony Nozzolillo, and each of them, to sign this report and any amendments thereto, as attorney-in-fact for each of the Directors and Officers of the Company, and a certified copy of the resolution of the Board of Directors of the Company authorizing said persons and each of them to sign this report and amendments thereto as attorney-in-fact for any Officers signing on behalf of the Company, have been, are being filed or will be filed with the Securities and Exchange Commission. 116 EX-10.X 2 INDENTURE OF TRUST BTWN NYSERDA AND CHEMICAL BANK Exhibit 10(x) INDENTURE OF TRUST BETWEEN NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY AND CHEMICAL BANK, AS TRUSTEE Dated as of August 1, 1995 -relating to- Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1995 Series A THIS INDENTURE OF TRUST, made and dated as of the 1st day of August, 1995, by and between New York State Energy Research and Development Authority (the "Authority"), a body corporate and politic, constituting a public benefit corporation, and Chemical Bank (the "Trustee"), a banking corporation organized under the laws of the State of New York, with its principal corporate trust office located in New York, New York, as trustee, W I T N E S S E T H T H A T: WHEREAS, pursuant to special act of the Legislature of the State of New York (Title 9 of Article 8 of the Public Authorities Law of New York, as from time to time amended and supplemented, herein called the "Act"), the Authority has been established as a body corporate and politic, constituting a public benefit corporation; and WHEREAS, pursuant to the Act, the Authority is empowered to contract with any power company to participate in the construction of facilities to be used for the furnishing of electric energy to the extent required by the public interest in development, health, recreation, safety, conservation of natural resources and aesthetics; and WHEREAS, pursuant to the Act, the Authority has also been empowered to extend credit and make loans from bond and note proceeds to any Person for the construction, acquisition and installation of, or for the reimbursement to any Person for costs in connection with, any special energy project, including, but not limited to, any land, works, system, building or other improvement, and all real and personal properties of any nature or any interest in any of them which are suitable for or related to the furnishing, generation or production of energy; and WHEREAS, the Authority is also authorized under the Act to borrow money and issue its negotiable bonds and notes to provide sufficient moneys for achieving its corporate purposes; and WHEREAS, the Authority is also authorized under the Act to enter into any contracts and to execute all instruments necessary or convenient for the exercise of its corporate powers and the fulfillment of its corporate purposes; and WHEREAS, contemporaneously with the execution hereof, Long Island Lighting Company (the "Company") and the Authority have entered into a Participation Agreement of even date herewith (herein referred to as the "Participation Agreement"), providing for the acquisition, construction and installation of certain facilities (the "Project") for the furnishing of electric energy within the Company's service area; and WHEREAS, the Participation Agreement provides that the Authority will issue its bonds and make the proceeds of such bonds available to the Company to finance the cost of the Project; and WHEREAS, pursuant to Resolution No. 850 adopted January 30, 1995, the Authority has determined to issue $50,000,000 aggregate principal amount of electric facilities revenue bonds initially bearing the designation set forth on the title page of the Indenture of Trust (the "Bonds") for the purpose of financing the cost of the Project; and WHEREAS, in order to provide an inducement to the Authority to issue the Bonds, the Company has entered into a Letter of Credit and Reimbursement Agreement relating to the Bonds dated as of August 1, 1995, with Union Bank of Switzerland, New York Branch (the "Bank") and certain other parties, pursuant to which the Bank has agreed to issue an irrevocable letter of credit in favor of the Trustee, which letter of credit expires by its terms on August 24, 1998, unless extended or unless earlier terminated in accordance with its terms, to provide for the payment of such amounts as are specified therein with respect to the principal of, premium, if any, and interest on, the Bonds and certain other payments with respect to the Bonds; and WHEREAS, all acts, conditions and things necessary or required by the Constitution and statutes of the State of New York or otherwise, to exist, happen, and be performed as prerequisites to the execution and delivery of the Indenture, do exist, have happened, and have been performed; and WHEREAS, the Authority has determined that the Bonds issuable hereunder and the certificate of authentication by the Trustee to be endorsed on such Bonds shall be, respectively, substantially in the following forms with such variations, omissions and insertions as are required or permitted by the Indenture: 2 [Form of Bonds] [MONEY MARKET MUNICIPAL RATE LEGEND Last Day of Money Market Interest Rate _____ Municipal Rate Period _____ Interest due at end of Money Market Municipal Rate Period _____ Number of Days _____]^1 NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY ELECTRIC FACILITIES REVENUE BOND (LONG ISLAND LIGHTING COMPANY PROJECT) 1995 SERIES A NO. _____ $__________* MATURITY DATE ORIGINAL ISSUE DATE CUSIP AUGUST 1, 2025 AUGUST 24, 1995 ________ REGISTERED OWNER: CEDE & CO. PRINCIPAL AMOUNT: ____________________ DOLLARS NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY (the "Authority"), a body corporate and politic, constituting a public benefit corporation, organized and existing under and by virtue of the laws of the State of New York, for value received, hereby promises to pay solely from the sources hereinafter provided, to the Registered Owner specified above, or registered assigns, on the Maturity Date specified above, unless redeemed prior thereto as hereinafter provided, upon the presentation and surrender hereof, the Principal Amount specified above and to pay solely from such sources interest on said Principal Amount from the date hereof at the rates and at the times provided herein, until said Principal Amount is paid. This bond shall be subject to mandatory purchase by the Tender Agent as hereinafter described. The principal of and premium, if any, on this bond are payable at the corporate trust office of Chemical Bank, New York, New York, the Trustee hereinafter - -------- 1Such legend to appear only on face of Bonds bearing interest at a Money Market Municipal Rate. 3 mentioned and as paying agent. The interest on this bond, when due and payable, shall be paid to the Registered Owner hereof (or of any bond or bonds previously outstanding in exchange, transfer or substitution for which this bond was issued) as of the close of business on the Record Date (hereinafter referred to) for each interest payment date by check, mailed to such Person at such Person's address appearing as of the close of business on such Record Date on the Bond Register (hereinafter referred to). On and prior to the date a Fixed Rate (as hereinafter defined) becomes effective as hereinafter provided, in the event that less than all of the Bonds are held under a book-entry-only system, any owner of not less than $1,000,000 (or $100,000 during any Money Market Municipal Rate Period) aggregate principal amount of Bonds not held under a book-entry-only system may request that interest on the Bonds be paid by wire transfer within the continental United States; provided, however, that during a Money Market Municipal Rate Period, interest on a Bond is payable only upon presentation and surrender of the Bond to the Tender Agent upon purchase thereof pursuant to the Indenture, and if such presentation and surrender is made by 12:00 noon (New York City time) such payment shall be by wire transfer. Interest not so paid shall be paid in accordance with the provisions of Article X of the Indenture (as hereinafter defined). All such payments shall be made in such coin or currency of the United States of America, which at the respective times of payment, are legal tender for payment of public and private debts. This bond is one of a duly authorized issue of bonds of the Authority designated as "Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1995 Series A" (the "Bonds"), issued in the aggregate principal amount of $50,000,000 pursuant to the Constitution and laws of the State of New York, particularly the New York State Energy Research and Development Authority Act, Title 9 of Article 8 of the Public Authorities Law of the State of New York, as amended (the "Act"), and a resolution adopted by the Authority on January 30, 1995. The Bonds are issued and secured under and pursuant to an Indenture of Trust dated as of August 1, 1995, between the Authority and Chemical Bank, as Trustee (the "Indenture"). The Bonds are issued for the purpose of financing a portion of the cost of acquisition, construction and installation of certain facilities of Long Island Lighting Company (the "Company") to be used for the local furnishing of electric energy (the "Project") pursuant to a Participation Agreement dated as of August 1, 1995, between the Authority and the Company (hereinafter, as it may be amended or supplemented from time to time, called the "Participation Agreement"). All terms used but not defined herein are used as defined in the Indenture. *1. Copies of the Indenture are on file at the corporate trust office of Chemical Bank, New York, New York, as Trustee under the Indenture or its successor as Trustee (the "Trustee"), and reference is made to the Indenture for the provisions relating, among other things, to the terms and security of the Bonds, the rights and remedies of the owners of the Bonds, and the terms and conditions upon which Bonds are issued thereunder. *2. The Bonds are not general obligations of the Authority, and shall not constitute an indebtedness of or a charge against the general credit of the Authority or give rise 4 to any pecuniary liability of the Authority. The liability of the Authority under the Bonds shall be enforceable only to the extent provided in the Indenture, and the Bonds shall be payable solely from payments to be made by the Company to the Trustee and any other funds held by the Trustee under the Indenture (including, but not limited to, funds drawn under the Letter of Credit) and available for such payment. In order to provide security for the payment of the principal of and premium, if any, and interest on all the Bonds in accordance with their terms and the terms of the Indenture, the Authority has in the Participation Agreement directed the Company to execute and deliver its Company Note to the Trustee as evidence of the obligation of the Company to the Authority to repay the advance of the proceeds of the Bonds by the Authority and the Authority has under the Indenture pledged and assigned all its right, title and interest in and to the payments under such Company Note to the Trustee for the benefit of the owners from time to time of the Bonds. The Bonds are further secured by a pledge and assignment of (i) the rights and interest of the Authority under the Participation Agreement (except the rights and interest of the Authority under Article III and Sections 4.04, 4.08, 4.09, 4.10 and 5.16 and insofar as the obligations of the Company under Section 4.07 relate to taxes and assessments imposed upon the Authority and not the Trustee, Section 4.07 thereof and subject to the provisions of the Participation Agreement relating to the amendment thereof), (ii) the rights and interest of the Authority under the Tax Regulatory Agreement, dated the date of the original issuance of the Bonds, between the Authority and the Company (subject to a reservation by the Authority of the right to independently enforce the obligations of the Company thereunder and to the provisions of the Tax Regulatory Agreement relating to the amendment thereof) (iii) the proceeds of the sale of the Bonds and (iv) all funds held by the Trustee under the Indenture and available for the payment of the Bonds under the terms of the Indenture (expressly not including in such funds, the Rebate Fund) and the income earned by the investment of such funds held under the Indenture. In addition, the Authority has granted the Trustee the same power as the Authority to enforce from time to time the rights of the Authority set forth in Article III and Section 5.16 of the Participation Agreement, subject to the provisions of the Participation Agreement relating to the amendment thereof. *3. Interest Rate. Interest on the Bonds will initially be payable at a Weekly Rate of three and eighty-five one-hundredths per centum (3.85%) per annum from the initial delivery date to and including August 29, 1995 (the "First Interest Period"). Subsequent to such period and prior to the Fixed Rate Conversion Date, interest on this Bond will be paid at the lowest of (a) a Weekly Rate, a Money Market Municipal Rate, a Semi-Annual Rate or a Medium-Term Rate as from time to time selected and determined in accordance with the Indenture, (b) 15% or (c) the maximum interest rate specified in the Letter of Credit with respect to coverage for the payment of interest or the interest component of Purchase Price; thereafter, interest will be paid at the Fixed Rate, determined in accordance with the Indenture, which shall not exceed 18%. Each such Rate will be set by the Remarketing Agents in accordance with the applicable standards provided in the Indenture; provided that each such Rate will not be greater than 110% of the rate index for such Rate (the "Rate Index"). The Rate Index will be selected by an Indexing Agent for such Rate, appointed pursuant to the Indenture. If such Rate is not established by the Remarketing Agents, no Remarketing Agent shall be 5 serving or the Rate so established is held to be invalid or unenforceable by a final judgment of a court of law, then such Rate will be 100% of the related Rate Index. Subsequent to the First Interest Period, unless and until a different Interest Rate Determination Method is selected in accordance with the Indenture, interest on the Bonds will continue to be payable at a Weekly Rate. The Company may change the Interest Rate Determination Method from time to time in accordance with the Indenture; provided, however, that if the Company changes the Interest Rate Determination Method to a Fixed Rate, it may not thereafter change the Interest Rate Determination Method and the Fixed Rate shall be the rate of interest on the Bonds from the Fixed Rate Conversion Date to the Maturity Date. The Company may direct the Trustee to change the Interest Rate Determination Method applicable to all or a portion of the Bonds. Except as specifically provided otherwise in the Indenture, the conditions and procedures for such change in the Interest Rate Determination Method for a portion of the Bonds shall be the same as the conditions and procedures for a change in the Interest Rate Determination Method for the entire series of Bonds. If the Company directs the Trustee to change the Interest Rate Determination Method from one Rate to another for less than all of the Bonds then outstanding, the Trustee shall select Bonds to be converted by lot or by such other method as the Trustee shall deem appropriate. In the event the Company wishes to convert less than all the Bonds then outstanding, the Company shall notify the Trustee of such decision not less than 40 days or more than 60 days before the effective date of the proposed conversion. On the Conversion Date the portion of the Bonds which are being converted shall be redesignated in such a way as to identify a separate Subseries and thereby avoid confusion of such Subseries with any other Subseries. The Company may also determine to similarly redesignate the portion of the Bonds which are not being converted on the Conversion Date. The holders of Bonds which are being redesignated may be required to deliver such Bonds to the Trustee in order to receive a new Bond of the applicable designation, in the same principal amount. In the event holders are not required to surrender such Bonds, the Trustee shall appropriately designate any Bonds subsequently issued in exchange therefor. If less than all of the Bonds are to be converted, all references herein to the Bonds shall be deemed to refer to the Bonds of each Subseries separately. *Interest on this Bond will accrue and will be payable as provided in the Indenture. Except as otherwise provided in the Indenture, the Interest Payment Dates are: (i) during any Weekly Rate Period, the first Business Day of each calendar month; (ii) each Conversion Date; (iii) during any Semi-Annual Rate Period or Medium-Term Rate Period, the first day of each of two months which are six months apart, as specified in a certificate of an Authorized Officer delivered to the Trustee prior to the Conversions to a Semi-Annual Rate Period or Medium-Term Rate Period, provided, however, if the last such day occurring in any Semi-Annual Rate Period is not a Business Day then the first Business Day thereafter shall be the Interest Payment Date, provided, further, however, if any Interest Payment Date in a SemiAnnual Rate Period, determined as set forth above, would cause such Semi-Annual Rate Period to extend for a period in excess of 182 days, the Interest Payment Date for such Semi-Annual Rate Period shall be the last Business Day occurring within such Semi-Annual Rate Period that does not cause such Semi-Annual Rate Period to exceed 182 days in duration; (iv) during the 6 Fixed Rate Period, each February 1 and August 1; (v) during each Money Market Municipal Rate Period, the first Business Day after any Calculation Period; and (vi) the Maturity Date. With respect to the First Interest Period, the first Interest Payment Date will be September 1, 1995. If prior to the conversion to a Semi-Annual Rate Period, Medium-Term Rate Period or Fixed Rate Period, an Officer's Certificate shall be delivered to the Trustee specifying different Interest Payment Dates for such Rate Period together with an Opinion of Bond Counsel to the effect that such adjustment will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes, then the Interest Payment Dates for such Rate Period shall be so adjusted; provided, however, that no such adjustment shall result in the establishment of Interest Payment Dates between which more than six months would pass. *The Record Dates with respect to the various Interest Payment Dates are: (i) during any Weekly Rate Period or Money Market Municipal Rate Period, the day next preceding such Interest Payment Date, regardless of whether such day is a Business Day; and (ii) during any Semi-Annual Rate Period, Medium-Term Rate Period or Fixed Rate Period, the Trustee's close of business on the fifteenth day of the calendar month next preceding such Interest Payment Date, regardless of whether such day is a Business Day. *During any Weekly Rate Period or Money Market Municipal Rate Period, interest on the Bonds will be computed on the basis of a 365 or 366-day year, as the case may be, for the actual number of days elapsed. During any Semi-Annual Rate Period, Medium-Term Rate Period or Fixed Rate Period, interest on the Bonds will be computed on the basis of a 360- day year consisting of twelve 30-day months. *4. Letter of Credit. The Bonds are initially supported by a letter of credit issued by Union Bank of Switzerland, New York Branch (such bank or any issuer of any alternate credit facility as described herein being hereinafter referred to as the "Bank"), in favor of the Trustee. The letter of credit expires on August 24, 1998, unless extended in accordance with its terms, or on the earlier occurrence of events specified in it. The initial letter of credit or any Alternate Credit Facility meeting the requirements of Section 6.07 of the Indenture and Section 4.12 of the Participation Agreement during the time it is in effect is hereinafter called the "Letter of Credit." The Letter of Credit shall be in effect at all times prior to the Fixed Rate Conversion Date, except any period during which all of the outstanding Bonds are owned by the Company. The Letter of Credit shall entitle the Trustee to draw up to (a) an amount equal to the principal amount of the Bonds then outstanding to pay the principal amount of the Bonds (or the portion of the Purchase Price of the Bonds corresponding to principal); plus (b) an amount equal to 210 days' accrued interest on the Bonds at a maximum rate specified therein, which shall in no event exceed 15%, to pay interest on the Bonds. Such maximum rate for the initial letter of credit is 15%. If the Bonds shall be redeemable at a premium during a period during which a Letter of Credit is in effect, no redemption may be made unless the Letter of Credit or other Available Moneys are available to pay such premium. 7 *Except as otherwise provided herein, the Bonds shall become subject to mandatory tender for purchase (see "Mandatory Tender for Purchase" below) on the twentieth calendar day next preceding the scheduled expiration date of the Letter of Credit. Within five calendar days after the Bonds become subject to such mandatory tender for purchase, the Trustee shall notify the owners of the Bonds by first class mail of the expiration of the Letter of Credit and the name of the issuer of the successor Letter of Credit, if applicable. *5. Tender of Bonds for Purchase. *Optional Tender. During any Weekly Rate Period or any Semi-Annual Rate Period, the owners of the Bonds shall have the right to tender any Bond (or portion thereof in an authorized denomination) to the Tender Agent for purchase on any Optional Tender Date prior to the Conversion Date, but only upon: (1) giving or delivery to the Tender Agent at its principal office, during the times specified below, of a telephonic or facsimile notice confirmed in writing which states (i) the aggregate principal amount of the Bond to be purchased and (ii) that such Bond (or portion thereof in an authorized denomination) shall be purchased on such Optional Tender Date pursuant to the Indenture; and (2) delivery of such Bond (with an appropriate instrument of transfer duly executed in blank) to the Tender Agent at its principal office at or prior to 12:00 noon, New York City time, on such Optional Tender Date; provided, however, that no Bond (or portion thereof in an authorized denomination) shall be purchased unless the Bond so delivered to the Tender Agent shall conform in all respects to the description thereof in the aforesaid notice. During any Weekly Rate Period, irrevocable notice must be given on a Business Day not later than the close of business on the seventh calendar day prior to the Optional Tender Date; and during any Semi-Annual Rate Period irrevocable notice must be given not earlier than the thirtieth calendar day and not later than the close of business on the fifteenth calendar day next preceding the Optional Tender Date. *Any election of a Bondowner to tender a Bond (or portion thereof as aforesaid) for purchase on the Optional Tender Date in accordance with the Indenture shall be irrevocable and shall be binding on the Bondowner making such election and on any transferee of such Bondowner. *Mandatory Tender for Purchase. All Bonds are subject to mandatory tender and purchase, with no right of owners to retain Bonds, as more fully provided in the Indenture, on each Conversion Date and each Medium-Term Adjustment Date. 8 *Any Bond bearing a Money Market Municipal Rate shall be subject to mandatory tender for purchase in accordance with the Indenture on the Business Day immediately following each Calculation Period for such Bond at a price equal to the principal amount thereof and owners of any Bond bearing interest at a Money Market Municipal Rate shall have no right to elect to retain such Bond subsequent to such Business Day. *Each Bond shall be subject to mandatory tender and purchase on each Mandatory Purchase Date established pursuant to Section 2.05(e) of the Indenture. *Upon the Bonds becoming subject to mandatory tender for purchase on a Mandatory Purchase Date, the Trustee shall give telephonic notice to the Remarketing Agents, the Authority and the Tender Agent and give notice by mail to the Bondowners in accordance with Section 2.05(e)(2) of the Indenture. *Failure to mail the notice described in Section 2.05(e)(2) of the Indenture or any defect therein, shall not extend the period for tendering any of the Bonds for purchase, and the Trustee shall not be liable to any Bondowner by reason of its failure to mail such notice or any defect therein. *The Bonds shall be tendered for purchase as provided in Section 2.05(e) of the Indenture. *All Bonds (or portion thereof in an authorized denomination) which are not delivered to the Tender Agent shall be deemed to have been properly tendered to the Tender Agent (such Bond being hereinafter referred to as an "Untendered Bond"), and, to the extent that there shall be on deposit with the Tender Agent on the applicable Purchase Date, an amount sufficient to pay the Purchase Price thereof, such Untendered Bond shall cease to constitute or represent a right to payment of principal or interest thereon and shall constitute and represent only the right to the payment of Purchase Price payable on such date. The foregoing shall not limit the entitlement of any Bondowner on any Record Date to receipt of interest due on such date unless such interest is paid as part of the Purchase Price. *Purchase of Tendered Bonds. On each Optional Tender Date and Purchase Date there shall be purchased (but solely from funds received by the Tender Agent in accordance with the terms of the Indenture) the Bond or Bonds (or portions thereof in authorized denominations) tendered (or deemed to have been tendered) to the Tender Agent for purchase in accordance with Section 2.05 of the Indenture at the applicable Purchase Price. Funds for the payment of the Purchase Price of such Bond or Bonds (or portions thereof in authorized denominations) shall be paid by the Tender Agent solely from the sources and in the order of priority specified in Section 2.05(h) of the Indenture. Bonds (or portions thereof in authorized denominations) purchased as provided above shall be delivered as provided in Section 2.07 of the Indenture. 9 *The owners of the Bonds shall not have the right or be required, as the case may be, to tender any Bond or Bonds (or portions thereof in authorized denominations) for purchase on any Optional Tender Date or the Purchase Date, if on any such date an Event of Default under Section 10.01(f) or (g) of the Indenture shall have occurred and be continuing thereunder with respect to the Bonds. *All Bonds shall be subject to mandatory tender and purchase, with no right of owners to retain Bonds, upon a date established by the Trustee after receipt by the Trustee of a written notice from the Bank of the occurrence and continuance of an event that would constitute an Event of Default pursuant to Section 10.01(f) or (g) of the Indenture except that the Bank shall have directed mandatory tender and purchase pursuant to Section 2.05(j) of the Indenture rather than acceleration of the Bonds. *6. Redemptions. *Optional Redemption. At any time during a Weekly Rate Period or Money Market Municipal Rate Period, the Bonds will be subject to redemption, by the Authority at the direction of the Company, in whole on any Business Day or in part on any Interest Payment Date at a redemption price equal to the principal amount thereof plus accrued interest, if any, to the redemption date. During a Semi-Annual Rate Period or during a Medium-Term Rate Period equal to one calendar year, each Bond is subject to redemption by the Authority at the direction of the Company, in whole or in part on the last Business Day of such Rate Period in effect on the applicable redemption date, at a redemption price equal to the principal amount of the Bond or Bonds to be redeemed plus accrued and unpaid interest thereon to the redemption date. During a Medium-Term Rate Period of greater than one calendar year but less than or equal to three calendar years, each Bond will be subject to optional redemption by the Authority at the direction of the Company on the dates and at the redemption prices set forth in the following table plus accrued and unpaid interest to the redemption date: Redemption Date Redemption Prices Earliest Optional Redemption Date through 100.5% the last day prior to the First Anniversary of the Earliest Optional Redemption Date First Anniversary of the Earliest Optional 100 Redemption Date, if applicable, and thereafter As used in the immediately preceding table "Earliest Optional Redemption Date" means the anniversary of the Conversion Date occurring in the year which is one year after the commencement of any such Medium-Term Rate Period. 10 *During a Medium-Term Rate Period of greater than three calendar years but less than or equal to five calendar years, each Bond will be subject to optional redemption by the Authority at the direction of the Company on the dates and at the redemption prices set forth in the following table plus accrued and unpaid interest to the redemption date: Redemption Date Redemption Prices Earliest Optional Redemption Date through 101% the last day prior to the First Anniversary of the Earliest Optional Redemption Date First Anniversary of the Earliest Optional 100.5 Redemption Date through the last day prior to the Second Anniversary of the Earliest Optional Redemption Date Second Anniversary of the Earliest Optional 100 Redemption Date and thereafter As used in the preceding table "Earliest Optional Redemption Date" means the anniversary of the Conversion Date occurring in the year which is two years after the commencement of any such Medium-Term Rate Period. *During a Medium-Term Rate Period of greater than five but less than or equal to ten calendar years, the Bonds will be subject to optional redemption by the Authority at the direction of the Company on the dates and at the redemption prices set forth in the following table plus accrued and unpaid interest to the redemption date: Redemption Date Redemption Prices Earliest Optional Redemption Date through 101.5% the last day prior to the First Anniversary of the Earliest Optional Redemption Date First Anniversary of the Earliest Optional 101 Redemption Date through the last day prior to the Second Anniversary of the Earliest Optional Redemption Date 11 Second Anniversary of the Earliest Optional 100.5 Redemption Date through the last day prior to the Third Anniversary of the Earliest Optional Redemption Date Third Anniversary of the Earliest Optional 100 Redemption Date and thereafter As used in the immediately preceding table "Earliest Optional Redemption Date" means the anniversary of the Conversion Date occurring in the year which is four years after the commencement of any such Medium-Term Rate Period. *During a Medium-Term Rate Period of greater than ten calendar years, the Bonds will be subject to optional redemption by the Authority at the direction of the Company on the dates and at the redemption prices set forth in the next succeeding table; provided that, with respect to such a Medium-Term Rate Period, "Earliest Optional Redemption Date" means the anniversary of the Conversion Date occurring in the year which is eight years after the Conversion Date or Medium-Term Adjustment Date. *After the Fixed Rate Conversion Date, the Bonds will be subject to optional redemption by the Authority at the direction of the Company on or after the Earliest Optional Redemption Date (as defined below), in whole on any Business Day or in part on any Interest Payment Date, during the periods and at the respective redemption prices (expressed as a percentage of principal amount) set forth in the following table plus accrued and unpaid interest to the redemption date: Redemption Date Redemption Prices Earliest Optional Redemption Date through 102% the last day prior to the First Anniversary of the Earliest Optional Redemption Date First Anniversary of the Earliest Optional 101 Redemption Date through the last day prior to the Second Anniversary of the Earliest Optional Redemption Date Second Anniversary of the Earliest Optional 100 Redemption Date and thereafter As used in the preceding table, "Earliest Optional Redemption Date" means the anniversary of the Conversion Date occurring in the year which is ten years after the Fixed Rate Conversion Date. 12 *Subject to the provisions of the Indenture, if prior to a Medium-Term Rate Conversion Date or the Fixed Rate Conversion Date the Remarketing Agents certify to the Trustee, the Authority and the Company in writing that any of the foregoing redemption schedules are not consistent with then prevailing market conditions, with the approval of the Authority and the Company, the foregoing Earliest Optional Redemption Dates or premiums may be revised in accordance with the best professional judgment of the Remarketing Agents to reflect then prevailing market conditions; provided, that the Company causes to be delivered to the Trustee an Opinion of Bond Counsel stating to the effect that such revision is permitted by the Indenture and will not cause the interest on the Bonds to be includible in gross income for federal income tax purposes. *Extraordinary Optional Redemption. The Bonds may be redeemed at the option of the Authority exercised at the direction of the Company, as a whole or in part at any time, at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date fixed for redemption, upon the occurrence of any of the following events: (i) All or substantially all of the Project shall have been damaged or destroyed or title to, or the temporary use of, all or a substantial portion of the Project shall have been taken under the exercise of the power of eminent domain by any governmental authority, or Person, firm or corporation acting under governmental authority, as in each case renders the Project unsatisfactory to the Company for its intended use; (ii) Unreasonable burdens or excessive liabilities shall have been imposed upon the Authority or the Company with respect to all or substantially all of the Project, including without limitation the imposition of federal, state or other ad valorem property, income or other taxes other than taxes in effect on the date of original issuance of the Bonds levied upon privately owned property used for the same general purpose as the Project; or (iii) Any court or regulatory or administrative body shall enter or adopt, or fail to enter or adopt, a judgment, order, approval, decree, rule or regulation, as a result of which the Company elects to cease operation of all or substantially all of the Project. *Special Optional Redemptions. The Bonds will also be subject to redemption at the option of the Authority exercised at the direction of the Company, in whole at a redemption price equal to the principal amount thereof plus accrued and unpaid interest thereon to the redemption date if the Company reasonably concludes and certifies to the Trustee that the business, properties, condition (financial or otherwise), operations or business prospects of the Company will be materially and adversely affected unless the Company takes or omits to take 13 a specified action and that the Company has been advised in writing by Bond Counsel that either (x) the specified action or omission would adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds afforded by Section 103 of the Code, or (y) that the matter is subject to such doubt that such Bond Counsel is unable to advise the Company that the specified action or omission would not adversely affect such exclusion. Such conclusion and certification shall be evidenced by delivery to the Trustee of a written certificate of an Authorized Company Representative to the effect that the Company has reached such conclusion, together with a copy of such advice of Bond Counsel. *During any Medium-Term Rate or the Fixed Rate Period, the Bonds will also be subject to redemption at the option of the Authority exercised at the direction of the Company at a redemption price equal to the principal amount thereof plus accrued and unpaid interest thereon to the redemption date if the Company reasonably concludes and certifies to the Trustee that the business, properties, condition (financial or otherwise), operations or business prospects of the Company will be materially and adversely affected unless the Company takes or omits to take a specified action and that the specified action or omission would cause the use of the Project to be such that, pursuant to Section 150 of the Code, the Company would not be entitled to deduct the interest on the Bonds for purposes of determining the Company's federal taxable income, for a period of not less than ninety consecutive or nonconsecutive days during a twelve-month period. Such conclusion and certification shall be evidenced by delivery to the Trustee of a written certificate of an Authorized Company Representative to the effect that the Company has reached such conclusion, together with a copy of written advice of Bond Counsel. In the event that the Bonds become subject to redemption as provided in this paragraph, the Bonds will be redeemed in whole unless redemption of a portion of the Bonds outstanding would, in the opinion of Bond Counsel, have the result that interest payable on the Bonds remaining outstanding after such redemption would be deductible for purposes of determining the federal taxable income of the Company, and, in such event, the Bonds shall be redeemed (in the principal amount equal to the current minimum authorized denomination or an integral multiple thereof) from time to time by lot or in such other manner as the Trustee shall in its discretion deem proper in order to assure each owner of Bonds a fair opportunity to have such owner's Bond or Bonds or portions thereof selected, in such amount as is necessary to accomplish that result. *Mandatory Redemption on Determination of Taxability. The Bonds will be redeemed in whole (or in part as provided below), at a redemption price equal to the principal amount thereof plus accrued and unpaid interest accrued thereon to the redemption date, on the first day of a month selected by the Authority at the direction of the Company (such direction also being delivered to the Trustee) within 180 days after the Company receives written notice from a Bondowner or former Bondowner or the Trustee of a final determination by the Internal Revenue Service or a court of competent jurisdiction that, as a result of a failure by the Company to perform any of its agreements in the Participation Agreement or the inaccuracy, the failure to perform or breach of any of the representations, warranties, covenants or agreements of the Company in the Tax Regulatory Agreement or any requisition submitted pursuant to the 14 Indenture, the interest paid or to be paid on any Bond (except to a "substantial user" of the Project or a "related person" of such a "substantial user" within the meaning of Section 147(a) of the Internal Revenue Code of 1986, as amended) is or was included in the gross income of the Bond's owner for federal income tax purposes. No such determination will be considered final unless the Bondowner or former Bondowner involved in the determination gives the Company, the Authority and the Trustee prompt written notice of the commencement of the proceedings resulting in the determination and offers the Company, subject to the Company's agreeing to pay all expenses of the proceeding and to indemnify the owner against all liabilities that might result from it, including additional income tax liabilities as a result of interest accruing on the Bonds following commencement of such proceedings, the opportunity to control the defense of the proceeding and either the Company does not agree within 30 days to pay the expenses, indemnify the owner and control the defense or the Company exhausts or chooses not to exhaust available procedures to contest or obtain review of the result of the proceedings. Fewer than all the Bonds may be redeemed if, in the opinion of Bond Counsel, redemption of fewer than all would result in the interest payable on the Bonds remaining outstanding being not included in the gross income for federal income tax purposes of any owner other than a "substantial user" of the Project or a "related person" of such a "substantial user". If fewer than all of the Bonds are redeemed, the Trustee will select the Bonds to be redeemed as provided in the Indenture. IF THE LIEN OF THE INDENTURE IS DISCHARGED AS DESCRIBED IN SECTION 10 BELOW PRIOR TO THE OCCURRENCE OF A FINAL DETERMINATION OF TAXABILITY AS DESCRIBED ABOVE, THE BONDS WILL NOT BE REDEEMED AS DESCRIBED IN THIS PARAGRAPH. *Mandatory Redemption Upon State Furnishing Funds. The Bonds are subject to redemption as a whole, at a redemption price equal to the applicable optional redemption price described herein or, if no such optional redemption price shall be applicable, 105% of the principal amount thereof during the Fixed Rate Period or 100% of the principal amount thereof prior to the Fixed Rate Conversion Date, together with unpaid interest accrued thereon to the date fixed for redemption, on any Interest Payment Date not less than twenty years after the date of the original issuance of the Bonds if the State of New York furnishes funds therefor, all as more fully described in the Indenture. *Notice of Redemption. At least 30 days before each redemption, the Trustee will mail a notice of redemption by first-class mail to each Bondowner at the owner's registered address. Failure to give any required notice of redemption as to any particular Bonds will not affect the validity of the call for redemption of any Bonds in respect of which no such failure occurs. Any notice mailed as provided in this paragraph will be conclusively presumed to have been given whether or not actually received by the addressee. *Effect of Notice of Redemption. When notice of redemption is required and given, Bonds called for redemption become due and payable on the redemption date at the applicable redemption price, except as otherwise provided herein; in such case when funds are deposited with the Trustee sufficient for redemption or for the purchase of Bonds otherwise 15 subject to redemption, interest on the Bonds to be redeemed or purchased ceases to accrue as of the date of redemption or purchase whether or not such Bond is delivered to the Trustee on such date. *7. Denominations, Transfer, Exchange. The Bonds are issued in registered form without coupons in denominations of $5,000 or any integral multiple of $5,000, except that when the Bonds bear interest at a Weekly Rate or Money Market Municipal Rate, they will be issuable in denominations of $100,000 or any integral multiple thereof. Notwithstanding the foregoing, prior to the commencement of any Semi-Annual Rate Period, Medium-Term Rate Period or the Fixed Rate Period, the Authority at the request of the Company may direct the Trustee to authenticate Bonds only in denominations of $100,000 or any integral multiple of $100,000 during such Rate Period in accordance with the Indenture. An owner may register the transfer of or exchange Bonds in accordance with the Indenture. The Trustee may require an owner, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. After the Fixed Rate Conversion Date, the Trustee need not register the transfer of or exchange any Bond for the period beginning 15 days before mailing a notice of redemption of such Bond and ending on the redemption date. *The Depository Trust Company, New York, New York ("DTC") initially will act as Securities Depository for the Bonds. The ownership of one fully registered Bond in the aggregate principal amount of the Bonds will be registered in the name of Cede & Co., as nominee of DTC. Such Bond will be held in trust until its redemption or until such time as DTC or its nominee is no longer the registered owner of the Bonds. So long as Cede & Co. is the registered owner of the Bonds, as nominee of DTC, references herein to the Bondowners or registered owners of the Bonds, shall mean Cede & Co. and shall not mean the beneficial owners of the Bonds. In the event that the book-entry-only system through DTC (or a successor securities depository) is discontinued as provided in the Indenture and the beneficial owners become registered owners of the Bonds, the provisions applicable to such registered owners, as set forth herein and in the Indenture, will apply. In the event that a book-entry-only system is reinstituted after discontinuance, Registered Owners will not be able to register the transfer of or tender their Bonds without first registering such Bonds in the book-entry-only system. *8. Persons Deemed Owners. The Registered Owner of this Bond may be treated by the Authority, the Company, the Trustee, the Tender Agent and the Paying Agent as the owner of this Bond for all purposes. *9. Unclaimed Money. On or after the Fixed Rate Conversion Date and solely with respect to moneys not resulting from a draw on the Letter of Credit and not constituting remarketing proceeds, if money for the payment of principal, premium, if any, interest or Purchase Price remains unclaimed for two years, the Trustee will, upon request of the Company, pay the money to or for the account of the Company. After that, owners entitled to the money 16 must look only to the Company and not to the Trustee or the Bank for payment unless an applicable abandoned property law designates another person. *10. Discharge Before Redemption or Maturity. If at any time there shall have been delivered to the Trustee for cancellation all the Bonds (other than any Bonds which have been mutilated, lost, stolen or destroyed and which shall have been replaced or paid as provided in the Indenture, except for any such Bonds as are shown by proof satisfactory to the Trustee to be held by bona fide owners), or with respect to all the Bonds not theretofore delivered to the Trustee for cancellation, the whole amount of the principal and the interest and the premium, if any, due and payable on such Bonds then outstanding shall be paid or deemed to be paid as set forth in the Indenture, and provision shall also be made for paying all other sums payable thereunder, including the Authority's, the Indexing Agent's, the Remarketing Agents', the Paying Agent's, the Trustee's and the Tender Agent's fees and expenses, then the Bonds shall be deemed paid and the Trustee, in such case, on demand of the Authority or the Company, shall acknowledge the discharge of the Authority's obligations under the Indenture with respect to such Bonds and under the Bonds and deliver to the Company the Company Note and deliver to the Bank the Letter of Credit, if it is still in existence, and shall execute such documents as may be reasonably required by the Authority and the Company to evidence such discharge, all as more fully set forth in Article XIV of the Indenture. If the Company at any time deposits with the Trustee money or Investment Obligations sufficient to pay at redemption or maturity principal of and interest on or the Purchase Price of the outstanding Bonds, and if the Company also pays all other sums then payable by the Company under the Indenture, the Indenture (except for the Rebate Fund established pursuant to the Indenture) will be discharged. After discharge, Bondowners may look only to the deposited money and securities for payment. Investment Obligations are securities backed by the full faith and credit of the United States or securities evidencing ownership interest in such full-faith-and-credit securities. *11. Amendment, Supplement, Waiver. Subject to certain exceptions, the Indenture, the Participation Agreement or the Bonds may be amended or supplemented with the consent of the owners of not less than two-thirds in aggregate principal amount of the Bonds, and any past default or noncompliance with any provision may be waived with the consent of the owners of a majority in aggregate principal amount of the Bonds. Without the consent of any Bondowner, the Authority may amend or supplement the Indenture, the Participation Agreement or the Bonds as described in the Indenture in order to, among other things, cure any ambiguity, omission, defect or inconsistency, provide for uncertificated Bonds in addition to or in place of certificated Bonds, to the extent permitted by law, or make any change that does not materially adversely affect the rights of any Bondowner. *12. Defaults and Remedies. The Indenture provides that the occurrences of certain events constitute Events of Default. An Event of Default and its consequences may be waived as provided in the Indenture. Bondowners may not enforce the Indenture or the Bonds except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Bonds unless it receives indemnity satisfactory to it. Subject to certain limitations, owners of 17 a majority in principal amount of the Bonds may direct the Trustee in its exercise of any trust or power. *13. Abbreviations. Customary abbreviations may be used in the name of a Bondowner or an assignee, such as TEN COM (= tenants in common), TEN ENT (= Tenants by the entireties), JT WROS (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). *14. Remarketing Agents; Indexing Agent; Tender Agent. The Authority has appointed Lehman Brothers Inc. and Dillon, Read & Co. Inc. as the initial Remarketing Agents under the Indenture. The Authority may from time to time, at the request of the Company, remove or replace one or more of the Remarketing Agents. The Authority has appointed Kenny Information Systems Inc. as Indexing Agent under the Indenture. The Authority may from time to time, at the request of the Company, remove the Indexing Agent and appoint a different nationally recognized municipal securities evaluation service to serve as Indexing Agent. The Authority has appointed Chemical Bank as Tender Agent under the Indenture. The Authority may from time to time, at the request of the Company, remove or replace the Tender Agent. This Bond shall not be entitled to any benefit under the Indenture or be valid or become obligatory for any purpose until this Bond shall have been authenticated by the execution by the Trustee or the Tender Agent of the Certificate of Authentication hereon. No covenant or agreement contained in this Bond or the Indenture shall be deemed to be a covenant or agreement of any member or employee of the Authority in his or her individual capacity, and neither the members of the Authority nor any officer thereof executing this Bond shall be liable personally on this Bond or be subject to any personal liability or accountability by reason of the issuance of this Bond. The Bonds are not a debt of the State of New York and the State of New York shall not be liable thereon. It is hereby certified and recited that all conditions, acts and things required by law and the Indenture to exist, to have happened and to have been performed precedent to and for the issuance of this Bond, exist, have happened and have been performed, and that the issuance of this Bond and the issue of which it forms a part are within every debt and other limit prescribed by the laws of the State of New York. 18 IN WITNESS WHEREOF, the Authority has caused this Bond to be signed in its name and on its behalf by the manual or facsimile signature of its Chair, Vice-Chair, President or Treasurer and its seal or a facsimile thereof to be impressed, imprinted or otherwise reproduced hereon and attested by the manual or facsimile signature of its Secretary or an Assistant Secretary, as of the date set forth below. NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY By /s/ --------------------------------- President Attest: /s/ ------------------------------- Secretary Dated: 19 [Form of Trustee's or Tender Agent's Authentication on Bonds] CERTIFICATE OF AUTHENTICATION This Bond is one of the Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1995 Series A, described in the within-mentioned Indenture. Chemical Bank Chemical Bank as Trustee or as Tender Agent By_____________________________ By_____________________________ 20 The Authority may, in its discretion, cause any or all of the paragraphs preceded by the symbol "*" to be printed on the reverse of the Bonds, in which event the face of the Bonds shall state the following: THE TERMS AND PROVISIONS OF THIS BOND ARE CONTINUED ON THE REVERSE SIDE HEREOF AND SUCH CONTINUED TERMS AND CONDITIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE. In the event that some but not all of such paragraphs are printed on the reverse of the Bonds, the numbering of such paragraphs may be revised accordingly. The language contained in the preceding paragraph and the paragraphs preceded by the symbol "*" may be deleted for Bonds issued in temporary form or delivered to a Securities Depository for book-entry-only registration and the language to be contained on the reverse side of definitive Bonds and Bonds not in book-entry-only form may be incorporated by reference, in which event the Bonds shall state the following after the second paragraph of the Bonds: REFERENCE IS MADE TO THE FURTHER PROVISIONS OF THIS BOND SET FORTH IN THE FORM OF BONDS IN THE INDENTURE, WHICH PROVISIONS COMPRISE THE PARAGRAPHS IDENTIFIED BY THE INDENTURE AS APPEARING ON THE REVERSE OF THE BONDS AND SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET FORTH AT THIS PLACE. [END OF BOND FORM] 21 WHEREAS, the Trustee has accepted the trusts created by the Indenture and in evidence thereof has joined in the execution hereof; GRANTING CLAUSE NOW, THEREFORE, THIS INDENTURE WITNESSETH, that in consideration of the premises, of the acceptance by the Trustee of the trusts hereby created, and of the purchase and acceptance of the Bonds by the owners thereof, and also for and in consideration of the sum of One Dollar ($1.00) to the Authority in hand paid by the Trustee at or before the execution and delivery of the Indenture, the receipt of which is hereby acknowledged, and for the purpose of fixing and declaring the terms and conditions upon which the Bonds are to be issued, authenticated, delivered, secured and accepted by all Persons who shall from time to time be or become owners thereof, and in order to secure the payment of all the Bonds at any time issued and outstanding hereunder and the interest and the redemption premiums, if any, thereon according to their tenor, purport and effect, and in order to secure the performance and observance of all the covenants, agreements and conditions therein or herein contained, the Authority has executed and delivered the Indenture, has caused the Company to deliver to the Trustee the Company Note executed by the Company pursuant to the Participation Agreement and the Company has caused the Bank (hereinafter referred to) to deliver the Letter of Credit (hereinafter referred to) to the Trustee, and the Authority does hereby assign and pledge to the Trustee, for the benefit of such Bondowners, as security for the payment of the principal of and premium, if any, and interest on the Bonds in accordance with their terms and the provisions of the Indenture, subject only to the provisions of the Indenture, permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture, (i) the rights and interest of the Authority under the Participation Agreement (except the rights and interest of the Authority under Article III and Sections 4.04, 4.08, 4.09, 4.10 and 5.16 and insofar as the obligations of the Company under Section 4.07 relate to taxes and assessments imposed upon the Authority and not the Trustee, Section 4.07 of the Participation Agreement and subject to the provisions of the Participation Agreement relating to the amendment thereof), (ii) the rights and interest of the Authority under the Tax Regulatory Agreement (as defined herein), subject to a reservation by the Authority of a right to independently enforce the obligations of the Company thereunder and to the provisions of the Tax Regulatory Agreement relating to the amendment thereof, (iii) the proceeds of sale of the Bonds and (iv) all funds held by the Trustee under the Indenture and available for the payment of Bonds under the terms of the Indenture (expressly not including in such funds the Rebate Fund) and the income earned by the investment of such funds held under the Indenture; in addition, the Authority hereby grants the Trustee the same power as the Authority to enforce from time to time the rights of the Authority set forth in Article III and Section 5.16 of the Participation Agreement, subject to the provisions of the Participation Agreement relating to the amendment thereof. 22 THIS INDENTURE FURTHER WITNESSETH, and it is expressly declared, that all Bonds from time to time issued and secured hereunder are to be issued, authenticated and delivered, and all said property, rights and interest, including, without limitation, the amounts hereby assigned and pledged, are to be dealt with and disposed of subject to the terms of the Indenture, and the Authority agrees with the Trustee and with the respective owners, from time to time, of said Bonds or any part thereof as follows: 23 ARTICLE I DEFINITIONS; LIABILITY UNDER BONDS; INDENTURE TO CONSTITUTE CONTRACT Section 1.01. Definitions. The terms defined in this Section 1.01 shall for all purposes of the Indenture have the meanings herein specified, unless the context clearly otherwise requires: Act shall mean the New York State Energy Research and Development Authority Act, Title 9 of Article 8 of the Public Authorities Law of the State of New York, as from time to time amended and supplemented. Act of Bankruptcy shall mean the filing of a petition commencing a case by or against the Company or any of its Affiliates or the Authority under the United States Bankruptcy Code, Title 11, United States Code, as the same may be amended from time to time, or any successor law, or the filing of a petition or the seeking of relief by or against the Company or the Authority under any state bankruptcy or insolvency law. Administration Fees shall mean the amounts payable by the Company to the Authority pursuant to Section 4.04 of the Participation Agreement to defray a portion of the expenses incurred by the Authority in conducting and administering its special energy project programs and the amount payable to the State of New York as a bond issuance charge in connection with the Bonds. Affiliate of any specified Person shall mean any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. Alternate Credit Facility shall mean any instrument satisfactory to the Authority, such as a letter of credit, committed line of credit, insurance policy, surety bond or standby bond purchase agreement, or any combination of the foregoing, and issued by a bank or banks, insurance company or companies, other financial institution or institutions, or any combination of the foregoing, which Alternate Credit Facility provides for the payment of (i) the purchase price equal to the principal of and accrued interest on Bonds delivered to the Remarketing Agents or any depository or other party pursuant to the provisions hereof or of a Remarketing Agreement and discount, if any, incurred in remarketing such Bonds, and/or (ii) principal of and interest on all Bonds coming due and payable during the term thereof, and is issued in substitution for and having, in all material respects, the same terms as the Letter of Credit in accordance with, and pursuant to, Section 4.12 of the Participation Agreement. 24 Authority shall mean New York State Energy Research and Development Authority, the public benefit corporation created by the Act, and its successors and assigns. Authorized Company Representative shall mean any officer or other employee of the Company at the time designated to act on behalf of the Company by written certificate furnished to the Authority and the Trustee containing the specimen signature of such person and signed on behalf of the Company by its President, Senior Vice President or a Vice President and its Treasurer, Assistant Treasurer, Secretary or an Assistant Secretary. authorized denomination means (a) during any Weekly Rate Period or any Money Market Municipal Rate Period, $100,000 or any larger integral multiple of $100,000, and (b) during any Semi-Annual Rate Period, any Medium-Term Rate Period or the Fixed Rate Period, $5,000 or any integral multiple thereof. Notwithstanding the foregoing, at the time of any conversion to a Semi-Annual Rate Period, Medium-Term Rate Period or the Fixed Rate Period, the Authority at the written request of the Company may direct the Trustee to authenticate and deliver Bonds only in denominations of $100,000 or any larger integral multiple of $100,000 during such Rate Period. Authorized Officer means the Chair, Vice-Chair, President, Treasurer, Assistant Treasurer or Secretary of the Authority. Available Moneys shall mean (a) with respect to any date for the payment of principal, premium, if any, interest or Purchase Price on the Bonds occurring during the term of the Letter of Credit, moneys which have been on deposit with the Trustee, the Tender Agent or the Paying Agent in the Bond Fund or in a separate and segregated account for the purpose of purchasing or redeeming Bonds for at least 123 days during and prior to which no Act of Bankruptcy, as evidenced by a certificate of the Company and the Authority respectively, shall have occurred unless the proceeding arising from such Act of Bankruptcy shall have been dismissed and such dismissal shall be final and not subject to appeal, and the proceeds from the investment thereof, and (b) with respect to any date for the payment of principal, interest or premium, if any, on the Bonds not occurring during the term of the Letter of Credit, any moneys furnished to the Trustee and the proceeds from the investment thereof. Bank means Union Bank of Switzerland, New York Branch, the issuer of the initial Letter of Credit, in its capacity as issuer of the Letter of Credit, the issuer of any Alternate Credit Facility and each of their successors in such capacity. Bond or Bonds shall mean any bond or bonds or all the bonds, as the case may be, of the Authority executed, authenticated and delivered under the Indenture. Bond Counsel shall mean an attorney or firm or firms of attorneys, satisfactory to the Authority and the Trustee, experienced in laws relating to tax exemption of interest on bonds of states and their political subdivisions. 25 Bond Fund shall mean the Bond Fund created in Section 6.01. Bond Register shall have the meaning specified in Section 2.11. Bond Year shall mean each one-year period (or shorter period from the issue date) that ends at the close of business each August 1. Business Day means any day other than (1) Saturday or Sunday, (2) a day of the year on which banks located in (i) The City of New York, New York, or (ii) the city in which the Corporate Trust Office of the Trustee is located are authorized or obligated by law or executive order to remain closed, or (3) any other day not defined as a "business day" under the Letter of Credit. Calculation Period shall mean during any Money Market Municipal Rate Period, any period or periods from and including a Business Day to and including any day not more than 364 (during any year other than a "leap year") or 365 (during any "leap year") days, as the case may be, thereafter, which is a day immediately preceding a Business Day established by the Remarketing Agents pursuant to Section 2.03(d). Code shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder or officially proposed to be promulgated thereunder. Company shall mean Long Island Lighting Company, or any corporation which is the surviving, resulting or transferee corporation in any merger, consolidation or transfer of assets permitted under the Participation Agreement. Company Indenture shall mean collectively, (i) the Indenture of Mortgage and Deed of Trust, dated as of September 1, 1951, from the Company to IBJ Schroder Bank and Trust Company (formerly J. Henry Schroder Bank & Trust Company) as trustee, as amended and supplemented and (ii) the General and Refunding Indenture dated as of June 1, 1975, from the Company to United States Bank & Trust Company of New York (as successor trustee), as amended and supplemented. Company Note shall mean the promissory note of the Company executed and delivered to the Trustee as provided in Section 4.01 of the Participation Agreement. Company Note Payments shall mean the amounts payable by the Company under the Company Note. completed or completion, when used with reference to the Project as of a stated date, shall mean that the Project has been constructed substantially in accordance with the description thereof (notwithstanding that substantial additions or modifications thereto are planned, and notwithstanding that additional licensing or testing may be required with respect 26 to the Project), and that the Company does not intend to submit any further requisitions pursuant to Section 3.03 of the Participation Agreement with respect to the Project. Completion Date shall mean the date specified by an Authorized Company Representative pursuant to Section 3.05 of the Participation Agreement. Component Issuers means issuers of securities, the interest on which is excluded from gross income for federal income tax purposes, selected by the Indexing Agent in accordance with the Indenture. Computation Period shall have the meaning ascribed to such term in the Tax Regulatory Agreement. construction, when used with respect to the Project, shall include, without limitation, the construction, acquisition and/or installation of the Project. Conversion Date means each day on which the Interest Rate Determination Method applicable to the Bonds shall be converted from one Interest Rate Determination Method to a different Interest Rate Determination Method or each day on which the interest rate on the Bonds shall be converted from a Medium-Term Rate applicable for a Medium-Term Rate Period of one duration to a Medium-Term Rate applicable for a Medium-Term Rate Period of a different duration, as the case may be, in accordance with Section 2.04. With respect to notices, time periods and requirements in connection with the proceedings for such conversion, "Conversion Date" means the day on which it is proposed that such conversion occur. Conversion Notice shall have the meaning set forth in Section 2.04(a)(1). Corporate Trust Office, when used in connection with the Trustee, shall mean the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date hereof is located at 450 West 33rd Street, 15th Floor, New York, New York 10001, Attention: Corporate Trustee Administration Department and when used in connection with the Tender Agent shall mean its principal office located at 55 Water Street, Room 234, North Building, New York, New York 10041, Attention: Corporate Tellers. Cost of Construction shall mean all costs incurred by the Company at any time prior to or after delivery of the Bonds for or in connection with the construction of the Project and shall include, but not be limited to, (a) obligations of the Company incurred for labor, services, materials and other expenses and to contractors, builders and materialmen in connection with the construction of the Project; (b) the cost of acquiring necessary land or rights in land and any costs incidental thereto; (c) the cost of contract bonds and of insurance of all kinds that may be required or necessary prior to the Completion Date which is not paid by the contractor or contractors or otherwise provided for; (d) expenses of the Company (including overhead charges) 27 in connection with the preparation of plans and specifications for the Project (including any architectural, engineering or other professional fees or the cost of any preliminary investigations for the Project), and for supervising construction, as well as for the performance of all other duties required by or appropriate to the construction of the Project; (e) the fees, compensation and expenses (including reasonable counsel fees) of the Trustee, the Tender Agent, the Paying Agent, the Bank, the Indexing Agent and the Remarketing Agents incurred prior to the Completion Date of the Project and the legal, accounting, financial (including compensation to underwriters), printing, bond rating and other fees and expenses incurred in connection with the issuance, purchase and sale of the Bonds or any other obligations issued or incurred by the Authority pursuant to an agreement with the Company in connection with the Project, including, but not limited to, the Administration Fees or any other fees of the Authority; (f) taxes, assessments and other charges, if any, payable in connection with the construction and owning of the Project prior to the Completion Date; (g) interest due and payable on the Bonds or any other obligations issued or incurred by the Authority pursuant to an agreement with the Company or by the Company in connection with the Project from the date of issuance thereof to the Completion Date of the Project; (h) the costs of testing the Project and obtaining any required permit, consent, license or approval for the Project, to the extent such costs shall have been incurred prior to the Completion Date; (i) any amount payable to the United States of America in connection with the Bonds pursuant to Section 148(f) of the Code; and (j) any sums required to reimburse the Company for advances and payments made by it at any time prior to or after delivery of the Bonds for any of the above items, or for any other cost incurred or work done by the Company with respect to the Project. Debt Service Account shall mean the account in the Bond Fund so designated and created pursuant to Section 6.01. description, when used with reference to the Project, shall mean the description of the Project set forth in Exhibits A and B to the Participation Agreement, as such description may be amended in accordance with the Participation Agreement. Determination Date shall mean the first day of each Calculation Period. Electric Facilities shall mean facilities of the Company for the furnishing of electric energy which are required by the public interest in development, health, recreation, safety, conservation of natural resources or aesthetics or which constitute "special energy projects" within the meaning of the Act and which constitute facilities for the local furnishing of electric energy or other "exempt facilities" within the meaning of Section 142(a)(8) of the Code. Event of Default shall mean any event of default specified in Section 10.01. First Interest Period means the period described as such in Section 2.03(a). 28 Fixed Rate means the Fixed Rate established in accordance with Section 2.03(f). Fixed Rate Period means the period from and including the Fixed Rate Conversion Date to and including the date of maturity of the Bonds. Fixed Rate Conversion Date means the Conversion Date on which the interest rate on the Bonds shall be converted to the Fixed Rate. Fixed Rate Index means the average of the yield evaluations (on the basis of full coupon securities trading at par with a term approximately equal to the Fixed Rate Period) of securities (whether or not actually issued), the interest on which is not included in gross income for federal income tax purposes, of not fewer than twenty component issues, which shall be issues of bonds selected by the Indexing Agent and which have a rating by a Rating Agency in the same rating category as the bonds of the Authority secured by unsecured promissory notes of the Company are rated at the time by such rating agency (or if the Bonds are to be supported by some form of credit enhancement, which have a rating by a Rating Agency in the same rating category as the Bonds of the Authority supported by such credit enhancement are rated at the time by such Rating Agency) or, if no such bonds are so rated, shall be debt which, in the judgment of the Indexing Agent, is of credit quality comparable to that of such bonds, computed by the Indexing Agent on the day described in Section 2.03(f). In the event that the Indexing Agent fails to compute the Fixed Rate Index and no other qualified municipal securities evaluation service can be appointed Indexing Agent by the Authority, the Fixed Rate Index shall be determined by the Remarketing Agents and shall be 90% of the average yield shown for the most recent calendar month for United States Treasury Notes or Bonds having the same number of years to maturity as the number of 12-month periods (or months if the Fixed Rate Period is less than one year) in the Fixed Rate Period, as published in the Federal Reserve Bulletin in the last issue before the Computation Date. If that issue does not contain such a yield, the Fixed Rate Index will be determined by linear interpolation between the yields shown in that issue for United States Treasury Notes and Bonds having the next shorter and next longer number of years (or months) to maturity. In addition, at the request of the Company and upon delivery to the Trustee of an Opinion of Bond Counsel that such action will not adversely affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes, the Authority may designate a new method of setting the Fixed Rate Index in the event any of the above-described methods are unavailable, impracticable or unrealistic in the market place. Indenture shall mean the Indenture of Trust, as from time to time amended or supplemented in accordance with the terms hereof. Indexing Agent shall mean the indexing agent appointed in accordance with Section 15.03, and its successor or successors appointed pursuant to the provisions of the Indenture. 29 Interest Payment Date means (i) during any Weekly Rate Period, the first Business Day of each calendar month; (ii) each Conversion Date; (iii) during any Semi-Annual Rate Period or Medium-Term Rate Period the first day of each of two months which are six months apart, as specified in a certificate of an Authorized Officer delivered to the Trustee prior to the Conversions to a Semi-Annual Rate Period or Medium-Term Rate Period, provided, however, if the last such day occurring in any Semi-Annual Rate Period is not a Business Day then the first Business Day thereafter shall be the Interest Payment Date, provided, further, however, if any Interest Payment Date in a Semi-Annual Rate Period, determined as set forth above, would cause such Semi-Annual Rate Period to extend for a period in excess of 182 days, the Interest Payment Date for such Semi-Annual Rate Period shall be the last Business Day occurring within such Semi-Annual Rate Period that does not cause such Semi-Annual Rate Period to exceed 182 days in duration; (iv) during the Fixed Rate Period, each February 1 and August 1; (v) during each Money Market Municipal Rate Period, the first Business Day after any Calculation Period; and (vi) the Maturity Date. With respect to the First Interest Period, the first Interest Payment Date will be September 1, 1995. If prior to the conversion to a SemiAnnual Rate Period, Medium-Term Rate Period or Fixed Rate Period, an Officer's Certificate shall be delivered to the Trustee specifying different Interest Payment Dates for such Rate Period together with an Opinion of Bond Counsel to the effect that such adjustment will not adversely affect the exclusion of interest on the Bonds from gross income for federal income tax purposes, then the Interest Payment Dates for such Rate Period shall be so adjusted; provided, however, that no such adjustment shall result in the establishment of Interest Payment Dates between which more than six months would pass. Interest Period means the period from and including any Interest Payment Date to and including the day next preceding the following Interest Payment Date. Interest Rate Determination Method means any of the methods of determining the interest rate on the Bonds described in Section 2.03. Issue Date means the date on which the Bonds are delivered to the purchaser or purchasers thereof upon original issuance. Investment Obligations shall have the meaning assigned to that term in Section 14.01.2. Letter of Credit shall mean that irrevocable letter of credit issued and delivered to the Trustee pursuant to, and in the form of Exhibit A to, the Reimbursement Agreement (including any extensions of such letter of credit) and, upon the issuance and delivery of an Alternate Credit Facility, "Letter of Credit" shall mean such Alternate Credit Facility. Letter of Credit Account shall mean the account in the Bond Fund so designated and created pursuant to Section 6.01. 30 Mandatory Purchase Date means a date on which the Bonds are required to be purchased in accordance with Section 2.05(e). Maturity Date shall mean August 1, 2025. Medium-Term Adjustment Date means the first day of each Medium-Term Rate Period that does not occur on a Conversion Date and as of which a new interest rate is established pursuant to Section 2.03(e). Medium-Term Rate means the interest rate on the Bonds established from time to time under Section 2.03(e). Medium-Term Rate Index means the average of the yield evaluations at par, determined by the Indexing Agent, of securities (whether or not actually issued), having a term approximately equal to the Medium-Term Rate Period or which are subject to optional or mandatory tender by the owner thereof at the end of a term approximately equal to the MediumTerm Rate Period, the interest on which is not included in gross income for federal income tax purposes, of at least twenty Component Issuers selected by the Indexing Agent, computed by the Indexing Agent as of the Business Day preceding each date on which the Medium-Term Rate is determined by the Remarketing Agents. When the Bonds are rated by a Rating Agency or shall be subject to the benefits of a Letter of Credit and the Bank has issued letters of credit to support other debt obligations rated by a Rating Agency in one of its two highest long-term debt rating categories, each Component Issuer must have outstanding securities rated by a Rating Agency in one of its two highest long-term debt rating categories. If the Bonds or other debt obligations supported by letters of credit issued by the Bank are rated by a Rating Agency in a rating category that is lower than its two highest long-term debt rating categories (and the Bonds or other debt obligations supported by letters of credit issued by the Bank are not rated in one of the two highest such categories by the other Rating Agency), each Component Issuer must have outstanding securities rated by a Rating Agency in the same long-term debt rating category as the Bonds or other debt obligations supported by letters of credit issued by the Bank as are rated by that Rating Agency. The Indexing Agent may change the Component Issuers from time to time in its discretion, subject to the foregoing requirements. In addition, at the request of the Company and upon delivery to the Trustee of an Opinion of Bond Counsel that such action will not adversely affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes, the Authority may designate a new method of setting the Medium-Term Rate Index in the event any of the above-described methods are unavailable, impracticable or unrealistic in the market place. Medium-Term Rate Period means Medium-Term Rate Period as defined in Section 2.03(e). Money Market Municipal Rate shall mean an interest rate established pursuant to Section 2.03(d). 31 Money Market Municipal Rate Index shall mean with respect to the first day of each Calculation Period during a Money Market Municipal Rate Period, the average of yield evaluations at par, determined by the Indexing Agent, of securities (whether or not actually issued) all of which shall have a term as near as practicable to such Calculation Period or which are subject to optional or mandatory tender by the owner thereof at the end of a term as near as practicable to such Calculation Period, the interest on which is not included in gross income for federal income tax purposes, of no fewer than twenty Component Issuers selected by the Indexing Agent, including issuers of commercial paper, project notes, bond anticipation notes and tax anticipation notes, computed by the Indexing Agent on and as of such day. If the Bonds are rated by a Rating Agency or are subject to the benefits of a Letter of Credit and the issuer of such Letter of Credit has issued letters of credit to support other debt obligations rated by a Rating Agency in its highest note or commercial paper rating category or one of its two highest long-term debt rating categories, each Component Issuer must (a) have outstanding securities rated by a Rating Agency in its highest note or commercial paper rating category or (b) not have outstanding notes or commercial paper rated by a Rating Agency but have outstanding securities rated by a Rating Agency in one of its two highest long-term debt rating categories. If the Bonds or other debt obligations supported by letters of credit issued by the Bank are rated by a Rating Agency in a rating category that is lower than its highest note or commercial paper rating category or its two highest long-term debt rating categories (and the Bonds or other debt obligations supported by letters of credit issued by the Bank are not rated in one of such categories by the other Rating Agency), each Component Issuer must (a) have outstanding securities rated by a Rating Agency in its note or commercial paper rating category which is the same or correlative, in the Indexing Agent's judgment, to the note or commercial paper rating category or the long-term debt rating category of the Bonds or the other debt obligations supported by letters of credit issued by the Bank or (b) have outstanding securities rated by a Rating Agency in the same long-term debt rating category as the Bonds or the other debt obligations supported by letters of credit issued by the Bank are rated by that Rating Agency and not have any outstanding notes or commercial paper rated by such Rating Agency. The Indexing Agent may change the Component Issuers from time to time in its discretion, subject to the foregoing requirements. In addition, at the written request of the Company and upon delivery to the Trustee of an Opinion of Bond Counsel that, under then-existing statutes and court decisions, such action will not adversely affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes, the Authority, with the consent of the Company, may designate a new method of setting the Money Market Municipal Rate Index in the event any of the above-described methods are determined by the Authority to be unavailable, impracticable or unrealistic in the market place. Money Market Municipal Rate Period means Money Market Municipal Rate Period as defined in Section 2.03(d). Money Market Municipal Rate Period Record Date shall mean, with respect to each Interest Payment Date during a Money Market Municipal Rate Period, the Business Day next preceding such Interest Payment Date. 32 Moody's shall mean Moody's Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency designated by the Authority, with the approval of the Company, by written notice to the Trustee, the Company, the Remarketing Agents and the Indexing Agent. Officer's Certificate shall mean a certificate signed by an Authorized Officer. Opinion of Bond Counsel shall mean a written opinion of Bond Counsel. Optional Retention Date means each day which is one Business Day prior to each Mandatory Purchase Date established pursuant to Section 2.05(e). Nothing in the Indenture shall be deemed to provide any Bondowner the right contrary to Section 2.05(e)(4) to retain Bonds subject to mandatory purchase under Section 2.05(e). Optional Retention Notice Date means the fifth Business Day prior to a Mandatory Purchase Date. Optional Tender Date means (i) during any Weekly Rate Period, any Business Day; provided that such Business Day is at least seven days after notice of such tender is delivered in accordance with Section 2.05(a), and (ii) during any Semi-Annual Rate Period, each Interest Payment Date; provided that notice of such tender has been given in accordance with Section 2.05(b). Other Facilities shall mean the facilities described in Exhibit B to the Participation Agreement. outstanding, when used with reference to Bonds, shall mean, as of any particular date, the aggregate of all Bonds authenticated and delivered under the Indenture, except (a) Bonds cancelled by the Trustee or delivered to the Trustee for cancellation at or prior to such date; (b) Bonds for the payment or redemption of which Available Moneys in the necessary amount have been theretofore deposited with the Trustee or the Paying Agent for the owners of such Bonds, provided that if such Bonds are to be redeemed, notice of such redemption has been duly given pursuant to the Indenture or provision therefor satisfactory to the Trustee has been made; (c) Bonds paid or deemed to be paid as provided in Section 14.01; and 33 (d) Bonds in lieu of or in substitution for which other Bonds shall have been authenticated and delivered pursuant to the Indenture, unless proof satisfactory to the Trustee shall be presented that any such Bond shall be held by a bona fide purchaser (as such term is defined in the Uniform Commercial Code of the State of New York); provided, however, that in determining whether the owners of the requisite principal amount of Bonds outstanding have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Bonds held by the Tender Agent or held by or for the account of the Company shall be disregarded and deemed not to be outstanding, except, that in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Bonds which a Responsible Officer of the Trustee knows to be so held shall be so disregarded. Bonds so held which have been pledged in good faith may be regarded as outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Bonds and that the pledgee is not the Company and that the pledgee is not holding for the account of the Company. Owner or Bondowner or, when used with respect to an owner of Bonds, owner shall mean the Registered Owner of any Bond. Participation Agreement shall mean the Participation Agreement dated as of August 1, 1995, between the Authority and the Company, as amended and supplemented by Supplemental Participation Agreements from time to time. Paying Agent shall mean any paying agent or co-paying agent for the Bonds (and may include the Trustee) and its successor or successors appointed pursuant to the provisions of the Indenture. Person shall mean an individual, a corporation, a partnership, an association, a joint stock company, a trust, any unincorporated organization or a government or political subdivision thereof. Project shall mean the Electric Facilities described in Exhibit A to the Participation Agreement and the Other Facilities. Project Fund shall mean the Project Fund created in Section 5.01. Purchase Date means any Mandatory Purchase Date, Conversion Date, MediumTerm Adjustment Date or any date on which Bonds are subject to mandatory tender for purchase pursuant to Section 2.05(d), Section 2.05(e), Section 2.05(g) or Section 2.05(j). Purchase Price means an amount equal to 100% of the principal amount of any Bond tendered or deemed tendered to the Tender Agent for purchase pursuant to Section 2.05 34 (or an amount equal to any applicable optional redemption price on such date if such Bonds are to be purchased on a Conversion Date occurring during a Medium-Term Rate Period in accordance with Section 2.04), plus accrued and unpaid interest thereon to the date of purchase; provided, however, if the date of such purchase occurs after the Record Date applicable to the interest accrued on such Bond from the last occurring Interest Payment Date, then the Purchase Price shall not include accrued and unpaid interest, which shall be paid to the owner of record on the applicable Record Date. Rate means the Weekly Rate, Money Market Municipal Rate, Semi-Annual Rate, Medium-Term Rate or Fixed Rate. Rate Index means the Weekly Rate Index, the Semi-Annual Rate Index, the Medium-Term Rate Index, the Money Market Municipal Rate Index or the Fixed Rate Index. Rate Period means any Weekly Rate Period, Semi-Annual Rate Period, MediumTerm Rate Period, Money Market Municipal Rate Period or Fixed Rate Period. Rating Agency means, to the extent that such entity maintains a current rating on the Bonds, Moody's or S&P. Rating Category shall mean one of the generic rating categories of a Rating Agency, without regard to any refinement or gradation of such rating category by a numerical modifier, plus or minus sign, or otherwise. Rebate Amount shall have the meaning ascribed to such term in the Tax Regulatory Agreement. Rebate Fund shall mean the Rebate Fund created in Section 5.07. Record Date means with respect to each Interest Payment Date (i) during any Weekly Rate Period or Money Market Municipal Rate Period, the Business Day next preceding such Interest Payment Date, and (ii) during any Semi-Annual Rate Period or Medium-Term Rate Period or Fixed Rate Period, the Trustee's close of business on the fifteenth day of the calendar month next preceding such Interest Payment Date, regardless of whether such day is a Business Day. Registered Owner shall mean the Person or Persons in whose name or names the particular Bond shall be registered on the Bond Register. Reimbursement Agreement means the Letter of Credit and Reimbursement Agreement dated as of August 1, 1995, between the Company, Union Bank of Switzerland, New York Branch, as Issuing Bank and Agent, and the Participating Banks named therein, and any and all modifications, alterations, amendments and supplements thereto and, upon the issuance 35 and delivery of an Alternate Credit Facility, "Reimbursement Agreement" shall mean the letter of credit and reimbursement agreement (or other document performing a similar function) relating to such Alternate Credit Facility. Remarketing Agents means the remarketing agent or agents appointed in accordance with Section 15.01, and any successor or successors appointed pursuant to the provisions of the Indenture. Remarketing Agreement shall mean the Remarketing Agreement with respect to a particular Interest Rate Determination Method then in effect between the Company and the Remarketing Agents. Responsible Officer, when used with respect to the Trustee, means an officer of the Trustee assigned to the Corporate Trustee Administration Department of the Trustee to whom any matter is referred because of his or her knowledge of and familiarity with the particular subject. S&P shall mean Standard & Poor's Ratings Group (a division of McGraw-Hill, Inc.), its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, "S&P" shall be deemed to refer to any other nationally recognized securities rating agency designated by the Authority, with the approval of the Company, by notice to the Trustee, the Company, the Remarketing Agents and the Indexing Agent. Securities Depository means a Bondowner acting as a central securities depository as provided in Section 2.11(b). Semi-Annual Adjustment Date means Semi-Annual Adjustment Date as defined in Section 2.03(c). Semi-Annual Rate means the interest rate on the Bonds established from time to time pursuant to Section 2.03(c). Semi-Annual Rate Index means the average of six-month yield evaluations at par, determined by the Indexing Agent, of securities (whether or not actually issued), the interest on which is not included in gross income for federal income tax purposes, of at least twenty Component Issuers selected by the Indexing Agent, including issuers of commercial paper, project notes, bond anticipation notes and tax anticipation notes, computed by the Indexing Agent as of the Business Day next preceding each date on which the Semi-Annual Rate is determined by the Remarketing Agents. When the Bonds are rated by a Rating Agency or shall be subject to the benefits of a Letter of Credit and the Bank has issued letters of credit to support other debt obligations rated by a Rating Agency in its highest note or commercial paper rating category or one of its two highest long-term debt rating categories, each Component Issuer must 36 (a) have outstanding securities rated by a Rating Agency in its highest note or commercial paper rating category or (b) not have outstanding notes or commercial paper rated by a Rating Agency but have outstanding securities rated by a Rating Agency in one of its two highest long-term debt rating categories. If the Bonds or other debt obligations supported by letters of credit issued by the Bank are rated by a Rating Agency in a rating category that is lower than its highest note or commercial paper rating category or its two highest long-term debt rating categories (and the Bonds or other debt obligations supported by letters of credit issued by the Bank are not rated in one of such categories by the other Rating Agency), each Component Issuer must (a) have outstanding securities rated by a Rating Agency in its note or commercial paper rating category which is the same or correlative, in the Indexing Agent's judgment, to the note or commercial paper rating category or the long-term debt rating category of the Bonds or other debt obligations supported by letters of credit issued by the Bank or (b) have outstanding securities rated by a Rating Agency in the same long-term debt rating category as the Bonds or the other debt obligations supported by letters of credit issued by the Bank are rated by that Rating Agency and not have any outstanding notes or commercial paper rated by such Rating Agency. The Indexing Agent may change the Component Issuers from time to time in its discretion, subject to the foregoing requirements. In addition, at the request of the Company and upon delivery to the Trustee of an Opinion of Bond Counsel that such action will not adversely affect the exclusion of interest on the Bonds from gross income of the owners thereof for federal income tax purposes, the Authority may designate a new method of setting the Semi-Annual Rate Index in the event any of the above-described methods are unavailable, impracticable or unrealistic in the market place. Semi-Annual Rate Period means Semi-Annual Rate Period as defined in Section 2.03(c). Subseries means any Subseries of Bonds established pursuant to Section 2.01 and references to the Bonds of any Subseries shall include all Bonds at any particular point in time designated as the Bonds of such Subseries in accordance with the provisions of the Indenture. Supplemental Indenture shall mean any indenture supplementary or amendatory to the Indenture now or hereafter duly executed and delivered in accordance with the provisions hereof. Supplemental Participation Agreement shall mean an agreement supplementing or amending the Participation Agreement. Tax Regulatory Agreement shall mean the Tax Regulatory Agreement dated the date of the original issuance of the Bonds between the Authority and the Company and any and all modifications, alterations, amendments and supplements thereto. 37 Tender Agent shall mean Chemical Bank, a banking corporation organized under the laws of the State of New York, having its principal office in The City of New York, New York, and its successor or successors as Tender Agent under the Indenture. Trustee shall mean Chemical Bank, a banking corporation organized under the laws of the State of New York, having its principal corporate trust office in New York, New York, in its capacity as trustee under the Indenture, and its successor or successors as trustee under the Indenture. Untendered Bond means any Untendered Bond as defined in Section 2.05(f). Weekly Rate means the interest rate on the Bonds established pursuant to Section 2.03(b). Weekly Rate Index means the average of 30-day yield evaluations at par, determined by the Indexing Agent, of securities (whether or not actually issued), the interest on which is not included in gross income for federal income tax purposes, of at least twenty Component Issuers selected by the Indexing Agent, including issuers of commercial paper, project notes, bond anticipation notes and tax anticipation notes, computed by the Indexing Agent as of the Business Day next preceding each day a Weekly Rate is determined by the Remarketing Agents. When the Bonds are rated by a Rating Agency or shall be subject to the benefits of a letter of credit and the Bank has issued letters of credit to support other debt obligations rated by a Rating Agency in its highest note or commercial paper rating category or one of its two highest long-term debt rating categories, each Component Issuer must (a) have outstanding securities rated by a Rating Agency in its highest note or commercial paper rating category or (b) not have outstanding notes or commercial paper rated by a Rating Agency but have outstanding securities rated by a Rating Agency in one of its two highest long-term debt rating categories. If the Bonds or other debt obligations supported by letters of credit issued by the Bank are rated by a Rating Agency in a rating category that is lower than its highest note or commercial paper rating category or its two highest long-term debt rating categories (and the Bonds or other debt obligations supported by letters of credit issued by the Bank are not rated in one of such categories by the other Rating Agency), each Component Issuer must (a) have outstanding securities rated by a Rating Agency in its note or commercial paper rating category which is the same or correlative, in the Indexing Agent's judgment, to the note or commercial paper rating category or the long-term debt rating category of the Bonds or other debt obligations supported by letters of credit issued by the Bank or (b) have outstanding securities rated by a Rating Agency in the same long-term debt rating category as the Bonds or other debt obligations supported by letters of credit issued by the Bank are rated by that Rating Agency and not have any outstanding notes or commercial paper rated by such Rating Agency. The Indexing Agent may change the Component Issuers from time to time in its discretion, subject to the foregoing requirements. In addition, at the request of the Company and upon delivery to the Trustee of an Opinion of Bond Counsel that, under then existing statutes and court decisions, such action will not adversely affect the exclusion of interest on the Bonds from gross income 38 of the owners thereof for federal income tax purposes, the Authority may designate a new method of setting the Weekly Rate Index in the event any of the above-described methods are unavailable, impracticable or unrealistic in the market place. Weekly Rate Period means Weekly Rate Period as defined in Section 2.03(b). Section 1.02. Rules of construction. Unless the context clearly indicates to the contrary, the following rules shall apply to the construction of the Indenture: (a) Words importing the singular number shall include the plural number and vice versa. (b) Words importing the redemption or calling for redemption of Bonds shall not be deemed to refer to or connote the payment of Bonds at their stated maturity or upon the acceleration of the principal thereof by the Trustee under Article X. (c) All references herein to particular articles or sections are references to articles or sections of the Indenture. (d) The captions and headings herein are solely for convenience of reference and shall not constitute a part of the Indenture nor shall they affect its meaning, construction or effect. (e) The terms "hereby," "hereof," "hereto," "herein," "hereunder" and any similar terms, as used in the Indenture refer to the Indenture in its entirety and not the particular article or section of the Indenture in which they appear, and the term "hereafter" means after, and the term "heretofore" means before, the date of the Indenture. (f) All references to Medium-Term Rate Period of "similar duration" refer to Medium-Term Rate Periods of equal duration as measured in months taking into account any portion of a month as the entire month. Section 1.03. Liability under Bonds. The Bonds shall not be general obligations of the Authority, and shall not constitute an indebtedness of or a charge against the general credit of the Authority or give rise to any pecuniary liability of the Authority. The liability of the Authority under the Bonds shall be enforceable only to the extent provided in the Indenture, and the Bonds shall be payable solely from the Company Note Payments and any other funds held by the Trustee under the Indenture and available for such payment (including, but not limited to any funds drawn under the Letter of Credit). The Bonds shall not be a debt of the State of New York and the State of New York shall not be liable thereon. 39 ARTICLE II DESCRIPTION; AUTHORIZATION; MANNER OF EXECUTION; AUTHENTICATION; REGISTRATION AND TRANSFER OF BONDS Section 2.01. Issuance of Bonds; Designation of Bonds; Certain Particulars and Form of Bonds. The Bonds shall be issued in one series in the aggregate principal amount of $50,000,000 and shall be designated as "Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1995 Series A." In order to distinguish between Bonds which are subject to different Interest Rate Determination Methods, Bonds may be designated and redesignated (as herein provided) in such a way as to identify several Subseries. Such Subseries may be designated as Subseries A-1, Subseries A-2, and so forth. Each Bond shall bear upon the face thereof such designation or redesignation, if any. The Bonds shall be issuable in the form of registered bonds without coupons in authorized denominations except as provided in Section 2.08 with respect to lost, stolen, destroyed or undelivered Bonds. The Bonds shall be numbered consecutively from NYAR-1 upwards bearing numbers not then contemporaneously outstanding (in order of issuance) according to the records of the Trustee. If the Bonds are redesignated to identify several Subseries, the Bonds shall be numbered in accordance with their Subseries designation, i.e. NYA1R-1, NYA1R-2, and so forth. Bonds shall be substantially in the form set forth in the recitals to the Indenture, with such appropriate variations, omissions and insertions as are permitted or required by the Indenture and may have endorsed thereon such legends or text as may be necessary or appropriate to conform with the Indenture or to any applicable rules and regulations of any governmental authority or any usage or requirement of law with respect thereto. Section 2.02. Additional Particulars of Bonds. The Bonds initially shall be dated the Issue Date but, thereafter, each Bond shall be dated the date of its authentication. Each Bond shall bear interest from the last Interest Payment Date on which interest on such Bond has been paid or, if no interest has been paid, from the Issue Date. The Bonds will mature (subject to the right of prior redemption at the prices and dates and upon the terms and conditions hereinafter set forth) on the Maturity Date. Only such Bonds as shall have been endorsed thereon a certificate of authentication substantially in the form set forth in the Form of Bond duly executed by the Trustee or the Tender Agent shall be entitled to any right or benefit under the Indenture. No Bond shall be valid or obligatory for any purpose unless and until such certificate of authentication shall have been duly executed by the Trustee or the Tender Agent, and such executed certificate of the Trustee or the Tender Agent upon any such Bonds shall be conclusive evidence that such Bond has been authenticated and delivered under the Indenture. The certificate of authentication of the Trustee or the Tender Agent on any Bond shall be deemed 40 to have been executed by it, respectively, if signed with an authorized signature of the Trustee or the Tender Agent, but it shall not be necessary that the same party or the same person sign the certificate of authentication on all of the Bonds issued hereunder. The principal and the Purchase Price of and the redemption premium, if any, and the interest on the Bonds shall be payable in lawful money of the United States of America. The principal and the Purchase Price of and the redemption premium, if any, on all Bonds shall be payable at the principal office of the Paying Agent upon the presentation and surrender of the Bonds as the same become due and payable. The interest on the Bonds shall be paid by check or draft drawn upon the Paying Agent and mailed to the persons in whose names the Bonds are registered on the registration books maintained by the Trustee at the close of business on the Record Date next preceding each Interest Payment Date; provided, that in the event that less than all of the Bonds are held under a book-entry-only system any Registered Owner of a Bond or Bonds not held under a book-entry-only system in an aggregate principal amount of not less than $1,000,000 (or $100,000 during any Money Market Municipal Rate Period) may, by prior written instructions filed with the Paying Agent (which instructions shall remain in effect until revoked by subsequent written instructions), request that interest payments for any period prior to the Fixed Rate Conversion Date be made by wire transfer or other means acceptable to the Paying Agent to an address in the continental United States; and provided, further, that during a Money Market Municipal Rate Period, interest on a Bond is payable only upon presentation and surrender thereof to the Tender Agent upon purchase thereof pursuant to the Indenture, and if such presentation and surrender is made by 12:00 noon (New York City time) such payment shall be by wire transfer. If any payment of interest or principal or redemption premium on the Bonds is due on a date which is not a Business Day, payment shall be made on the next succeeding Business Day with the same force and effect as if made on the date which is fixed for such payment, and no interest shall accrue on such amount for the period after such due date. Section 2.03. Interest Rates on Bonds. [2.03] (a) Generally; Initial Rates. Interest accrued on the Bonds shall be paid on each Interest Payment Date. The interest rate on the Bonds will be determined as provided in this Section, provided, that in any event (i) no Weekly Rate, Money Market Municipal Rate, Semi-Annual Rate or Medium-Term Rate shall exceed the lesser of: (a) fifteen per centum (15%) per annum and (b) the maximum interest rate specified in the Letter of Credit with respect to coverage for the payment of interest or the interest component of Purchase Price and (ii) the Fixed Rate shall not exceed eighteen per centum (18%) per annum and, provided, further, no rate as so determined shall exceed the maximum rate permitted by applicable law. Interest on the Bonds will initially be payable at a Weekly Rate of three and eighty-five one-hundredths per centum (3.85%) per annum for the period from August 24, 1995, to and including August 29, 1995 (the "First Interest Period"). Thereafter, unless and until the Interest Rate Determination Method is changed as described in Section 2.04, the Bonds will bear interest at a Weekly Rate. 41 The Company may direct the Remarketing Agents to change the Interest Rate Determination Method applicable to all or a portion of the Bonds, except that no Bonds may be converted to bear interest at a Fixed Rate unless all Bonds are converted to bear interest at a Fixed Rate. Except as specifically provided otherwise herein, the conditions and procedures for such change in the Interest Rate Determination Method for a portion of the Bonds shall be the same as the conditions and procedures for a change in the Interest Rate Determination Method for the entire series of Bonds. If less than all of the Bonds are to be converted, the Bonds which are being converted shall, pursuant to Section 2.01, be redesignated in such a way as to identify a separate Subseries, and, in such event, all references herein to the Bonds shall be deemed to refer to the Bonds of each Subseries separately. During any Weekly Rate Period or Money Market Municipal Rate Period, interest on the Bonds will be computed on the basis of a 365 or 366-day year, as the case may be, for the actual number of days elapsed. During any Semi-Annual Rate Period, Medium-Term Rate Period or Fixed Rate Period, interest on the Bonds will be computed on the basis of a 360-day year of twelve 30-day months. [2.03] (b) Weekly Rate. During any period commencing on the date that the Interest Rate Determination Method is converted to a mode where the Bonds bear interest at a Weekly Rate pursuant to Section 2.04 to, but not including, the next Conversion Date (a "Weekly Rate Period"), the Bonds will bear interest at the Weekly Rate. With respect to any Weekly Rate Period, the Remarketing Agents will set a rate (a "Weekly Rate") by 12:00 noon New York City time: (i) on the first Business Day before any Conversion Date immediately after which the Bonds will bear interest at a Weekly Rate for the period commencing on the Conversion Date through and including the next Tuesday that is at least six days from such Conversion Date and (ii) on each Wednesday thereafter (or the first Business Day before such Wednesday, if such Wednesday is not a Business Day) for the seven day period from such Wednesday through and including the next Tuesday. Each Weekly Rate shall be the rate of interest which, if borne by the Bonds, would, in the judgment of the Remarketing Agents, having due regard to the prevailing financial market conditions for tax-exempt revenue bonds or other tax-exempt securities of the same general nature as the Bonds or tax-exempt securities which are competitive as to credit and maturity (or period for tender) with the credit and maturity (or period for tender) of the Bonds, be the interest rate necessary, but would not exceed the interest rate necessary, to enable the Remarketing Agents to remarket the Bonds at a price of par (plus accrued interest, if any) on such Wednesday; provided that the Weekly Rate shall not be greater than 110% of the Weekly Rate Index. If for any reason the Weekly Rate for any Weekly Rate Period is not established as aforesaid by the Remarketing Agents, no Remarketing Agent shall be serving as such hereunder or the rate so established is held to be invalid or unenforceable by a final judgment of a court of law with respect to any Weekly Rate Period, then the Weekly Rate for such Weekly Rate Period shall be 100% of the Weekly Rate Index on the date such interest rate was (or would have been) determined as provided above. 42 The Indexing Agent shall establish the Weekly Rate Index on the Business Day next preceding each day on which a Weekly Rate is determined by the Remarketing Agents. Notwithstanding the foregoing, in the event that the Remarketing Agents, in their judgment, shall determine that the Weekly Rate Index so established is sufficiently non-representative of current market conditions that the Bonds may not be remarketed at par if the Weekly Rate is set at a rate not greater than 110% of the applicable Weekly Rate Index, the Remarketing Agents may establish a new Weekly Rate Index in accordance with the procedures and standards set forth in this paragraph and in the preceding paragraph and for purposes of the Weekly Rate Index so established, all references to Indexing Agent in the Indenture shall be deemed to refer to the Remarketing Agents; provided that the Remarketing Agents shall select securities (whether or not actually issued) having a term equal to the Weekly Rate Period or which are subject to optional or mandatory tender by the owner thereof at the end of a term equal to the Weekly Rate Period. [2.03] (c) Semi-Annual Rate. During any period commencing on the date that the Interest Rate Determination Method is converted to a mode where the Bonds bear interest at a Semi-Annual Rate pursuant to Section 2.04 to, but not including, the next Conversion Date (a "Semi-Annual Rate Period"), the Bonds will bear interest at the Semi-Annual Rate. With respect to any Semi-Annual Rate Period, the Remarketing Agents will set a rate (a "Semi-Annual Rate") not later than 5:00 p.m. New York City time: (i) on or before the first Business Day before any Conversion Date immediately after which the Bonds will bear interest at a SemiAnnual Rate for the period commencing on the Conversion Date through but not including the next Interest Payment Date (each such date occurring during a Semi-Annual Rate Period being referred to herein as a "Semi-Annual Adjustment Date") and (ii) on or before the first Business Day before each Semi-Annual Adjustment Date for the period commencing on such Semi-Annual Adjustment Date through but not including the next Semi-Annual Adjustment Date. Each SemiAnnual Rate shall be the rate of interest which, if borne by the Bonds, would, in the judgment of the Remarketing Agents, having due regard for the prevailing financial market conditions for tax-exempt revenue bonds or other tax-exempt securities of the same general nature as the Bonds or tax-exempt securities which are competitive as to credit and maturity (or period for tender) with the credit and maturity (or period for tender) of the Bonds, be the interest rate necessary, but would not exceed the interest rate necessary to enable the Remarketing Agents to remarket the Bonds at a price of par (plus accrued interest, if any) on the next succeeding Interest Payment Date (or, if any such day is not a Business Day, on the next succeeding Business Day); provided that the Semi-Annual Rate shall not be greater than 110% of the Semi-Annual Rate Index. If for any reason the Semi-Annual Rate for any Semi-Annual Rate Period is not established as aforesaid by the Remarketing Agents, no Remarketing Agent shall be serving as such hereunder or the rate so established is held to be invalid or unenforceable by a final judgment of a court of law with respect to any Semi-Annual Period, then the Semi-Annual Rate for such Semi-Annual Rate Period shall be 100% of the Semi-Annual Rate Index on the date such interest rate was (or would have been) determined as provided above. 43 The Indexing Agent shall establish the Semi-Annual Rate Index during the SemiAnnual Rate Period on the Business Day next preceding each day on which a Semi-Annual Rate is determined by the Remarketing Agents. [2.03] (d) Money Market Municipal Rates. During any period commencing on the date that the Interest Rate Determination Method is converted to a mode where the Bonds bear interest at Money Market Municipal Rates pursuant to Section 2.04 to, but not including, the next Conversion Date (a "Money Market Municipal Rate Period"), the Bonds will bear interest at the various Money Market Municipal Rates for the various Calculation Periods established herein. During any Money Market Municipal Rate Period, any Bond may have a different Calculation Period and a different Money Market Municipal Rate from any other Bond, all as established by the Remarketing Agents as provided below. [2.03 (d)] (i) Establishment of Calculation Periods. During any Money Market Municipal Rate Period, at or prior to 12:00 noon New York City time on any Conversion Date immediately after which the Bonds will bear interest at the Money Market Municipal Rate and each day immediately after the end of a Calculation Period, the Remarketing Agents shall establish Calculation Periods with respect to Bonds for which no Calculation Period is currently in effect. In determining Calculation Periods, the Remarketing Agents shall take the following factors into account: (1) existing short-term taxable and tax-exempt market rates and indices of such short-term rates, (2) the existing market supply and demand for short-term tax-exempt securities, (3) existing yield curves for short-term and long-term tax-exempt securities or obligations having a credit rating that is comparable to the Bonds, (4) general economic conditions, (5) economic and financial factors present in the securities industry that may affect or that may be relevant to the Bonds and (6) any information available to the Remarketing Agents pertaining to the Bank or the Company regarding any events or anticipated events which could have a direct impact on the marketability of or interest rates on the Bonds. The Remarketing Agents shall select the Calculation Periods and the applicable Money Market Municipal Rates that, together with all other Calculation Periods and related Money Market Municipal Rates, in the sole judgment of the Remarketing Agents, will result in the lowest overall borrowing cost on the Bonds or are otherwise in the best financial interests of the Company, as determined in consultation with the Company. Any Calculation Period established hereunder may not extend beyond any Conversion Date, the first Business Day next preceding the scheduled expiration date of the Letter of Credit or the day prior to the maturity date of the Bonds, and the maximum length of the Calculation Period shall not exceed the number of days of interest coverage under the Letter of Credit minus 30 days of interest coverage. [2.03 (d)] (ii) Setting of Rates. On the first day of each Calculation Period, the Remarketing Agents shall set rates ("Money Market Municipal Rates") by 12:00 noon New York City time for each Calculation Period. With respect to Bonds for each Calculation Period, the Money Market Municipal Rate shall be the rate of interest which, 44 if borne by such Bonds, would, in the judgment of the Remarketing Agents, having due regard to the prevailing financial market conditions for tax-exempt revenue bonds or other tax-exempt securities which are competitive as to credit and maturity (or period of tender) with the credit and maturity (or period of tender) of such Bond, be the interest rate necessary, but would not exceed the interest rate necessary, to enable the Remarketing Agents to remarket such Bond at a price of par on the date such rate is set; provided that the Money Market Municipal Rates shall not be greater than 110% of the Money Market Municipal Rate Index. The Authority, at the request of the Company, may place such limitations upon the establishment of Calculation Periods pursuant to the preceding paragraph (i) as may be set forth in a written direction from the Authority, which direction must be received by the Trustee and the Remarketing Agents prior to 10:00 a.m. (New York City time) on the day prior to any Determination Date to be effective on such date, but only if the Trustee receives an Opinion of Bond Counsel to the effect that such action is authorized by the Indenture, is permitted under the Act, and will not have an adverse effect on the exclusion of interest on the Bonds from gross income for federal income tax purposes. The Indexing Agent shall establish the Money Market Municipal Rate Index. [2.03] (e) Medium-Term Rate. During any period (a "Medium-Term Rate Period") commencing on the date that the Interest Rate Determination Method is converted to a method where the Bonds bear interest at a Medium-Term Rate pursuant to Section 2.04 to, but not including the earliest to occur of, the next Conversion Date or the next Medium-Term Adjustment Date and any period commencing on a Medium-Term Adjustment Date, to but not including, the earliest to occur of the next Conversion Date or the next Medium-Term Adjustment Date, the Bonds shall bear interest at the Medium-Term Rate. [2.03(e)] (i) Selection of Period. The length of each Medium-Term Rate Period shall be selected by the Company with the intention of yielding the lowest overall interest expense on the Bonds over the term of such Medium-Term Rate Period, taking into account (1) general economic conditions and economic and market conditions relevant to the Bonds and (2) such other facts, circumstances and conditions as the Company determines to be relevant. The Company shall select a Medium-Term Rate Period so that: (1) such period ends on the day preceding an Interest Payment Date, (2) the Medium-Term Period is at least one year in duration, and (3) such period will end not later than one Business Day prior to the expiration of the Letter of Credit then in effect. In addition, if the Company is converting from a Weekly Rate Period, a Money Market Municipal Rate Period or a Semi-Annual Rate Period, the Company shall not select a Medium-Term Period that ends after the Interest Payment Date immediately preceding final maturity of the Bonds unless it has provided an Opinion of Bond Counsel that, under then existing statutes and court decisions, such conversion of interest on the 45 Bonds will not cause interest on the Bonds to be included in gross income for federal income tax purposes. The Company shall give written notice of the term of any Medium-Term Rate Period to the Trustee, the Tender Agent, the Authority, the Indexing Agent and the Remarketing Agents not later than 35 days prior to the commencement of any MediumTerm Rate Period. In the event that no specific term of a Medium-Term Rate Period shall have been so specified by the Company, the term of a subsequent Medium-Term Rate Period shall be the same as the term of the Medium-Term Rate Period immediately preceding it. [2.03(e)] (ii) Setting of Rate. With respect to any Medium-Term Rate Period, the Remarketing Agents will set a rate no later than 10:00 a.m. New York City time on or before the first Business Day before any Conversion Date immediately after which the Bonds will bear interest at a Medium-Term Rate and the first Business Day before any Medium-Term Adjustment Date for the applicable Medium-Term Rate Period. Each Medium-Term Rate shall be the rate of interest which, if borne by the Bonds, would, in the judgment of the Remarketing Agents, having due regard for prevailing market conditions for tax-exempt revenue bonds or other tax-exempt securities which are competitive as to credit and maturity (or period of tender), with the credit and maturity of the Bonds, be the interest rate necessary, but would not exceed the interest rate necessary, to enable the Remarketing Agents to remarket the Bond(s) or portion(s) thereof as aforesaid tendered (or deemed to have been tendered) for purchase at a price of par (plus accrued interest, if any) on the first day of such Medium-Term Period; provided that the Medium-Term Rate shall not be greater than 110% of the MediumTerm Rate Index. If for any reason the applicable Medium-Term Rate is not established as aforesaid by the Remarketing Agents, no Remarketing Agent shall be serving as such hereunder or the rate so established is held to be invalid or unenforceable by a final judgment of a court of law with respect to any Medium-Term Rate Period, the interest rate to be borne by all Bonds or portions thereof outstanding under the Indenture from the first day of the applicable Medium-Term Rate Period to the last day of the applicable MediumTerm Rate Period shall be equal to 100% of the Medium-Term Rate Index calculated for such Medium-Term Rate Period. The Indexing Agent shall establish the Medium-Term Rate Index on the Business Day next preceding each day on which a Medium-Term Rate is determined by the Remarketing Agents. [2.03] (f) Fixed Rate. During the period commencing on the date that the Interest Rate Determination Method is converted to a method where the Bonds bear interest at the Fixed Rate pursuant to Section 2.04 to (subject to the right of prior redemption at the prices and dates 46 and upon the terms and conditions hereinafter set forth) the Maturity Date of the Bonds (the "Fixed Rate Period"), the Bonds shall bear interest at the Fixed Rate. With respect to the Fixed Rate Period, the Remarketing Agents will set a rate (the "Fixed Rate") not later than 10:00 a.m. New York City time one Business Day prior to any Fixed Rate Conversion Date. The Fixed Rate shall be the interest rate which, if borne by the Bonds, would, in the judgment of the Remarketing Agents having due regard for prevailing financial market conditions for tax-exempt revenue bonds or other tax-exempt securities which are competitive as to credit and maturity (or period of tender) with the credit and maturity of the Bonds, be the interest rate necessary, but would not exceed the interest rate necessary, to enable the Remarketing Agents to remarket the Bonds(s) as aforesaid tendered (or deemed to have been tendered) for purchase at a price of par (plus accrued interest, if any) on the Fixed Rate Conversion Date, provided that the Fixed Rate shall not be greater than 110% of the Fixed Rate Index. If for any reason the applicable Fixed Rate is not established as aforesaid by the Remarketing Agents, no Remarketing Agent shall be serving as such hereunder or the rate so established is held to be invalid or unenforceable by a final judgment of a court of law, the interest rate to be borne by all Bonds outstanding under the Indenture from the Fixed Rate Conversion Date to the date of payment in full of the Bonds shall be equal to 100% of the Fixed Rate Index as of such Computation Date. The Indexing Agent shall establish the Fixed Rate Index on or before the Business Day next preceding the Fixed Rate Conversion Date. [2.03] (g) Notice of Rates. Promptly following the determination of any Weekly Rate, Semi-Annual Rate, Medium-Term Rate, Money Market Municipal Rate or Fixed Rate, the Remarketing Agents shall give notice to the Trustee, the Authority, the Company and the Tender Agent in writing and, promptly thereafter, except in the case of the Semi-Annual Rate and Weekly Rate, the Trustee shall give each Bondowner notice of the new Rate. [2.03] (h) Absence of Remarketing Agents. If no Remarketing Agent shall be serving hereunder at the time of the determination of the Weekly Rate, Semi-Annual Rate, Medium-Term Rate, the Fixed Rate or the Money Market Municipal Rate, the Rate shall be the Weekly Rate Index, Semi-Annual Rate Index, Medium-Term Rate Index, the Fixed Rate Index or Money Market Municipal Rate Index, as the case may be, then in effect until a new Remarketing Agent is appointed by the Authority to make such Rate determination. Any determination of the Weekly Rate, Semi-Annual Rate, the Medium-Term Rate, the Fixed Rate or the Money Market Municipal Rate by the Remarketing Agents, or pursuant to the preceding sentence, shall be conclusive and binding upon the Authority, the Company, the Tender Agent, the Trustee, the Paying Agent, the Remarketing Agents and the Bondowners. [2.03] (i) No Liability. In determining the interest rate that the Bonds shall bear as provided in this Section, the Remarketing Agents and, as aforesaid, the Trustee shall have 47 no liability to the Authority, the Company, the Tender Agent, the Paying Agent or any Bondowner except for their willful misconduct. [2.03] (j) Legend Authorized. Any Bond issued upon registration of transfer or exchange on or after any Fixed Rate Conversion Date shall contain a prominent legend on the face thereof, to be specified by the Authority and placed thereon by the Trustee, to the effect that the Letter of Credit has expired, that the Bonds are no longer entitled to the benefit of any Letter of Credit, that the Bonds are not subject to mandatory purchase by the Tender Agent and that the interest rate on the Bonds has been converted to a Fixed Rate. Section 2.04. Conversion of Interest Rate on Bonds. (a)(1) During any Rate Period other than the Fixed Rate Period, at any time, subject to the conditions set forth below, the Company may direct a change in the Interest Rate Determination Method from one Rate to another by so directing the Trustee in writing (such being hereinafter referred to as a "Conversion Notice") with copies to the Remarketing Agents, the Tender Agent, the Authority, the Indexing Agent and, during the term of the Letter of Credit, the Bank, delivered at least thirty (30) days (where the Bonds bear interest at a Weekly Rate, Money Market Rate or SemiAnnual Rate) or thirty-five (35) days (where the Bonds bear interest at a Medium-Term Rate) but, in either case, not more than sixty (60) days prior to the Conversion Date, accompanied by an Opinion of Bond Counsel stating that, under then existing statutes and court decisions, such conversion of interest on the Bonds to the other Rate will not cause the interest on the Bonds to be included in gross income for federal income tax purposes. The Company's notice must specify (i) the Conversion Date, (ii) the new Interest Rate Determination Method to take effect, (iii) if the new Interest Rate Determination Method is a Medium-Term Rate Period, the length of the Medium-Term Rate Period, (iv) if the new Interest Rate Determination Method is a Money Market Municipal Rate Period, the maximum length of Calculation Periods, and (v) if the new Interest Rate Determination Method is to apply to less than all of the Bonds then outstanding, the aggregate principal amount of Bonds to which the new Interest Rate Determination Method is to apply. If the Company directs the Trustee to change the Interest Rate Determination Method from one Rate to another for less than all of the Bonds then outstanding, the Trustee shall select Bonds to be converted by lot or by such other method as the Trustee may select. In the event the Company wishes to convert less than all the Bonds then outstanding, the Company shall notify the Trustee of such decision not less than 40 days or more than 60 days before the effective date of the proposed conversion. On the Conversion Date the portion of the Bonds which are being converted shall be redesignated in such a way as to identify a separate Subseries and thereby avoid confusion of such Subseries with any other Subseries. The Company may also determine to similarly redesignate the portion of the Bonds which are not being converted on the Conversion Date. The holders of Bonds which are being redesignated may be required to deliver such Bonds to the Trustee in order to receive a new Bond of the applicable designation, in the same principal amount. In the event holders are not required to surrender such Bonds, the Trustee shall appropriately designate any Bonds subsequently issued 48 in exchange therefor. The Trustee shall not be liable to any Bondholder for the method selected and employed by the Trustee or by the Company's selection of a partial redemption. [2.04(a)] (2) Any change in the Interest Rate Determination Method must comply with the following to the extent applicable: (i) Except in the case of a change in the Interest Rate Determination Method from a Medium-Term Rate Period to another Rate Period, all Conversion Dates shall occur on Business Days. (ii) If the Semi-Annual Rate or a Medium-Term Rate is then in effect, the Conversion Date shall be an Interest Payment Date (or if the Semi-Annual Rate is then in effect the immediately succeeding Business Day, if such Interest Payment Date is not a Business Day) or any Business Day on which the Bonds are subject to optional redemption. (iii) If a Medium-Term Rate is then in effect, the Conversion Date shall occur only during the period during which the Bonds are subject to optional redemption at a redemption price of 100% of the principal amount thereof unless the Letter of Credit then in effect provides for payment of Purchase Price equal to such redemption price above par or Available Moneys have been provided in an amount sufficient, together with any amounts available under the Letter of Credit, to pay such Purchase Price in full; provided, that if the Bonds are subject to optional redemption at a redemption price above par, the Purchase Price on the Conversion Date shall include the optional redemption premium. (iv) No conversion of the interest rate on the Bonds shall occur under this Section if at the time of such conversion an Event of Default shall have occurred hereunder and be continuing with respect to the Bonds. (v) No Rate Period other than the Fixed Rate Period shall extend to a date later than the first Business Day next preceding the scheduled expiration of the Letter of Credit in effect at the beginning of such Rate Period. (vi) If the Rate Period in effect after the conversion is a Money Market Municipal Rate Period, the maximum length of the Calculation Period shall not exceed the number of days of interest coverage under the Letter of Credit minus 30 days of interest coverage. [2.04(a)] (3) Any change in the Interest Rate Determination Method shall not be effective unless by 10:00 a.m., New York City time, on the Conversion Date the Company delivers a supplemental Opinion of Bond Counsel to the Trustee stating that under the laws existing on the Conversion Date the conversion to the other Rate will not cause the interest on 49 the Bonds to be included in gross income for federal income tax purposes and the Rate to be in effect after the conversion does not exceed the maximum rate permitted by the Indenture and by applicable law. [2.04(a)] (4) Notwithstanding any other provision of the Indenture, after the Interest Rate Determination Method is changed to the Fixed Rate, such method may not thereafter be changed and such Fixed Rate shall be the rate of interest on the Bonds from the Fixed Rate Conversion Date until the Maturity Date. (b) Upon receipt of a Conversion Notice from the Company, the Trustee shall no later than twenty-five (25) days (if the Bonds then bear interest at a Weekly Rate, Money Market Rate or Semi-Annual Rate) or thirty (30) days (if the Bonds then bear interest at a Medium-Term Rate) prior to the Conversion Date give notice by mail to the Bondowners provided, however, if the Conversion will occur on a Medium-Term Adjustment Date, no such notice to Bondholders need be given. Such notice shall state in substance: [2.04(b)] (1) that the interest rate on the Bonds shall be converted to a Weekly Rate, a Semi-Annual Rate, a Medium-Term Rate, a Money Market Municipal Rate or the Fixed Rate, as the case may be; [2.04(b)] (2) the Conversion Date; [2.04(b)] (3) if applicable, that the Company has delivered to the Trustee an Opinion of Bond Counsel stating that under the statutes and court decisions existing on the date of the Conversion Notice, the conversion of the interest rate on the Bonds to the applicable rate will not cause the interest on the Bonds to be included in gross income for federal income tax purposes; [2.04(b)] (4) if applicable, that the interest rate on the Bonds shall not be converted unless the Company delivers to the Trustee on the applicable Conversion Date a supplemental Opinion of Bond Counsel stating that under the statutes and court decisions existing on the Conversion Date, (A) the conversion of the interest rate on the Bonds will not cause the interest on the Bonds to be included in gross income for federal income tax purposes; and (B) the rate to be in effect after the conversion does not exceed the maximum rate permitted by the Indenture and by applicable law; provided, however, that if the Company fails to deliver such supplemental Opinion of Bond Counsel on such date, the interest rate on the Bonds shall not be converted on the applicable Conversion Date, and all Bonds tendered (or deemed to have been tendered) for purchase shall not be purchased on the applicable Conversion Date as provided herein and the Bonds shall continue to bear interest in accordance with the Interest Rate Determination Method in effect prior to the proposed Conversion Date; 50 [2.04(b)] (5) that all Bonds (or portions thereof in authorized denominations) tendered (or deemed to have been tendered) for purchase by the owners thereof shall be purchased on the applicable Conversion Date at the Purchase Price; [2.04(b)] (6) that, to the extent that there shall be on deposit with the Tender Agent, the Paying Agent or the Trustee on or before the applicable Conversion Date an amount of money sufficient to pay the Purchase Price thereof, all Bonds, whether or not actually delivered for purchase on such date, shall be deemed to have been properly tendered for purchase and shall cease to constitute or represent a right on behalf of the owner thereof to the payment of principal and/or interest thereon and shall represent and constitute only the right to payment of the Purchase Price thereof, without interest accruing thereon, on deposit with the Tender Agent, the Paying Agent or the Trustee; [2.04(b)](7)the name of the Tender Agent and the address of the principal office of the Tender Agent; [2.04(b)] (8) that, if the conversion is to a Fixed Rate, the Letter of Credit will expire no later than the close of business on the first Business Day following the applicable Fixed Rate Conversion Date and will not be available with respect to payment of interest after the Fixed Rate Conversion Date; [2.04(b)] (9) that, in the case of conversion to the Fixed Rate, the rating assigned by the Rating Agency then rating the Bonds, if any, to the Bonds, either may be or is expected to be lowered or eliminated as a result of such conversion; [2.04(b)] (10) that, if the conversion is to the Fixed Rate, from and after the Fixed Rate Conversion Date, the Bonds will no longer be subject to purchase as provided in Section 2.05 or, if the conversion is to a Medium-Term Rate, the Bonds will not be subject to tender until the expiration of the applicable Rate Period; and [2.04(b)] (11) that, if the conversion is to a Medium-Term Rate Period of greater than three years duration, the short term rating, if any, assigned by any Rating Agency to the Bonds will be withdrawn as a result of such conversion. [2.04] (c) If the Company fails to deliver to the Trustee by 10:00 a.m. New York City time on the Conversion Date, the supplemental Opinion of Bond Counsel as and if required by subsection (a) of this Section, the interest rate on the Bonds shall not be converted to the Weekly Rate, Semi-Annual Rate, Medium-Term Rate, Money Market Municipal Rate or Fixed Rate on the Conversion Date, as the case may be, and Bonds tendered (or deemed to have been tendered) for purchase on the Conversion Date shall not be purchased on the Conversion Date and the Bonds shall continue to bear interest at the rate determined in accordance with the Interest Rate Determination Method in effect prior to the proposed Conversion Date. In such event, all rights of the Authority, the Trustee and the Company hereunder shall continue as if 51 no such proceedings for the conversion of the interest rate on the Bonds had been taken and the Bonds shall be available for remarketing under Section 2.06. The Trustee shall promptly notify the Authority and the Bondowners by mail (and shall promptly notify the Tender Agent, the Paying Agent, the Bank and the Remarketing Agents by telephone) in the event that the interest rate on the Bonds is not converted on the Conversion Date as provided herein. [2.04] (d) Failure to mail the notice described in subsection (a) or (b), or any defect therein, shall not affect the validity of any interest rate or change in the Interest Rate Determination Method on any of the Bonds or extend the period for tendering any of the Bonds for purchase, and the Trustee shall not be liable to any Bondowner by reason of its failure to mail such notice or any defect therein. [2.04] (e) The Letter of Credit shall not be available to pay the principal or Purchase Price of or interest on any Bonds after the earlier of the first Business Day following the Fixed Rate Conversion Date or the date a drawing is made under the Letter of Credit in connection therewith. The Letter of Credit shall be returned to the Bank for cancellation promptly upon the expiration thereof on or after such Fixed Rate Conversion Date. Section 2.05. Optional and Mandatory Tender of Bonds for Purchase. (a) During any Weekly Rate Period, the owners of the Bonds shall have the right to tender any Bond (or portion thereof in an authorized denomination) to the Tender Agent for purchase on any Optional Tender Date, but only upon: (1) giving or delivery to the Tender Agent at its principal office, on a Business Day, not later than the seventh calendar day prior to the Optional Tender Date, of a written or telephonic notice, confirmed in writing, which states (i) the number and aggregate principal amount of each Bond to be purchased and (ii) that such Bond (or portion thereof in an authorized denomination) shall be purchased on such Optional Tender Date pursuant to the Indenture; and (2) delivery of such Bond (with an appropriate instrument of transfer duly executed in blank) to the Tender Agent at its principal office at or prior to 12:00 noon, New York City time, on such Optional Tender Date; provided, however, that no Bond (or portion thereof in an authorized denomination) shall be purchased unless the Bond so delivered to the Tender Agent shall conform in all respects to the description thereof in the aforesaid notice. Any election of a Bondowner to tender a Bond (or portion thereof as aforesaid) for purchase on the Optional Tender Date in accordance with this subsection (a) shall be irrevocable and shall be binding on the Bondowner making such election and on any transferee of such Bondowner and any Bond with respect to which such an election has been made which is not properly delivered by the owner thereof to the Tender Agent shall be deemed to have been properly tendered to the Tender Agent, and, to the extent that there shall be on deposit with the Tender 52 Agent on or before the Optional Tender Date, an amount sufficient to pay the Purchase Price thereof, such Bond shall cease to constitute or represent a right to payment of principal or interest thereon and shall constitute and represent only the right to payment of the Purchase Price payable on such date. [2.05] (b) During any Semi-Annual Rate Period, the owners of the Bonds shall have the right to tender any Bond (or portion thereof in an authorized denomination) to the Tender Agent for purchase on any Optional Tender Date prior to a Conversion Date, but only upon: (1) giving or delivery to the Tender Agent at its principal office, not earlier than the thirtieth calendar day and not later than the fifteenth calendar day next preceding such Optional Tender Date of a written or telephonic notice confirmed in writing which states (i) the number and aggregate principal amount of each Bond to be purchased and (ii) that such Bond (or portion thereof in an authorized denomination) shall be purchased on such Optional Tender Date pursuant to the Indenture; and (2) the delivery of such Bond (with an appropriate instrument of transfer duly executed in blank) to the Tender Agent at its principal office at or prior to 12:00 noon, New York City time, on such Optional Tender Date; provided, however, that no Bond (or portion thereof in an authorized denomination) shall be purchased unless the Bond so delivered to the Tender Agent shall conform in all respects to the description thereof in the aforesaid notice. Any election of a Bondowner to tender a Bond (or portion thereof as aforesaid) for purchase on the Optional Tender Date in accordance with this subsection (b) shall be irrevocable and shall be binding on the Bondowner making such election and on any transferee of such Bondowner and any Bond with respect to which such an election has been made which is not properly delivered by the owner thereof to the Tender Agent shall be deemed to have been properly tendered to the Tender Agent, and, to the extent, that there shall be on deposit with the Tender Agent on or before the Optional Tender Date, an amount sufficient to pay the Purchase Price thereof, such Bond shall cease to constitute or represent a right to payment of principal or interest thereon and shall constitute and represent only the right to payment of the Purchase Price payable on such date. [2.05] (c) The Tender Agent shall give the Trustee, the Company, the Remarketing Agents, the Paying Agent and the Bank prompt notice by telephone confirmed promptly in writing of the receipt of any notice in accordance with clause (1) of subsection (a) or (b) above. During any Semi-Annual Rate Period, the Trustee shall give notice by mail to Bondowners not more than forty-five or less than thirty calendar days before each Optional Tender Date, which notice shall state in substance: (i) the next Optional Tender Date, and (ii) that the Bonds are subject to tender at the option of the owner thereof in the manner set forth in subsection (b) of this section. 53 [2.05] (d) All Bonds are subject to mandatory tender and purchase at the Purchase Price on each Conversion Date and each Medium-Term Adjustment Date. [2.05] (e) All Bonds shall be subject to mandatory tender and purchase on each Mandatory Purchase Date unless the owner exercises his or her right to retain the Bonds (in certain circumstances) pursuant to this subsection (e) as hereinafter provided: [2.05(e)] (1) The owners of the Bonds shall tender all Bonds (with appropriate instruments of transfer duly executed in blank) to the Tender Agent at its principal office for purchase on the applicable Mandatory Purchase Date, which date shall be established pursuant to clause (iii) of paragraph (2) of this subsection (e), at the Purchase Price due on such Mandatory Purchase Date. A Mandatory Purchase Date shall be established for the Bonds if the Company fails to deliver to the Trustee on or prior to the thirty-seventh calendar day next preceding the scheduled expiration date of the Letter of Credit then in effect: (A) (i) an Alternate Credit Facility (including, without limitation, any Alternate Credit Facility issued as contemplated by (B) below), (ii) an Opinion of Bond Counsel as described in Section 6.07(2)(b) and (iii) written evidence as described in Section 6.07(2)(c); or (B) (i) written evidence that the Letter of Credit then in effect will be extended or renewed for a period of at least one year beyond such expiration date and will end not sooner than the first Business Day following the Interest Payment Date for such Interest Period. [2.05(e)] (2) Upon the Bonds becoming subject to mandatory tender for purchase as provided in clause (1) above, the Trustee shall within five (5) calendar days give telephonic notice to the Remarketing Agents, the Authority and the Tender Agent and give notice by mail to the Bondowners, which notice shall state in substance: (i) [intentionally omitted]; (ii) the Optional Retention Date, if applicable; (iii) the Mandatory Purchase Date, which in the case of (1)(A) above shall be the twentieth calendar day next preceding the scheduled expiration date of the Letter of Credit and in the case of (1)(B) above shall be a date that is one Business Day prior to such expiration date; (iv) in the case of the delivery of an Alternate Credit Facility meeting the requirements of Section 6.07(3) hereof but not meeting the requirements of Section 6.07(2)(c) hereof, that in connection with the issuance of the Alternate Credit Facility, the Trustee has not received a letter from the Rating Agency then rating the Bonds stating (1) that such Rating Agency has reviewed the terms of the Alternate Credit Facility and the bank issuing the same 54 and (2) that issuance of the Alternate Credit Facility for the benefit of the Bondowners will not result in a lowering of the rating then assigned by such Rating Agency to the Bonds, and, in such case, stating the name of the bank issuing the Alternate Credit Facility and the effective date thereof; (v) in the case of (1)(B) above, that the Letter of Credit will expire no later than the close of business on the first Business Day following the Mandatory Purchase Date; (vi) if the Bonds are then rated, that the rating assigned by the Rating Agency to the Bonds may be lowered or eliminated as a result of the issuance of the Alternate Credit Facility, in the case of (1)(A) above, or as a result of the expiration of the Letter of Credit, in the case of (1)(B) above; (vii) that all Bonds (or portions thereof in authorized denominations) tendered shall be purchased on the Mandatory Purchase Date at the applicable Purchase Price; (viii) that, to the extent that there shall be on deposit with the Tender Agent, the Paying Agent or the Trustee on or before the Mandatory Purchase Date an amount of money sufficient to pay the Purchase Price thereof, all Bonds, whether or not actually delivered for purchase on such date, not delivered to the Tender Agent on the Optional Retention Date shall be deemed to have been properly tendered for purchase and shall cease to constitute or represent a right on behalf of the owner thereof to the payment of principal and/or interest thereon and shall represent and constitute only the right to payment of the Purchase Price thereof, without interest accruing thereon, on deposit with the Tender Agent, the Paying Agent or the Trustee; provided that Bonds (or portions thereof in authorized denominations) the owner of which shall have elected to retain and not to tender in accordance with clause (4) below shall not be deemed to have been tendered for purchase and shall constitute and continue to represent the right of the owner thereof to payment of principal and interest, if any, thereon in accordance with the terms of such Bond; and (ix) the name of the Tender Agent and the address of the principal office of the Tender Agent. [2.05(e)] (3) Failure to mail the notice described in clause (2) or any defect therein, shall not extend the period for tendering any of the Bonds for purchase, and the Trustee shall not be liable to any Bondowner by reason of its failure to mail such notice or any defect therein. [2.05(e)] (4) The Bonds shall be tendered for purchase as provided in this subsection (e), except for any Bond or Bonds (or portions thereof in authorized denominations) the owner of which shall deliver to the Tender Agent at its principal office no later than the applicable Optional Retention Notice Date, a written notice, substantially in the form of EXHIBIT 55 A to the Indenture, appropriately completed; provided that such owners shall have the right to retain only those Bonds to be secured by a Letter of Credit meeting the minimum requirements of Section 4.12 of the Participation Agreement following the Mandatory Purchase Date and any Bonds not meeting those minimum requirements shall be deemed tendered and shall be subject to subsection (f) of this Section notwithstanding any election to retain such Bonds. [2.05] (f) Any election by a Bondowner to retain any Bond (or portion thereof in an authorized denomination) and not to tender such Bond (or portion thereof in an authorized denomination) for purchase on an Optional Retention Date in accordance with subsection (e), shall be irrevocable and shall be binding on the Bondowner making such election and on any transferee of such Bondowner. If a Bondowner fails to give notice of such an election with respect to any Bond (or portion thereof in an authorized denomination) on the applicable Optional Retention Notice Date and thereafter fails to deliver such Bond to the Tender Agent on or before the applicable Optional Retention Date, such Bond (or portion thereof in an authorized denomination) which is not delivered to the Tender Agent shall be deemed to have been properly tendered to the Tender Agent (such Bond being hereinafter referred to as an "Untendered Bond"), and, to the extent that there shall be on deposit with the Tender Agent on or before the Purchase Date, an amount sufficient to pay the Purchase Price thereof, such Untendered Bond shall cease to constitute or represent a right to payment of principal or interest thereon and shall constitute and represent only the right to the payment of the Purchase Price payable on such date. The foregoing shall not limit the entitlement of any Bondowner on any Record Date to receipt of interest due on such date unless such interest is paid as part of the Purchase Price. The Tender Agent will inform the Remarketing Agents and the Trustee by telephone promptly after the applicable Optional Retention Notice Date of the principal amount of Bonds which will be tendered or deemed to have been tendered on the applicable Optional Retention Date. [2.05] (g) During any Money Market Municipal Rate Period, each Bond shall be subject to mandatory tender for purchase on the Business Day immediately following each Calculation Period, at a price equal to the principal amount thereof. Owners of such Bonds shall have no right to elect to retain such Bonds. [2.05] (h) On each Optional Tender Date and Purchase Date, there shall be purchased (but solely from funds received by the Tender Agent in accordance with the terms hereof) the Bond or Bonds (or portions thereof in authorized denominations) tendered (or deemed to have been tendered) to the Tender Agent for purchase in accordance with this Section at the applicable Purchase Price. Funds for the payment of the Purchase Price of such Bond or Bonds (or portions thereof in authorized denominations) shall be paid by the Tender Agent solely from the following sources and in the following order of priority: (i) moneys drawn under the Letter of Credit by the Trustee pursuant to Section 6.07.1; 56 (ii) proceeds of the remarketing of such Bond or Bonds (or portions thereof in authorized denominations) pursuant to Section 2.06 which have been transferred to the Tender Agent pursuant to said Section; and (iii) any other moneys furnished by the Company for purchase of Bonds. The Trustee shall draw moneys under the Letter of Credit for the payment of Purchase Price to the extent that moneys are obtainable thereunder, and moneys described under clauses (ii) and (iii) above shall be used for payment of Purchase Price only to the extent that sufficient moneys are not obtainable under the Letter of Credit. To the extent that moneys drawn under the Letter of Credit have been used for payment of Purchase Price, moneys described under clause (ii) above may be paid to the Bank upon reinstatement of the related amount under the Letter of Credit. Bonds (or portions thereof in authorized denominations) purchased as provided above shall be delivered as provided in Section 2.07. The Tender Agent shall hold any such moneys, uninvested, in trust for the purposes set forth in the Indenture. [2.05] (i) The owners of the Bonds shall not have the right or be required, as the case may be, to exercise their optional right to tender any Bond or Bonds (or portions thereof in authorized denominations) for purchase on any Optional Tender Date or the Optional Retention Date, if on any such date an Event of Default under Section 10.01(f) or (g) shall have occurred and be continuing hereunder with respect to the Bonds. [2.05] (j) All Bonds shall be subject to mandatory tender and purchase, with no right of owners to retain Bonds, upon a date established by the Trustee after receipt by the Trustee and the Tender Agent of a written notice from the Bank of the occurrence and continuance of an event that would constitute an Event of Default pursuant to Section 10.01(f) or (g) except that the Bank shall have directed mandatory tender and purchase pursuant to this provision rather than acceleration of the Bonds; provided, however, that in the case of any event that would constitute an Event of Default pursuant to Section 10.01(g) such notice must have been received on or before the tenth calendar day after a drawing under the Letter of Credit in respect of interest on the Bonds. Upon receipt of such notice, the Trustee shall immediately declare the Bonds as being subject to mandatory tender and purchase in accordance with this Section 2.05(j) and give notice thereof to the Authority, the Company, the Tender Agent, the Remarketing Agents, and the Bank and shall select a date (occurring on or before the fourth day next succeeding the Trustee's receipt of such notice, which date shall be a Business Day) for the mandatory tender and purchase of the Bonds, and shall promptly give notice by mail to all Bondowners, which shall include the circumstances leading to mandatory tender and purchase, the absence of any right to retain Bonds, the date set therefor and directions for the tender and purchase of such Bonds. Upon such declaration, the Trustee immediately shall draw upon the Letter of Credit in an amount sufficient to pay the full Purchase Price due on the date established for such mandatory tender and purchase (including an amount representing interest accrued to 57 such mandatory tender and purchase date) and hold such amount for application to the payment on such mandatory tender and purchase date of the Purchase Price of the Bonds in accordance with the Indenture. Notwithstanding anything in this Indenture to the contrary, no Bonds which may be subject to mandatory tender and purchase under any other provision of the Indenture shall be remarketed by the Remarketing Agent subsequent to the receipt of a Notice from the Bank directing a mandatory tender and purchase under this Section 2.05(j). Any Bonds so tendered for purchase shall be purchased with funds drawn under the Letter of Credit as described above. [2.05] (k) In the event that any Bond is subject at any time to tender and purchase pursuant to more than one provision of the Indenture, provisions relating to the timing of notices of options to retain Bonds and options to tender Bonds and the irrevocability of certain actions and notices shall be interpreted as though only one such tender and purchase provision applied to such Bond to the extent that such interpretation will prevent a conflict between such provisions. For purposes of the foregoing sentence, a mandatory tender provision without a right of owners to retain Bonds shall take precedence over all other tender provisions, and a mandatory tender provision shall take precedence over any optional tender provision. [2.05] (l) If an agreement with a Securities Depository as described in Section 2.11 hereof is then in effect, tenders of Bonds shall be governed by the procedures of such Securities Depository as may be set forth in or described in an agreement between the Authority and such Securities Depository. The Depository Trust Company ("DTC") shall act as Securities Depository for the Bonds upon the initial issuance of the Bonds. So long as the Bonds are held in the DTC book-entry-only system, tenders of Bonds shall be governed by the DTC procedures described in the DTC Letter of Representations, which is hereby incorporated by reference. Section 2.06. Remarketing of Bonds. (a) Upon receipt of any notice given pursuant to Section 2.05 that any Bonds will be or are required to be tendered for purchase in accordance with Section 2.05, the Remarketing Agents shall use their best efforts to remarket such Bonds (or portions thereof in authorized denominations) on any Optional Tender Date or Purchase Date at the Purchase Price. By 2:00 p.m., New York City time, on the Business Day prior to each Optional Tender Date or Purchase Date, the Remarketing Agents shall give notice by telecopy or telephone (confirmed in writing) of the principal amount of such Bonds (or portions thereof in authorized denominations) and the registration information concerning the new Bondowners, for which they have arranged a remarketing and for which the Remarketing Agents hold remarketing proceeds on hand, to the Trustee, the Tender Agent, the Paying Agent and the Bank and, by 12:00 noon, New York City time, on each Optional Tender Date or Purchase Date shall transfer to the Tender Agent the proceeds of the remarketing of such Bonds for delivery to the Bank upon verification that sufficient amounts relating to such Bonds have been paid under the Letter of Credit and upon reinstatement of the related amount under the Letter of Credit. 58 [2.06] (b) In remarketing any Bonds tendered for purchase pursuant to the Indenture, the Remarketing Agents shall determine, in accordance with Section 2.03, the SemiAnnual Rate, the Weekly Rate, the Medium-Term Rate, the Money Market Municipal Rate or the Fixed Rate, as the case may be, on the Bonds. [2.06] (c) The Remarketing Agents shall not remarket any Bonds pursuant to this Section if they have received written notice from the Trustee that an Event of Default (other than an Event of Default set forth in Section 6.01(d) of the Participation Agreement) shall have occurred and be continuing hereunder with respect to the Bonds. [2.06] (d) The Remarketing Agents shall not knowingly remarket any Bonds to the Company or any of its Affiliates or to the Authority pursuant to this Section prior to the expiration or earlier termination of the Letter of Credit unless, prior to such remarketing, the Trustee and the Remarketing Agents shall have received an unqualified Opinion of Bond Counsel experienced in bankruptcy matters and satisfactory to the Trustee and to Moody's, if Moody's shall then be rating the Bonds, and to S&P, if S&P shall then be rating the Bonds, to the effect that such remarketing would not result in a preferential payment pursuant to the provisions of Section 547 of the United States Bankruptcy Code, 11 U.S.C. ss.ss.101, et seq. [2.06] (e) The Remarketing Agents may remarket any Bonds tendered for purchase as provided in Section 2.05(e) only if (1) the Company delivers to the Trustee a Letter of Credit and the requirements of Section 4.12 of the Participation Agreement have been met or (2) the Company changes the Interest Rate Determination Method to the Fixed Rate in accordance with Section 2.04. The Remarketing Agents may remarket any Bonds tendered for purchase as provided in Section 2.05(j) only if the Trustee and Remarketing Agents have received notice from the Bank that the event referred to in the written notice from the Bank delivered under Section 2.05(j) has been cured or waived and the Letter of Credit has been reinstated in full. [2.06] (f) The Remarketing Agents, with respect to any Bond for which a redemption date or a Mandatory Purchase Date has been established and which the Remarketing Agents are attempting to remarket, shall provide to any purchaser notice of the applicable redemption or mandatory purchase terms at the time of or before purchase by such purchaser. [2.06] (g) The Tender Agent, with respect to any Bond for which the Tender Agent or Trustee has received notification from the Remarketing Agent that it has found a purchaser or purchasers to whom the Remarketing Agent can remarket Bonds tendered for purchase, shall so notify the Bank in writing. Section 2.07. Delivery of Purchased Bonds. (a) Bonds (or portions thereof in authorized denominations) purchased pursuant to Section 2.05 (other than on a Fixed Rate Conversion Date) shall be delivered as follows: 59 [2.07(a)] (i) Bonds (or portions thereof in authorized denominations) purchased with moneys described in clause (i) (to the extent that the Trustee has received notice of reinstatement of the Letter of Credit in an amount equal to the Purchase Price of the Bonds and has so notified the Tender Agent) and in clause (ii) of Section 2.05(h) shall be delivered by the Tender Agent to the purchasers thereof upon receipt of payment thereof. Prior to such delivery, the Tender Agent shall surrender such Bonds, if so requested by the purchasers thereof, to the Trustee for registration of transfer. Bonds, portions of which in authorized denominations shall have been purchased with such moneys, shall be surrendered by the Tender Agent to the Trustee for registration of transfer with respect to principal amounts thereof so purchased and for registration of transfer with respect to the principal amounts thereof not so purchased as provided in clause (ii) below or for cancellation as provided in clause (iii) below; [2.07(a)] (ii) Bonds (or portions thereof in authorized denominations), any portion of the Purchase Price of which shall have been paid with moneys drawn under the Letter of Credit, shall, if and to the extent that the Trustee has not received notice of reinstatement of the Letter of Credit in an amount equal to the Purchase Price of the Bonds (or portion thereof), be surrendered by the Tender Agent to the Trustee for registration of transfer to the Company and upon such registration of transfer, the Bonds issued in respect thereof shall be delivered to and held by the Tender Agent for the account of the Company and shall not be released, pledged or otherwise transferred or disposed of unless prior to or simultaneously with the release of the Bonds by the Tender Agent to the Remarketing Agents for remarketing, the amount to be drawn under the Letter of Credit shall have been correspondingly reinstated and written notice of such reinstatement shall have been delivered by the Trustee or the Bank to the Tender Agent, or in the case of a purchase pursuant to Section 2.05(e), an Alternate Credit Facility meeting the requirements of Section 6.07 has been provided; provided, further, that, upon receipt by the Tender Agent of either (A) notice of the establishment of a Mandatory Purchase Date pursuant to Section 2.05(e) or (B) notice from the Bank directing mandatory tender and purchase of the Bonds pursuant to Section 2.05(j), then any Bonds theretofore or thereafter purchased with such moneys drawn under the Letter of Credit shall be surrendered by the Tender Agent to the Trustee for registration of transfer to the Bank and upon such registration of transfer, the Bonds issued in respect thereof shall be delivered to and held by the Tender Agent for the account of the Bank and shall not be released, pledged or otherwise transferred or disposed of (except to the Bank) other than in accordance with the Remarketing Agreement, and the Tender Agent shall notify the Bank that it is holding such Bonds for the Bank's account; and [2.07(a)] (iii) Bonds (or portions thereof in authorized denominations) purchased with any other moneys pursuant to Section 2.05(h) shall be delivered to the Trustee for cancellation as to the principal amount thereof so purchased and for registration of transfer and delivery pursuant to (i) or (ii) above as to the remainder thereof. 60 [2.07] (b) Bonds (or portions thereof in authorized denominations) purchased pursuant to Section 2.05(d) (only insofar as such subsection relates to a Fixed Rate Conversion Date) shall be delivered to the Trustee for cancellation and Bonds shall be issued in exchange therefor in accordance with Section 2.03(k), which shall be delivered: (i) to the purchasers thereof, with respect to the Bonds (or portions thereof in authorized denominations) purchased with moneys described in Section 2.07(a)(i) or (ii) to the Tender Agent, with respect to Bonds (or portions thereof in authorized denominations) purchased with moneys as described in Section 2.07(a)(ii) and shall be held for the account of the Company, except as otherwise provided in such Section 2.07(a)(ii), will not be entitled to the benefits of the Letter of Credit and shall (x) have a legend stating "This Bond is not entitled to the benefits of the Letter of Credit referred to herein", affixed thereto by the Tender Agent until released and delivered pursuant to the following paragraph (c), and (y) shall be held by the Tender Agent and shall be disposed of solely pursuant to the terms of the following clause (c). Bonds so purchased with any other moneys shall be delivered to the Trustee for cancellation and no replacement Bonds shall be issued in respect thereof. [2.07] (c) The Tender Agent shall authenticate and deliver new Bonds in replacement of any Bonds held pursuant to the preceding clause (ii) to or upon the order of the Remarketing Agents, only upon receipt by the Tender Agent from any Person other than the Company following any remarketing of such new Bonds of payment in immediately available funds in respect of the principal amount of such Bonds (including accrued interest, if any). Such funds shall be received by the Tender Agent solely for the account of the Bank and shall be promptly transmitted to or upon the written order of the Bank. Upon such delivery, such Bonds shall be entitled to the benefits of the Letter of Credit. Section 2.08. Mutilated, Lost, Stolen or Destroyed Bonds. In the event any outstanding Bond, whether temporary or definitive, is mutilated, lost, stolen or destroyed, the Authority may execute and, upon its request, the Trustee may authenticate a new Bond of like tenor as the mutilated, lost, stolen or destroyed Bond; provided that, in the case of any mutilated Bond, such mutilated Bond shall first be surrendered to the Trustee, and in the case of any lost, stolen or destroyed Bond, there shall be first furnished to the Trustee evidence of the ownership thereof and of such loss, theft or destruction in form satisfactory to the Trustee, together with an indemnity satisfactory to it which indemnity shall name the Authority as an additional indemnified party. In the event any such Bond shall have matured, instead of issuing a substitute Bond the Authority may authorize the payment of the same. The Authority and the Trustee may charge the owner of such Bond with their reasonable fees and expenses in this connection. Any Bond issued under the provisions of this Section in lieu of any Bond alleged to be destroyed, lost or stolen shall constitute an original additional contractual obligation on the part of the Authority, whether or not the Bond so alleged to be destroyed, lost or stolen be at any time enforceable by anyone, and shall be equally and proportionately entitled to the benefits of the Indenture with all other Bonds issued hereunder to the same extent as the Bonds in substitution for which such Bonds were issued. 61 Section 2.09. Temporary Bonds. Until Bonds in definitive form are ready for delivery, the Authority may execute, and upon its request in writing, the Trustee shall authenticate and deliver in lieu of any thereof, and subject to the same provisions, limitations, and conditions, one or more printed, lithographed or typewritten Bonds in temporary form, substantially of the tenor of the Bonds hereinbefore described, and with appropriate omissions, variations and insertions. Bonds in temporary form will be for such principal amounts as the Authority shall determine. Until exchanged for Bonds in definitive form, such Bonds in temporary form shall be entitled to the security and benefit of the Indenture. The Authority shall, without unreasonable delay, prepare, execute and deliver to the Trustee, and thereupon, upon the presentation and surrender of the Bond or Bonds in temporary form to the Trustee at the Corporate Trust Office, the Trustee shall authenticate and deliver, in exchange therefor, a Bond or Bonds, in definitive form in the authorized denomination, and for the same principal amount, as the Bond or Bonds in temporary form surrendered. Such exchange shall be made without making any charge to the Bondowners therefor. Section 2.10. Execution of Bonds; Effect of Change of Officers. All the Bonds shall, from time to time, be executed on behalf of the Authority by, or bear the facsimile signature of, its Chair, Vice Chair, President or Treasurer, and its corporate seal (which may be facsimile) shall be thereunto affixed (or imprinted or engraved if facsimile) and attested by the signature of its Secretary or an Assistant Secretary (which may be facsimile). If any of the officers who shall have signed or sealed any of the Bonds or whose facsimile signature shall be upon the Bonds shall cease to be such officer of the Authority before the Bonds so signed and sealed shall have been actually authenticated by the Trustee or delivered by the Authority, such Bonds nevertheless may be authenticated, issued and delivered with the same force and effect as though the person or persons who signed or sealed such Bonds or whose facsimile signature shall be upon the Bonds had not ceased to be such officer or officers of the Authority; and also any such Bond may be signed and sealed on behalf of the Authority by those persons who at the actual date of the execution of such Bond shall be the proper officers of the Authority, although at the date of such Bond any such person shall not have been such officer of the Authority. Section 2.11. Registration of Bonds; Transfers; Securities Depository. (a) All the Bonds issued under the Indenture shall be negotiable, subject to the provisions for registration of transfer contained in the Indenture and in the Bonds. The Trustee shall be the registrar for the Bonds. So long as any of the Bonds shall remain outstanding, the Trustee shall maintain and keep at its Corporate Trust Office the Bond Register for the registration of transfer of Bonds. Upon presentation thereof for such purpose at said office, the Trustee shall register or cause to be registered therein under such reasonable regulations as it may prescribe, the transfer of any Bond. The registration of transfer of any Bond shall be made only upon the Bond Register at such Corporate Trust Office at the written request of the Registered Owner thereof 62 or his or her representative duly authorized in writing, upon surrender thereof, together with a written instrument of transfer satisfactory to the Trustee duly executed by the Registered Owner or his or her representative duly authorized in writing. Upon the registration of transfer of any Bond, the Authority shall issue in the name of the transferee, in authorized denominations, one or more Bonds of the same aggregate principal amount as the surrendered Bonds. The Trustee shall not register any transfer of any Bond (or portion thereof), except pursuant to Bondowner tender, after notice calling such Bond (or portion thereof) for redemption or partial redemption has been given and prior to such redemption. In connection with any such transfer pursuant to Bondowner tender, the Trustee shall deliver to the transferee a copy of the applicable call for redemption. The Trustee or the Tender Agent shall, in addition, authenticate and register in the name and in the manner directed by the recipient thereof Bonds in replacement for Bonds deemed to be tendered for purchase pursuant to Section 2.05 for delivery in accordance therewith. [2.11] (b) DTC shall act as Securities Depository for the Bonds upon the initial issuance of the Bonds. The ownership of one fully registered Bond in the aggregate principal amount of the Bonds shall be registered in the name of Cede & Co., as nominee of DTC. Each such Bond shall be held in trust until its redemption or until such time as DTC or its nominee is no longer the Registered Owner of the Bonds, as provided below. For so long as the Bonds are held in a book-entry-only system and so long as a Securities Depository or its nominee is the Registered Owner of the Bonds, references herein to the Bondowners or Registered Owners of the Bonds shall mean such Securities Depository or its nominee and shall not mean the beneficial owners ("Beneficial Owners") of the Bonds. For so long as a Securities Depository or its nominee is the Registered Owner of the Bonds, principal, Purchase Price, redemption price, including premium, if any, and interest payments on the Bonds shall be made to such Securities Depository or its nominee, as Registered Owner of the Bonds, and the Authority and the Trustee shall recognize such Securities Depository or its nominee as the Bondowner for all purposes, and such Securities Depository or its nominee shall be considered the only owner of such Bonds for all purposes, including receipt of notice, voting and requesting or directing the Trustee, the Remarketing Agents, the Paying Agent, the Tender Agent or any other fiduciary to take or not to take any action under the Indenture. Conveyance of notices and other communications by a Securities Depository to Beneficial Owners will be governed by arrangements among them, subject to any statutory and regulatory requirements as may be in effect from time to time. THE AUTHORITY, THE COMPANY, THE TRUSTEE, THE PAYING AGENT AND THE REMARKETING AGENTS WILL NOT HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY BENEFICIAL OWNER WITH RESPECT TO (I) THE ACCURACY OF ANY RECORDS MAINTAINED BY A SECURITIES DEPOSITORY; (II) THE 63 PAYMENT BY A SECURITIES DEPOSITORY OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL, PURCHASE PRICE, INCLUDING PREMIUM, IF ANY, OR INTEREST ON THE BONDS; (III) ANY NOTICE WHICH IS PERMITTED OR REQUIRED TO BE GIVEN TO BENEFICIAL OWNERS OR (IV) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY A SECURITIES DEPOSITORY OR ITS NOMINEE AS BONDOWNER. The Authority may elect to discontinue such book-entry-only system and upon the discontinuance of such book-entry-only system, Bond certificates are required to be delivered in physical and registered form to the Bondowners or their designees, according to the terms of the Indenture. Upon the institution of any Rate Period after such discontinuance, the Authority upon the direction of the Company may direct that the Bonds shall be held as book-entry-only Bonds by notification to the Trustee, the Paying Agent, the Tender Agent and the Remarketing Agents of its intention to reinstitute the book-entry-only system. Upon receipt of such notice, the Trustee shall notify owners of such Bonds that such Bonds shall be registered in a bookentry-only system with DTC or its nominee or such alternative Securities Depository as the Authority shall appoint. Upon or before the date specified in such notice, such owners shall surrender their Bond certificates to the Trustee or Tender Agent to have their beneficial ownership interest in the Bonds registered under the book-entry-only system described herein. If any Bondowner fails to surrender any such certificate to the Trustee or Tender Agent, such Bondowner shall remain the Registered Owner of such Bond; provided, however, that such Registered Owner shall have no right to transfer or tender such Bond without first surrendering such Bond for registry in the book-entry-only system. If, during any period that a Securities Depository, including DTC or its nominee, is the Registered Owner of the Bonds, (a) such Securities Depository determines to discontinue providing its service with respect to the Bonds by giving notice to the Authority and the Trustee and discharging its responsibilities with respect thereto under applicable laws, and the Authority fails to appoint a successor Securities Depository for the Bonds, or (b) the Authority at the direction of the Company determines to discontinue the book-entry-only system through such Securities Depository, then Bond certificates are required to be delivered in physical and registered form to the Beneficial Owners or their designees, according to the terms of the Indenture. Each Beneficial Owner, upon delivery of certificates held in the Beneficial Owner's name, will become the Registered Owner of that portion of the Bonds. In the event that the book-entry-only system is discontinued and the Beneficial Owners become Registered Owners of the Bonds, the provisions applicable to such Registered Owners shall apply. In connection with any notice or other communication to be provided to Bondowners pursuant to the Indenture by the Authority or the Trustee with respect to any consent or other action to be taken by Bondowners, the Authority or the Trustee, as the case may be, shall establish a record date for such consent or other action and give the nominee or 64 Securities Depository notice of such record date not less than fifteen calendar days in advance of such record date to the extent possible. The Authority and the Trustee are hereby authorized to enter into any arrangements determined necessary or desirable with any Securities Depository in order to effectuate this Section and both of them shall act in accordance with the Indenture and any such agreement. Without limiting the generality of the foregoing, any such arrangements may alter the manner of effecting delivery of Bonds and the transfer of funds for the payment of Bonds to the Securities Depository. Section 2.12. Persons Treated as Owners. The Authority, the Trustee, the Tender Agent and any Paying Agent may, for all purposes, deem and treat the Registered Owner of any Bond as the absolute owner of such Bond whether or not such Bond is overdue, and neither the Authority nor the Trustee nor the Tender Agent nor the Paying Agent shall be affected by any notice to the contrary. Payment made to the Registered Owner of any Bond for the purpose of such payment in accordance with the provisions of this Section 2.12 shall be valid and effectual, to the extent of the sum or sums so paid, to satisfy and discharge the liability upon such Bond in respect of which such payment was made. Section 2.13. Exchange of Bonds. So long as any of the Bonds remain outstanding, the Authority shall make all necessary provisions to permit the exchange of Bonds at the Corporate Trust Office of the Trustee. Bonds, upon surrender thereof at the Corporate Trust Office of the Trustee with a written instrument requesting such exchange satisfactory to the Trustee duly executed by the Registered Owner or his or her representative duly authorized in writing, may be exchanged for an equal aggregate principal amount of Bonds of any other authorized denominations, in an aggregate principal amount equal to the principal amount of the Bonds so surrendered. Section 2.14. Payment For and Limitations on Exchanges and Transfers. In all cases in which the right of exchanging or registering the transfer of Bonds is exercised, the Authority shall execute and the Trustee shall authenticate and deliver Bonds in accordance with the provisions hereof. All Bonds surrendered for registration of transfer or exchange shall forthwith be cancelled by the Trustee. For every such registration of transfer or exchange of Bonds, the Trustee may charge an amount sufficient to reimburse it for any tax, fee or other governmental charge required to be paid with respect to such registration of transfer or exchange which, if not resulting in a change in Bondowner, shall be paid by the Company pursuant to the Participation Agreement. The cost of preparing each new Bond upon each registration of transfer or exchange, and any other expenses (except any applicable tax, fee or other governmental charge) of the Authority or the Trustee incurred in connection with such 65 registration of transfer or exchange shall be paid by the Company pursuant to the Participation Agreement. Section 2.15. Endorsement of Certificate of Authentication on Bonds. No Bond shall be secured hereby or entitled to the benefit of the Indenture or be valid or obligatory for any purpose unless there shall be endorsed on such Bond a certificate of authentication, substantially in the form prescribed in the Indenture, executed by the Trustee or the Tender Agent; and such certificate on any Bond issued by the Authority shall be conclusive evidence and the only competent evidence that such Bond has been duly authenticated and delivered hereunder. The Trustee's certificate of authentication on any Bond shall be deemed to have been executed by it if signed by an authorized officer of the Trustee or the Tender Agent, but it shall not be necessary that the same officer sign the certificate of authentication on all of the Bonds issued hereunder. Section 2.16. Cancellation of Bonds. Upon the surrender to the Trustee of any temporary or mutilated Bonds, or Bonds transferred or exchanged for other Bonds, or Bonds paid at maturity or upon defeasance in accordance with Article XIV or otherwise delivered to the Trustee for cancellation, the same shall forthwith be cancelled and may be destroyed by the Trustee in such manner as it deems appropriate and the Trustee shall, if such Bonds are so destroyed, deliver its certificate as to such destruction to the Authority. Section 2.17. Redemption of Bonds. The Bonds shall be subject to optional and mandatory redemption at the times and at the redemption prices set forth in the form of Bonds in the preamble hereto. 66 ARTICLE III SECURITY FOR BONDS; ISSUANCE OF BONDS Section 3.01. Pledge and Assignment Effected by Indenture; Bonds Equally and Ratably Secured. In accordance with the provisions of subsection 8 of Section 1860 of the Act, the pledge and assignment effected by the Indenture shall be valid and binding from the date of execution and delivery of the Indenture, the moneys so pledged and assigned and hereafter received by the Authority shall be subject to the lien of such pledge and assignment without any physical delivery thereof or further act, and such lien shall be a continuing, irrevocable and exclusive first lien and shall be valid and binding as against all parties having claims of any kind in tort, contract or otherwise against the Authority irrespective of whether such parties have notice thereof. In addition to the pledges and assignments set forth above, the Authority hereby further grants to the Trustee the same power as the Authority to enforce from time to time the rights of the Authority set forth in Article III and Section 5.16 of the Participation Agreement, subject to the provisions of the Participation Agreement relating to the amendment thereof. All Bonds issued and to be issued hereunder are, and are to be, to the extent provided in the Indenture, equally and ratably secured by the Indenture without preference, priority or distinction on account of the actual time or times of the authentication or delivery of the Bonds, or any of them, so that, subject to the provisions of Section 9.05, all Bonds at any time outstanding hereunder shall have the same right, lien and preference under and by virtue of the Indenture and shall all be equally and ratably secured hereby with like effect as if they had all been executed, authenticated and delivered simultaneously on the date hereof; provided, however, that Bonds registered in the name of the Company or held or required to be held by the Tender Agent pursuant to Section 2.07 shall not be entitled to any benefit of the Letter of Credit. Section 3.02. Issuance of Bonds. The Bonds shall forthwith be executed by the Authority and delivered to the Trustee for authentication and, upon the written request and authorization to the Trustee signed by an Authorized Officer, the Bonds shall be authenticated by the Trustee or the Tender Agent and shall be delivered to or upon the written order of an Authorized Officer, but only upon the receipt by the Trustee of proceeds (including accrued interest, if any) of sale of the Bonds, of which (i) a sum equal to the accrued interest, if any, paid by the initial purchasers of such Bonds shall be deposited in the Bond Fund and (ii) the balance thereof shall be deposited in the Construction Account of the Project Fund. Prior to, or simultaneously with, the authentication and delivery of the Bonds, the Trustee shall also receive the following: (a) A copy, certified by the Secretary of the Authority, of the resolution or resolutions adopted by the Authority authorizing the execution and delivery of the Indenture and the Participation Agreement and the issuance, sale, execution and delivery of the Bonds; 67 (b) An original executed counterpart of the Participation Agreement and the Indenture; (c) The Company Note; (d) The Letter of Credit; (e) A copy of resolutions authorizing the execution and delivery of the Participation Agreement, and the issuance, execution and delivery of the Company Note, by the Company, certified by the Secretary or an Assistant Secretary of the Company, under its corporate seal, to have been duly adopted by the Board of Directors of the Company, or the Executive and Finance Committee thereof, and to be in full force and effect on the date of such certification; (f) A copy of the opinion of counsel to the Company delivered to the initial purchasers of the Bonds, together with a letter to the effect that the Trustee may rely on such opinion as if it were addressed to it; (g) An opinion of counsel, who shall be satisfactory to the Trustee, experienced in laws relating to the issuance of bonds of states and their political subdivisions, to the effect that the issuance of the Bonds has been duly authorized and that all conditions precedent to the issuance thereof have been fulfilled; and (h) A copy of an opinion of counsel to the Bank to the effect that the Letter of Credit has been duly authorized, executed and delivered and is a valid and binding obligation of the Bank, together with a letter to the effect that the Trustee may rely on such opinion as if it were addressed to it. 68 ARTICLE IV AMENDMENT OF PARTICIPATION AGREEMENT, COMPANY NOTE AND TAX REGULATORY AGREEMENT Section 4.01. Amendments to Participation Agreement not Requiring Consent of Bondowners. The Authority may, without the consent of the Trustee and without notice to or consent of the Bondowners, enter into any amendment or modification of the rights and interest of the Authority under Article III of the Participation Agreement or Sections 4.04, 4.08, 4.09, 4.10 and 5.16 of the Participation Agreement upon the delivery to the Trustee of an Opinion of Bond Counsel, satisfactory to the Trustee, to the effect that the proposed amendment or modification will not impair the exclusion from gross income for federal income tax purposes of interest on any of the Bonds theretofore issued or otherwise adversely affect the rights and/or interests of the Trustee or any of the owners of the Bonds. The Authority may, without the consent of or notice to the Bondowners, amend or modify any other provision of the Participation Agreement as may be required (i) for the purpose of curing any ambiguity or formal defect or omission in the Participation Agreement; or (ii) in connection with any other change therein which is not prejudicial to the interests of the Trustee or the owners of the Bonds, including but not limited to any change necessary to obtain or maintain a rating of the Bonds from Moody's or S&P. Prior to the expiration of the Letter of Credit, no amendment or modification of the Participation Agreement shall be effective without the prior written consent of the Bank, which consent shall not be unreasonably withheld. Section 4.02. Amendments to Participation Agreement Requiring Consent of Bondowners. Except for amendments or modifications as provided in Section 4.01, the Authority shall not enter into any amendment or modification of the Participation Agreement without the written consent of the Trustee and the owners of not less than two-thirds in aggregate principal amount of the Bonds then outstanding and affected by such modification or amendment. Such consent of Bondowners shall be given and procured in the same manner as provided in Section 13.02 with respect to Supplemental Indentures. No modification or amendment requiring the consent of Bondowners shall be effective unless the required consent of Bondowners is obtained and such modification is not prejudicial to the interests of the Trustee. Notwithstanding anything to the contrary contained in the Indenture or the Participation Agreement, the Authority shall not agree to any amendment, change or modification of, or any waiver, discharge or termination of, any of the provisions of the 69 Participation Agreement in any respect which would impair the exclusion from gross income for federal income tax purposes of interest on any of the Bonds. Prior to the expiration of the Letter of Credit, no amendment or modification of the Participation Agreement shall be effective without the prior written consent of the Bank, which consent shall not be unreasonably withheld. Section 4.03. Amendments to Company Note. Except for such amendments or modifications of the Company Note as may be required for the purpose of curing any ambiguity or formal defect or omission in the Company Note, or in connection with any other change therein which, in the judgment of the Trustee, is not prejudicial to the interests of the Trustee or the Bondowners, the Trustee shall not enter into any amendment or modification of the Company Note without obtaining the prior written consent of the owners of not less than two-thirds in aggregate principal amount of the Bonds then outstanding. No such modification or amendment shall be made which will affect the times, amounts and currency of payment of the principal of and premium, if any, and interest on the Company Note without the consent of the owners of all Bonds then outstanding. The Trustee shall consent to any such proposed action requiring the consent of the owners of the Bonds if the required consent of the owners of the Bonds is obtained; provided that the Trustee may, but shall not be obligated to consent to any such proposed action which affects its own rights, powers, duties or obligations hereunder. Such consent of Bondowners shall be given and procured in the same manner as provided in Section 13.02 with respect to Supplemental Indentures. Prior to the expiration of the Letter of Credit, the Trustee shall not consent to any amendment or modification of the Company Note without the prior written consent of the Bank, which consent shall not be unreasonably withheld. Section 4.04. Amendments to Tax Regulatory Agreement. The Authority may, without the consent of the Trustee and without notice to or consent of the Bondowners, enter into any amendment or modification of the Tax Regulatory Agreement upon the delivery to the Trustee of an Opinion of Bond Counsel to the effect that the proposed amendment or modification will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds. 70 ARTICLE V PROJECT FUND; REBATE FUND Section 5.01. Creation and Custody of Project Fund. 1. There is hereby created a Project Fund, which shall be held by the Trustee. There shall be paid into the Project Fund the amount required to be so paid by the provisions of Section 3.02. 2. There is hereby established within the Project Fund two (2) separate trust accounts to be known as the "Construction Account" and the "Investment Proceeds Account." All income or gain on moneys deposited in the Construction Account or the Investment Proceeds Account shall be deposited in the Investment Proceeds Account. Section 5.02. Application of Moneys in the Project Fund. 1. The moneys in the Construction Account, until applied in payment of any item of the Cost of Construction of the Project, shall be held by the Trustee and, pending such application, shall be subject to a claim and charge in favor of the owners of the Bonds and for the further security of such owners until paid out as herein provided. The moneys in the Investment Proceeds Account, until applied in accordance with the provisions of Section 5.02.2, shall be held by the Trustee, but shall not be subject to a claim or charge in favor of the Bondowners and shall be applied solely in accordance with the provisions of this Article and shall not be available for the payment of Bonds within the meaning of the Indenture. Pending such application, such moneys may be invested in accordance with the provisions of Article VII. 2. On the first Business Day following each Computation Period, the Trustee shall withdraw from the Investment Proceeds Account and deposit in the Rebate Fund an amount such that the amount held in the Rebate Fund after such deposit, as certified to the Trustee by an Authorized Company Representative, is equal to the Rebate Amount calculated as of the last day of the Computation Period, as certified to the Trustee by an Authorized Company Representative. Any remaining balance in the Investment Proceeds Account shall be deposited in the Construction Account. In the event of any deficiency, the balance required shall be provided by the Company pursuant to Section 7.4 of the Tax Regulatory Agreement. Computations of the amounts on deposit in each fund hereunder, descriptions of each investment held therein, and computations of the Rebate Amount shall be furnished to the Trustee by the Company in accordance with Section 7.4 of the Tax Regulatory Agreement. Section 5.03. Construction Account Requisitions. The Trustee is authorized and directed to make payments from the Construction Account to pay the Cost of Construction of the Project, upon the written order of the Company, but only upon receipt from time to time of requisitions signed by an Authorized Company Representative in the form of EXHIBIT B attached hereto upon which the Trustee may conclusively rely, stating with respect to each payment to be made for the Project: 71 (a) the requisition number; (b) the items of the Cost of Construction of the Project to which the disbursement relates or has been allocated and the nature of the disbursement; (c) the payee, with address, which may be the Company in the case of reimbursements for advances and payments made or costs incurred or work done by the Company; (d) the amount of such payment; (e) that the disbursement will be used to pay, or reimburse the Company for, a Cost of Construction of the Project and that it is a proper charge against the Construction Account; (f) that none of the items for which the disbursement is requested has formed the basis for any disbursement theretofore made from the Construction Account; (g) that the disbursement will not be used in a manner that would result in a violation of any representation, warranty or covenant contained in Article III of the Tax Regulatory Agreement or Section 5.04 of the Participation Agreement; (h) that no event of default under the Participation Agreement shall have occurred and be continuing and that no event which with the lapse of time alone would become such a default has occurred and is continuing; and (i) that no event of default under the Indenture shall have occurred and be continuing and that no event which with the lapse of time alone would become such a default has occurred and is continuing. Section 5.04. Retention of Requisitions. For seven years from the dates thereof the Trustee shall retain in its possession all requisitions received by it as herein required, subject to the inspection during normal banking hours, of the Authority, its agents and representatives and the Company and, upon reasonable request, inspection during normal banking hours of the Bondowners and their representatives, in any case, at the Corporate Trust Office. Section 5.05. Certification of Completion of the Project. On the date when all Costs of Construction expected to be paid from the Project Fund have been paid, the Trustee and the Authority shall be furnished promptly with a certificate of an Authorized Company Representative, which certificate shall contain an appropriate direction to the Trustee with respect to any amount in the Project Fund which is to be disposed of as provided in Section 5.06. 72 Section 5.06. Disposition of Balance Remaining in Project Fund. All moneys remaining in the Project Fund after the certificate referred to in Section 5.05 is furnished shall, at the written direction of an Authorized Company Representative, be deposited in a segregated account in the Bond Fund, or paid to the Bank to reimburse the Bank for any unreimbursed draw under the Letter of Credit relating to the purchase of Bonds tendered or deemed tendered pursuant to Section 2.05 (and, pending any such application, be invested in securities in accordance with the direction of an Authorized Company Representative delivered pursuant to Article VII, which direction shall confirm that such investment will not be in violation of the covenants and warranties made to the Authority by the Company in Section 7.1 of the Tax Regulatory Agreement), or deposited in the Rebate Fund. Section 5.07. Creation and Custody of Rebate Fund. There is hereby created a Rebate Fund, which shall be held by the Trustee. There shall be paid into the Rebate Fund the amount required to be so paid under Section 5.02.2. All income or gain on moneys deposited in the Rebate Fund shall be deposited in the Rebate Fund. The Rebate Fund and the amounts deposited therein shall not be subject to a claim and charge in favor of the Trustee or any owners of Bonds and shall be applied solely in accordance with the provisions of this Article and shall not be available for the payment of Bonds within the meaning of the Indenture. Section 5.08. Application of Moneys in the Rebate Fund. 1. Amounts deposited in the Rebate Fund shall be applied solely to pay Costs of Construction described in clause (i) of the definition of Costs of Construction in accordance with subsection 2 of this Section 5.08 except to the extent otherwise permitted by subsection 3 of this Section 5.08. 2. The Trustee, upon receipt of written instructions from an Authorized Company Representative in accordance with Section 7.3 of the Tax Regulatory Agreement, shall pay to the United States out of amounts in the Rebate Fund (a) not later than thirty (30) days after the end of each five-year period following the date of issuance of the Bonds, an amount certified to the Trustee by an Authorized Company Representative such that, together with amounts previously paid, the total amount paid to the United States is equal to 90% of the Rebate Amount calculated as of the end of the most recent Computation Period, and (b) not later than 30 days after the date on which all of the Bonds have been paid or redeemed, 100% of the Rebate Amount as of the end of the final Computation Period as certified to the Trustee by an Authorized Company Representative. 3. In the event that on the first day of any Bond Year the amount on deposit in the Rebate Fund exceeds the Rebate Amount, the Trustee, upon the receipt of written instructions from an Authorized Company Representative specifying the amount of such excess, shall withdraw such excess amount and prior to the Completion Date, deposit it in the Investment Proceeds Account of the Project Fund, or, after the Completion Date, deposit it in the Bond Fund. 73 Pending such application, such moneys may be invested in accordance with instructions from the Company given in accordance with the provisions of Article VII. 74 ARTICLE VI BOND FUND; LETTER OF CREDIT Section 6.01. Creation and Custody of the Bond Fund. There is hereby created a Bond Fund, which shall be held in trust by the Trustee for the benefit of the Bondowners and shall be subject to a lien and charge in favor of the Bondowners. Neither the Company nor the Authority shall have any interest in, or ability to withdraw funds from, the Bond Fund. There are hereby created within the Bond Fund two separate trust accounts to be designated as the Debt Service Account and the Letter of Credit Account. The moneys in each such account shall not in any way be commingled with funds in any other trust account maintained by the Trustee. The Trustee shall maintain such records for deposits made into the Debt Service Account so that the Trustee may at all times ascertain the source and dates of deposit of the moneys in the Debt Service Account. The Authority hereby authorizes and directs the Trustee to withdraw in accordance with Section 6.03 sufficient funds from the Bond Fund to pay the principal of and premium, if any, and interest on the Bonds as the same become due and payable and to make such funds so withdrawn available to the Paying Agents, if any, for the purpose of paying such principal, premium, if any, and interest. Section 6.02. Payments into the Bond Fund. The Trustee shall deposit in the Bond Fund for credit to the Debt Service Account as and when received (1) the amount, if any, of the proceeds of sale of the Bonds, to the extent required by this Indenture, (2) all Company Note Payments, (3) the amounts remaining in the Project Fund after the certificate referred to in Section 5.05 is furnished, (4) all interest and other income received on investments of moneys on deposit in the Bond Fund, as provided in Section 7.03, (5) any funds made available pursuant to Section 8.05, (6) any proceeds of refunding obligations and (7) any amount paid into the Bond Fund pursuant to Section 5.08.3. There shall be deposited in the Letter of Credit Account all moneys drawn by the Trustee under the Letter of Credit and received by the Trustee for the purposes of paying principal of, premium, if any, and interest on, the Bonds. In the event that the Bonds are held by a Securities Depository, moneys drawn under the Letter of Credit may be paid directly to the Securities Depository, in which event, proper notification concerning such payment shall be sent to the Trustee and the Paying Agent. Section 6.03. Application of Moneys in the Bond Fund. Except as otherwise provided in Sections 6.04 and 14.01.3, moneys on deposit in the Bond Fund shall be used solely for the payment of the principal of and premium, if any, and interest on the Bonds as the same shall become due and payable either at maturity, upon redemption, by declaration or otherwise. Moneys for such payments of the principal of, premium, if any and interest on the Bonds shall be derived from the following sources in the following order of priority: 75 (i) moneys drawn under the Letter of Credit and either deposited in the Letter of Credit Account or, if necessary during any Rate Period when the Bonds are held by a Securities Depository, paid to such Securities Depository; (ii) moneys paid into the Bond Fund pursuant to clause (1) of Section 6.02 in respect of accrued interest which constitute Available Moneys and proceeds from the investment thereof that constitute Available Moneys which moneys shall be used to pay interest on the Bonds; (iii) proceeds of the sale of refunding obligations which constitute Available Moneys and proceeds from the investment thereof that constitute Available Moneys; (iv) moneys deposited into the Bond Fund pursuant to clause (3) or clause (7) of Section 6.02 which constitute Available Moneys and proceeds from the investment thereof that constitute Available Moneys; (v) Company Note Payments which constitute Available Moneys and proceeds from the investment thereof that constitute Available Moneys; (vi) to the extent permitted by Section 8.05, moneys deposited into the Bond Fund pursuant to clause (5) of Section 6.02, and proceeds from the investment thereof that constitute Available Moneys; and (vii) Company Note Payments which do not constitute Available Moneys and proceeds from the investment thereof. The Trustee hereby agrees to draw moneys under the Letter of Credit to be applied to the payment of principal of, premium, if any, or interest on, the Bonds. If and to the extent moneys under clause (i) of the preceding paragraph are insufficient or unobtainable therefor, the Trustee shall apply any other moneys that are available therefor, in the preceding order of priority, including moneys described in clauses (vi) and (vii) of the preceding paragraph, to the payment of the principal of, premium, if any, and interest on, the Bonds. After the Letter of Credit has expired, any moneys held by the Trustee in the Bond Fund may be used to make any payment of the principal of, premium, if any, and interest on, the Bonds. Prior to the expiration of the Letter of Credit, moneys under clauses (iii), (iv) and (v) of this Section 6.03 shall not be used to pay the redemption price of any Bond redeemed pursuant to the direction of the Company, unless the Trustee shall have received the written direction specified in Section 8.01 providing for such redemption at least 123 days prior to such redemption date. If on the due date of principal and premium, if any, or interest with respect to Bonds, the amounts on deposit in the Bond Fund (except amounts held by the Trustee pursuant 76 to Section 6.04) are not sufficient to pay in full all such principal of and premium, if any, and interest on the Bonds, such amounts shall be applied to the payment of such principal, premium and interest in accordance with the provisions of Section 10.09. Section 6.04. Non-presentment of Bonds. In the event any Bonds (or any portion thereof) shall not be presented for payment when the principal thereof and redemption premium, if any, thereon becomes due, either at maturity or at the date fixed for redemption thereof (including, for such purpose, any conversion to a Fixed Rate) or otherwise, if funds sufficient to pay such Bonds (or portions thereof) and redemption premiums, if any, shall be held by the Trustee for the benefit of the owner or owners thereof, all liability of the Authority to the owner or owners thereof for the payment of such Bonds (or portions thereof) and redemption premiums, if any, shall forthwith cease, terminate and be completely discharged, and thereupon it shall be the duty of the Trustee to hold such funds (without investment thereof) in the Bond Fund for a period of at least two years, without liability for interest thereon, for the benefit of the owner or owners of such Bonds who shall thereafter be restricted exclusively to such funds for any claim of whatever nature on such owner's or owners' part under the Indenture or on, or with respect to, such Bonds. On August 1 of each year in which the Bonds are outstanding, the Trustee will pay any funds (other than moneys resulting from a draw on the Letter of Credit) which it has then held in respect of Bonds not presented for payment for two years or more to the Company, and thereafter the owners of such Bonds shall look only to the Company for the payment thereof and then only to the extent of the amount so received without any interest thereon, and the Authority, the Trustee and the Paying Agent shall have no responsibility with respect to such moneys. Section 6.05. (Intentionally Deleted). Section 6.06. Trustee to Notify Authority and Company of Funds in Bond Fund. The Trustee, upon the written request of the Company or the Authority, shall notify the Company and the Authority of the amount of funds on deposit in the Bond Fund at the time of such request. Section 6.07. Letter of Credit. (1) The Trustee shall draw moneys under the Letter of Credit in accordance with the terms thereof as shall be necessary to make timely payments of principal of, and interest on, the Bonds required to be made from the Bond Fund and to make timely payments required to be made pursuant to, and in accordance with, Section 2.05. In connection with each such drawing, the Trustee shall timely prepare and present all certificates, drafts and other documents which are required by the terms of the Letter of Credit to effect payment thereunder. The Trustee shall give immediate telephonic or facsimile (confirmed in writing) notice to the Company of a draw under the Letter of Credit and the amount thereof. Nothing in this Section 6.07 shall require the Trustee to draw moneys under the Letter of Credit for the payment of Bonds registered in the name of, or held beneficially for, the Company or the Bank or any Bonds held or required to be held by the Tender Agent for the 77 account of the Company or the Bank pursuant to the Indenture to the extent not permitted by the Letter of Credit. (2) If at any time on or prior to the thirty-seventh calendar day next preceding the scheduled expiration date of a Letter of Credit, there shall have been delivered to the Trustee (a) an Alternate Credit Facility, (b) an Opinion of Bond Counsel stating that the delivery of such Alternate Credit Facility to the Trustee is authorized under the Participation Agreement and the Indenture and complies with the terms of the Participation Agreement and the Indenture and (c) written evidence satisfactory to the Trustee from Moody's, if the Bonds are then rated by Moody's, and from S&P, if the Bonds are then rated by S&P, in each case to the effect that such Rating Agency has reviewed the proposed Alternate Credit Facility and that the substitution of the proposed Alternate Credit Facility for the Letter of Credit will not, by itself, result in a reduction or withdrawal of its rating or ratings of the Bonds from those which then prevail, then the Trustee shall accept such Alternate Credit Facility and surrender the previously held Letter of Credit to the Bank, in accordance with the terms of such Letter of Credit, for cancellation. (3) The Company may substitute an Alternate Credit Facility which has the effect of lowering any then prevailing rating on the Bonds or with respect to which the Company will not seek a rating from a Rating Agency then rating the Bonds only if (i) notice of mandatory purchase pursuant to Section 2.05(e)(1) shall have been given and such Alternate Credit Facility shall take effect on or prior to the date on which the Bonds are purchased pursuant to Section 2.05(e)(1) and (ii) such substitution will result in a rating of not less than the third highest rating category of a Rating Agency. Upon delivery to the Trustee of: (a) such Alternate Credit Facility, (b) an Opinion of Bond Counsel stating that the delivery of such Alternate Credit Facility is authorized under the Participation Agreement and the Indenture and complies with the terms thereof, and (c) written evidence satisfactory to the Trustee from a Rating Agency that delivery of such Alternate Credit Facility will not result in a rating of less than the third highest rating category of such Rating Agency, currently "A" in each case, the Trustee shall surrender the Letter of Credit previously in effect, promptly following any drawing required to be made on such Letter of Credit on the date the Bonds are so purchased. (4) If at any time, the Letter of Credit shall expire because there shall cease to be any Bonds outstanding hereunder, or because the Fixed Rate Conversion Date shall have occurred, then the Trustee shall surrender the Letter of Credit to the Bank for cancellation after having made any necessary drawing in accordance with this Section 6.07 and with the terms of the Letter of Credit. The Trustee shall comply with the procedures set forth in the Letter of Credit relating to the termination thereof. (5) Prior to the expiration of the Letter of Credit, the Trustee shall give notice to the owners of the Bonds, in the name of the Authority, of such expiration, which notice shall (a) specify the date of the expiration of the Letter of Credit and (b) specify the last time and date prior to such expiration on which Bonds must be delivered and the notice given to the owners of the Bonds for the purchase of Bonds pursuant to tenders as provided in Section 2.05, and the 78 places where such Bonds must be delivered for such purchase, and (c) either (i) if the requirements of subsection 2 of this Section 6.07 have not been met, state that the Bonds shall be subject to mandatory tender for purchase at the Purchase Price thereof on the Mandatory Purchase Date or (ii) state the name of the issuer of the Alternate Credit Facility. Such notice shall be given by first class mail not later than thirty (30) days prior to the Mandatory Purchase Date. (6) Notwithstanding anything in the Indenture to the contrary, in the event the Bonds are held by a Securities Depository under Section 2.11(b), the Trustee may instruct the Bank to pay amounts drawn thereunder directly to the Securities Depository, as Registered Owner of the Bonds, in which event, proper notification concerning such payment shall be sent to the Trustee and the Paying Agent. 79 ARTICLE VII SECURITY FOR AND INVESTMENT OF MONEYS Section 7.01. Moneys Held in Trust. All moneys from time to time received by the Trustee and held in any fund created under the Indenture (other than the Rebate Fund), or otherwise held for the benefit of the owners, shall, except as otherwise provided herein, be held in trust by the Trustee for the benefit of the owners from time to time of the Bonds entitled to be paid therefrom. Section 7.02. Uninvested Moneys Held by the Trustee. All moneys received by the Trustee hereunder and not invested by the Trustee pursuant to the provisions of this Article VII, to the extent not insured by the Federal Deposit Insurance Company or other federal agency, shall be deposited with a member bank of the Federal Reserve System or with the Trustee, or with a national or state bank or a trust company which has a combined capital and surplus aggregating not less than $100,000,000; provided, however, that any such moneys drawn under the Letter of Credit and any moneys held under Section 6.04 shall be deposited with the Trustee or be fully insured by the Federal Deposit Insurance Company. Section 7.03. Investment of, and Payment of Interest on, Moneys. Moneys on deposit to the credit of the Project Fund or the Rebate Fund may be retained uninvested as trust funds. Such moneys shall, at the written direction of an Authorized Company Representative, be invested by the Trustee in (a) any obligation issued or guaranteed by, or backed by the full faith and credit of, the United States of America (including any certificates or any other evidence of an ownership interest in any such obligation or in specified portions thereof, which may consist of specified portions of the principal thereof or the interest thereon), (b) deposit accounts in, or certificates of deposit issued by, and bankers' acceptances of, any bank, trust company or national banking association which is a member of the Federal Reserve System (which may include the Trustee), having capital stock and surplus aggregating not less than $100,000,000, (c) obligations issued or guaranteed by any Person controlled or supervised by and acting as an instrumentality of the United States of America pursuant to the authority granted by the Congress of the United States, (d) commercial paper rated in the highest investment grade or next highest investment grade by Moody's or S&P, (e) obligations rated not less than "A" or equivalent by Moody's or S&P issued or guaranteed by any state of the United States of America or the District of Columbia, or any political subdivision, agency or instrumentality of any such state or District, or issued by any corporation, (f) obligations of a public housing authority fully secured by contracts with the United States of America, rated at least "A" or better by a Rating Agency, (g) shares of a money market fund, the sole assets of which are comprised of obligations described in (a) above or (h) shares of a money market fund which is rated "Prime- 1" by Moody's or "AAAm" or "AAAm-g" by S&P. Moneys on deposit to the credit of the Bond Fund, other than moneys on deposit in the Letter of Credit Account, subject to Section 6.04, shall without any instruction from the 80 Company or the Authority be invested in shares of a money market fund, the sole assets of which are comprised of obligations issued or guaranteed by, or backed by the full faith and credit of, the United States of America (including any certificates or any other evidence of an ownership interest in any such obligation or in specified portions thereof, which may consist of specified portions of the principal thereof or the interest thereon and which certificates or other evidence of an ownership interest must be rated by the Rating Agency then rating the Bonds at least as high as the obligations issued or guaranteed by, or backed by the full faith and credit of, the United States of America); provided that to the extent that such investments may be unavailable the Trustee may hold such funds uninvested. Notwithstanding anything in the preceding paragraph, Available Moneys held under the Indenture shall be invested by the Trustee, except to the extent such Available Moneys are permitted to be held uninvested under the Indenture, in any obligation issued or guaranteed by, or backed by the full faith and credit of, the United States of America (including any certificates or any other evidence of an ownership interest in any such obligation or in specified portions thereof, which may consist of specified portions of the principal thereof or the interest thereon and which certificates or other evidence of an ownership interest must be rated by the Rating Agency then rating the Bonds at least as high as the obligations issued or guaranteed by, or backed by the full faith and credit of, the United States of America), which matures on or prior to the redemption date. In no event shall the Trustee invest moneys on deposit to the credit of the Bond Fund in any obligation or security issued or guaranteed by the Company or the Authority or any obligation or security issued or guaranteed by any Person known to a Responsible Officer of the Trustee to be an Affiliate of either the Company or the Authority. Investments of moneys on deposit to the credit of the Project Fund, the Bond Fund and the Rebate Fund pursuant to this Section 7.03 shall have maturity dates, or shall be subject to redemption at the option of the Trustee, on or prior to the respective dates on which the moneys invested therein are payable for the purposes of such Funds. The securities purchased with the moneys in each such Fund or in any account or sub-account thereof shall be deemed a part of such Fund or account or sub-account. The interest, including realized increment on securities purchased at a discount, received on all such securities in any Fund or any account or sub-account thereof shall be deposited by the Trustee to the credit of such Fund or account or sub-account, except as otherwise provided in Section 5.01.2. The Trustee shall not be liable or responsible for any loss resulting from any such investment or resulting from the redemption, sale or maturity of any such investment as herein authorized or for monitoring or ensuring the Company's compliance with its covenants contained in the Tax Regulatory Agreement. The Company shall be responsible for, and provide additional funds as necessary in connection with, any and all losses on investment of moneys on deposit in the Bond Fund. If at any time it shall become necessary that some or all of the securities purchased with the moneys in either such Fund be redeemed or sold in order to raise the moneys necessary to 81 comply with the provisions of the Indenture, the Trustee shall effect such redemption or sale, employing in the case of a sale any commercially reasonable method of effecting such sale. Any direction to invest moneys given orally under the terms of the Indenture shall be confirmed in writing. Moneys drawn on the Letter of Credit shall be retained uninvested by the Trustee or the Tender Agent, as appropriate, and shall not bear interest. Section 7.04. Disposition of Amounts After Payment of Bonds. Any amounts determined by the Trustee to be remaining in the Funds created under the Indenture, other than amounts held in the Rebate Fund, after payment in full, or provision for payment in full, of principal of and premium, if any, and interest on all the Bonds, in accordance with the provisions of the Indenture, and payment of all the fees, charges and expenses of the Authority, the Trustee, the Tender Agent, the Indexing Agent, the Remarketing Agents and the Paying Agent in accordance with the Indenture and the Participation Agreement and any amounts required to be paid to the United States of America pursuant to the Tax Regulatory Agreement, shall be paid to the Bank; provided, however, that on or after the Fixed Rate Conversion Date and solely with respect to moneys not resulting from a draw on the Letter of Credit and not constituting remarketing proceeds, such amounts that would be payable to the Bank pursuant to this Section 7.04 shall, at the written direction of an Authorized Company Representative, be paid to the Company or, if the Bank has not been paid in full under the Reimbursement Agreement, to the Bank. 82 ARTICLE VIII REDEMPTION OF BONDS Section 8.01. Bonds to be Redeemed Only in Manner Provided in Article VIII. Any redemption of all or any part of the Bonds which are subject to redemption shall be made in the manner provided in this Article VIII. Bonds which are subject to redemption at the option of the Authority exercised upon the direction of an Authorized Company Representative, shall be called by the Trustee for redemption in the manner provided in this Article VIII upon receipt by the Trustee, at least forty-five (45) days prior to the redemption date, of an executed counterpart of the written direction of an Authorized Company Representative to the Authority and the Trustee providing for such redemption. Such written direction shall specify the principal amount of such Bonds or portions thereof so to be called for redemption, the applicable redemption price, the applicable redemption date and the provision or provisions of the Indenture pursuant to which such Bonds are to be called for redemption. The foregoing provisions of this paragraph shall not apply in the case of any mandatory redemption of Bonds in accordance with the Indenture. The moneys necessary for any redemption of Bonds shall be made available to the Trustee on or prior to the date fixed for redemption. The Trustee is hereby authorized and directed to apply such moneys in accordance with Section 6.03 to the payment of the Bonds or portions thereof called for redemption, together with accrued interest thereon to the redemption date. Upon the giving of notice and the deposit of funds for redemption, interest on the Bonds or portions thereof thus called shall no longer accrue on and after the date fixed for redemption. No payment shall be made by the Trustee upon any Bond or portion thereof called for redemption until such Bond or portion thereof shall have been delivered for payment or cancellation or the Trustee shall have received the items required by Section 2.08 with respect to any mutilated, lost, stolen or destroyed Bond. Notwithstanding anything in the Indenture to the contrary, no redemption at the option of the Authority which requires a redemption price in excess of par to be payable shall be exercisable unless (i) a Letter of Credit providing for payment of such premium together with other amounts owed as part of redemption price shall be in effect and shall not be scheduled to expire by its terms before the specified redemption date or (ii) other Available Moneys shall be held by the Trustee under the Indenture and are available for payment of such premium. 83 Section 8.02. Redemption of Less Than all Bonds. If less than all of the Bonds shall be called for redemption, the particular Bonds or portions of Bonds to be redeemed shall be selected by the Trustee by lot or in such other manner as the Trustee in its discretion may deem proper in order to assure each owner of Bonds a fair opportunity to have such owner's Bond or Bonds or portions thereof selected; provided, however, that the portion to be redeemed of any Bond of a denomination more than the then-applicable minimum authorized denomination shall be such minimum authorized denomination or an integral multiple thereof, and that in selecting portions of such Bonds for redemption, the Trustee shall treat each such Bond as representing that number of Bonds of such minimum authorized denomination obtained by dividing the principal amount of such Bond by such minimum authorized denomination; provided further that the Trustee shall first select any Bonds registered in the name of the Company or the Bank and then the remaining Bonds. Section 8.03. Notice of Redemption. In the case of any redemption pursuant to Section 2.17, the Trustee shall give in its own name or in the name of the Authority, notice mailed by first-class mail to the Registered Owners of the Bonds to be redeemed, addressed to him or her at his or her address as it appears on the Bond Register at least thirty (30) days before the date fixed for redemption, which notice shall state that Bonds properly identified have been called for redemption and, in the case of Bonds to be redeemed in part only, the portion of the principal amount thereof that has been called for redemption (or if all the outstanding Bonds are to be redeemed, so stating, in which event such identification may be omitted), that they will be due and payable on the date fixed for redemption (specifying such date) upon surrender thereof at the Corporate Trust Office or, at the option of the owner, at the corporate trust office of the Paying Agent, if any, for such Bonds, at the applicable redemption price (specifying such price) together with accrued interest to such date, and that all interest on the Bonds, or portions thereof, so to be redeemed will cease to accrue on and after such date. Failure to give any required notice of redemption as to any particular Bonds will not affect the validity of the call for redemption of any Bonds in respect to which no such failure occurs. Any notice mailed as provided in this Section shall be conclusively presumed to have been duly given, whether or not the Registered Owner actually receives the notice. Section 8.04. Rights of Owners of Bonds Called for Redemption Limited to Redemption Price and Accrued Interest. If notice of redemption has been given as provided in Section 8.03, the Bonds or portions thereof called for redemption shall be due and payable on the date fixed for redemption at the redemption price, together with accrued interest to the date fixed for redemption. Payment of the redemption price, together with accrued interest, shall be made by the Trustee upon surrender of such Bonds. If there shall be called for redemption less than the entire principal amount of a Bond, the Authority shall execute and deliver and the Trustee shall authenticate, upon surrender of such Bond, and without charge to the owner thereof, Bonds for the unredeemed portion of the principal amount of the Bond so surrendered. Subject to the deposit with the Trustee of amounts necessary for the redemption of such Bonds as provided in Section 8.01, from and after the date fixed for redemption 84 designated in such notice, notwithstanding that any Bonds so called for redemption in whole or in part shall not have been surrendered for cancellation, no further interest shall accrue upon the principal of any of the Bonds or portions thereof so called for redemption; and such Bonds or portions thereof so to be redeemed shall cease to be entitled to any lien, benefit or security under the Indenture and the owners thereof shall have no rights in respect of such Bonds or portions thereof except to receive payment of the redemption price thereof and unpaid interest accrued to the date fixed for redemption from such amounts deposited with the Trustee which shall be held uninvested by the Trustee in trust for the owner of such Bonds or portions thereof. Section 8.05. Redemption at Demand of the State. In accordance with the provisions of Section 1864 of the Act, the State of New York may, upon furnishing sufficient funds therefor, require the Authority to redeem prior to maturity, as a whole, any issue of Bonds, on any Interest Payment Date not less than twenty years after the date of the original issuance of the Bonds of such issue. The Authority shall deposit any such funds received by it with the Trustee. After the expiration of the Letter of Credit, the Trustee shall deposit such funds in the Bond Fund and, upon notice given as provided in Section 8.03, shall apply such funds to the redemption of such Bonds, at a redemption price equal to the applicable optional redemption price set forth in the Indenture or 105 percent of the principal amount of the Bonds to be redeemed, whichever is less, together with accrued and unpaid interest to the date fixed for redemption, all in the manner provided in this Article VIII. Prior to the expiration of the Letter of Credit, the Trustee shall deposit any such funds received by it in a segregated sub-account in the Debt Service Account of the Bond Fund, and upon notice published in the manner provided in Section 1864 of the Act, shall draw moneys under the Letter of Credit and apply such moneys drawn under the Letter of Credit to the redemption of such Bonds at a redemption price equal to 100 percent of the principal amount of the Bonds to be redeemed, together with accrued and unpaid interest to the date fixed for redemption in the manner specified in the preceding sentence. Upon the application of such moneys drawn under the Letter of Credit, the Trustee shall pay the funds furnished by the State of New York to the Bank with instructions to apply such funds to the reimbursement of the Bank for such moneys drawn under the Letter of Credit. Upon such redemption, the Trustee shall assign the Company Note to or as directed in writing by the Authority. 85 ARTICLE IX PARTICULAR COVENANTS Section 9.01. Payment of Principal of and Interest and Redemption Premium of Bonds. The Authority will promptly pay from the Company Note Payments and other funds held by the Trustee and available therefor the principal of, and the interest on, every Bond issued under and secured by the Indenture and any premium required to be paid for the retirement of said Bonds by redemption, at the places, on the dates and in the manner specified in the Indenture and in said Bonds according to the true intent and meaning thereof, subject, however, to the provisions of Section 1.03. Section 9.02. Performance of Covenants. The Authority will faithfully perform at all times all covenants, undertakings, stipulations and provisions contained in the Indenture, in any and every Bond and in all proceedings of the Authority pertaining thereto. Section 9.03. Further Instruments. The Authority will from time to time execute and deliver such further instruments and take such further action as may be reasonable and as may be required to carry out the purpose of the Indenture; provided, however, that no such instruments or actions shall pledge the credit of the Authority or the State of New York or the taxing power of the State of New York or otherwise be inconsistent with the provisions of Section 1.03. Section 9.04. Inspection of Project Books. All books and documents in the possession of the Authority relating to the Project or the Participation Agreement shall at all times be open to inspection by such accountants or other agents as the Trustee may from time to time designate. Section 9.05. No Extension of Time of Payment of Interest. In order to prevent any accumulation of claims for interest after maturity, the Authority will not directly or indirectly extend or assent to the extension of the time of payment of any claims for interest on any of the Bonds and will not directly or indirectly be a party to or approve any such arrangement by purchasing such claims for interest or in any other manner. In case any such claim for interest shall be extended in violation hereof, such claim for interest shall not be entitled, in case of any default hereunder, to the benefit or security of the Indenture except subject to the prior payment in full of the principal of, and premium, if any, on, all Bonds issued and outstanding hereunder, and of all claims for interest which shall not have been so extended or funded. 86 Section 9.06. Trustee's, Paying Agent's, Indexing Agent's, Tender Agent's and Remarketing Agents' Fees, Charges and Expenses. Pursuant to the provisions of Section 4.05 of the Participation Agreement, the Company has agreed to pay the fees and the expenses of the Trustee, the Paying Agent, the Indexing Agent, the Tender Agent and the Remarketing Agents, in the amounts set forth more fully therein, and the Authority shall have no liability for the payment of any fees or expenses of the Trustee, the Paying Agent, the Indexing Agent, the Tender Agent and the Remarketing Agents. Exclusive of the proceeds of any drawing under the Letter of Credit and any other moneys within the meaning of subdivision (a) of the definition of Available Moneys, the Trustee shall have a first lien with right of payment prior to payment on account of principal of, premium, if any, and interest on any Bond under the Indenture for the fees, charges and expenses of the Trustee. When the Trustee incurs expenses or renders services after the occurrence of an Act of Bankruptcy with respect to the Company, the expenses and the compensation for services are intended to constitute expenses of administration under any federal or state bankruptcy, insolvency, arrangement, moratorium, reorganization or other debtor relief law. The Company shall have no liability to pay any fees, charges or other expenses of the Trustee hereinabove mentioned except from amounts pledged under the Indenture. Section 9.07. Agreement of the State of New York. In accordance with the provisions of subdivision 11 of Section 1860 of the Act, the Authority, on behalf of the State of New York, does hereby pledge to and agree with the owners of the Bonds that the State of New York will not limit or alter the rights and powers vested by the Act in the Authority to fulfill the terms of any contract made with Bondowners, or in any way impair the rights and remedies of such owners, until the Bonds, together with the interest thereon, with (to the extent permitted by law) interest on any unpaid installments of interest, and all costs and expenses in connection with any action or proceeding by or on behalf of such owners, are fully met and discharged. 87 ARTICLE X DEFAULTS AND REMEDIES Section 10.01. Events of Default. In case one or more of the following Events of Default shall have occurred: (a) default in the payment of any installment of interest in respect of any Bond as the same shall become due and payable which default continues for five days; or (b) default in the payment of the principal of or premium, if any, in respect of any Bond as the same shall become due and payable either at maturity, upon redemption, by acceleration or otherwise; or (c) default in the payment of any amount due pursuant to Section 2.05 as the same becomes due and payable which default continues for five days; or (d) an event of default specified in Article VI of the Participation Agreement; or (e) after the expiration of the Letter of Credit, failure on the part of the Authority to duly observe or perform any other of the covenants or agreements on the part of the Authority contained in the Indenture or in any Bond for a period of 90 days after the date on which written notice of such failure, requiring the Authority to remedy the same, shall have been given to the Authority and the Company by the Trustee; or (f) receipt by the Trustee of written notice from the Bank of the occurrence and continuance of an event of default under the Reimbursement Agreement, that the Bank is terminating the Letter of Credit and that the Bank is directing the Trustee to accelerate the Bonds; or (g) receipt by the Trustee of written notice from the Bank on or before the tenth day after a drawing under the Letter of Credit in respect of interest on the Bonds, to the effect that the Bank has not been reimbursed for any such drawing and that the Bank is directing the Trustee to accelerate the Bonds; then, upon (a) the occurrence and continuance of any Event of Default described in clause (a), (b), (c), (d) or (e) of this paragraph, the Trustee may, and at the written request of owners of not less than 25% in aggregate principal amount of Bonds then outstanding shall, or (b) the occurrence of an Event of Default described in clause (f) or (g) of this paragraph the Trustee shall immediately, by written notice given to the Authority, the Governor, the Comptroller, the 88 Attorney General of the State of New York and the Company, declare the principal of all Bonds then outstanding to be due and payable immediately, at which time (unless a Fixed Rate Conversion Date has occurred and the Letter of Credit is no longer in effect) interest shall cease to accrue, and upon such declaration the said principal, together with interest accrued thereon, shall become due and payable immediately at the place of payment provided therein, anything in the Indenture or in the Bonds to the contrary notwithstanding and the Trustee shall give notice thereof to the Authority, the Company, the Tender Agent, the Remarketing Agents and the Bank, and shall give notice thereof by mail to all owners of outstanding Bonds. Prior to the expiration of the Letter of Credit, the Trustee shall draw immediately upon the Letter of Credit in the event the Bonds shall have been declared immediately due and payable and immediately apply amounts drawn under the Letter of Credit to payment of Bonds in accordance with the Indenture. The provisions of the preceding paragraph, however, are subject, after the expiration of the Letter of Credit, to the condition that if, after the principal of said Bonds has been so declared to be due and payable, all arrears of interest upon the Bonds are paid, and the Authority has performed all other things in respect to which it may have been in default hereunder and the reasonable compensation and expenses of the Trustee, and the Bondowners, including reasonable attorneys' fees, shall have been paid, or provision satisfactory to the Trustee shall be made for such payments, then, and in every such case, the owners of a majority in aggregate principal amount of the Bonds then outstanding, by written notice to the Authority and to the Trustee, may annul such declaration and its consequences, and such annulment shall be binding upon the Trustee and upon all owners of Bonds issued hereunder, or, if the Trustee shall have acted in the absence of a written request of the owners of at least twenty-five percent (25%) in aggregate principal amount of all outstanding Bonds, and if there shall not have been theretofore delivered to the Trustee written direction to the contrary by the owners of at least twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding, then any such declaration shall ipso facto be deemed to be rescinded and any such default and its consequences shall ipso facto be deemed to be annulled and such annulment shall be binding upon the Trustee and upon all owners of Bonds; but no such annulment shall extend to or affect any subsequent default or impair any right or remedy consequent thereon. The Trustee shall forward a copy of any notice from Bondowners received by it pursuant to this paragraph to the Company. The provisions of the second preceding paragraph are, further, subject to the condition that any waiver by the Bank of any event of default under the Reimbursement Agreement and a rescission and annulment of its consequences shall constitute a waiver of the corresponding Event of Default under the Indenture and a rescission and annulment of the consequences thereof; provided that, the Trustee shall have received written notice from the Bank to the effect that the Letter of Credit has been reinstated, if applicable, and is in full force and effect (with respect to the principal of, premium, if any (only to the extent that the Letter of Credit then in effect provides for the payment of premium, if any), interest on, and the purchase price of, all Bonds then entitled to the benefits of the Letter of Credit). If written 89 notice of such event of default under the Reimbursement Agreement shall have been given as provided herein and if the Trustee shall thereafter have received written notice from the Bank that such event of default shall have been waived, the Trustee shall promptly give written notice of such waiver, rescission or annulment and of the corresponding waiver, rescission and annulment of the Event of Default hereunder to the Authority, the Governor, the Comptroller, the Attorney General of the State of New York, the Company, the Bank, the Tender Agent and the Remarketing Agents, and shall give written notice thereof by mail to all owners of outstanding Bonds; but no such waiver, rescission and annulment shall extend to or affect any subsequent Event of Default or impair any right or remedy consequent thereon. Section 10.02. Judicial Proceedings by Trustee. Upon the happening and continuance of any Event of Default, then and in every such case the Trustee in its discretion may, and upon the written request of the owners of at least twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding and receipt of indemnity to its satisfaction, shall: (a) by suit, action or special proceeding, enforce all rights of the Bondowners and require the Authority, the Bank or the Company to perform its or their duties under the Act, the Participation Agreement, the Bonds, the Letter of Credit, the Company Note and the Indenture; (b) bring suit upon the Bonds; (c) by action or suit in equity require the Authority to account as if it were the trustee of an express trust for the Bondowners; or (d) by action or suit in equity enjoin any acts or things which may be unlawful or in violation of the rights of the Bondowners. Section 10.03. Effect of Discontinuance or Abandonment of Proceedings. In case the Trustee shall have proceeded to enforce any right under the Indenture and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee, then and in every such case the Authority, the Trustee and the Bondowners shall be restored respectively to their former positions and rights hereunder, respectively, and all rights, remedies and powers of the Authority, the Trustee and the Bondowners, respectively, shall continue as though no such proceedings had been taken. Section 10.04. Power of Bondowners to Direct Proceedings. Anything in the Indenture to the contrary notwithstanding, the owners of a majority in aggregate principal amount of the Bonds then outstanding hereunder shall have the right, by an instrument in writing executed and delivered to the Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Trustee hereunder, subject, however, to the provisions of Section 11.04, and provided, however, such direction shall not be in conflict with any rule of law or 90 with any provision of the Indenture (including, without limitation, any provision requiring the Trustee to accelerate the Bonds and draw on the Letter of Credit upon the occurrence of an Event of Default under Section 10.01(f) or (g)) and shall not unduly prejudice the rights of the Bondowners who are not in such majority. The Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the owners of a majority in aggregate principal amount of the Bonds and which is not in conflict with the Trustee's obligation to accelerate the Bonds and draw on the Letter of Credit upon the occurrence of an Event of Default under Section 10.01(f) or (g). Section 10.05. Limitation on Actions by Bondowners. No owner of any of the Bonds shall have any right to institute any suit, action or proceeding in equity or at law for the enforcement of any trust hereunder, or any other remedy hereunder or under the Bonds, unless such owner previously shall have given to the Trustee written notice of an Event of Default as hereinabove provided and unless also the owners of not less than twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding shall have made written request of the Trustee so to do, after the right to exercise such powers or rights of action, as the case may be, shall have accrued, and shall have afforded the Trustee a reasonable opportunity either to proceed to exercise the powers hereinabove granted, or to institute such action, suit or proceeding in its or their name; nor unless there also shall have been offered to the Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee shall not have complied with such request within a reasonable time; and such notification, request and offer of indemnity are hereby declared in every such case, at the option of the Trustee, to be conditions precedent to the execution of the trusts of the Indenture or for any other remedy hereunder; it being understood and intended that no one or more owners of the Bonds hereby secured shall have any right in any manner whatever by such owner's or owners' action to affect, disturb or prejudice the security of the Indenture, or to enforce any right hereunder or under the Bonds, except in the manner herein provided, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner herein provided and for the equal benefit of all owners of outstanding Bonds, subject, however, to the provisions of Section 9.05. Nothing in the Indenture or in the Bonds contained shall affect or impair the right of action, which is also absolute and unconditional, of any owner of any Bond to enforce payment of the principal of and premium, if any, and interest on such owner's Bond at the date of maturity and places therein expressed. Section 10.06. Trustee's Right to Enforce Rights in Respect of Bonds in Own Name and Without Possession of Bonds. All rights of action under the Indenture or under any of the Bonds which are enforceable by the Trustee may be enforced by it without the possession of any of the Bonds, or the production thereof at the trial or other proceedings relative thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in its name, as trustee, for the equal and ratable benefit of the owners of the Bonds subject to the provisions of the Indenture. 91 Section 10.07. No Remedy herein Conferred upon or Reserved Exclusive. No remedy herein conferred upon or reserved to the Trustee or to the owners of the Bonds is intended to be exclusive of any other remedy or remedies, except as provided in Section 10.10, and each and every such remedy shall be cumulative, and shall be in addition to every other remedy given hereunder. Section 10.08. No Delay or Omission to be Deemed Waiver of Default. No delay or omission of the Trustee or of any owner of the Bonds to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver of any such default, or an acquiescence therein; and every power and remedy given by this Article X to the Trustee and to the owners of the Bonds, respectively, may be exercised from time to time and as often as may be deemed expedient. Section 10.09. Application of Moneys Received by Trustee Pursuant to Article X. Any moneys or other property or assets received by the Trustee or by any receiver pursuant to this Article X (i) shall be applied first to the payment of the costs and expenses of the proceedings resulting in the collection of any moneys received by the Trustee or by any receiver pursuant to this Article X and of the expenses, liabilities and advances incurred or made and compensation for services rendered by or on behalf of the Trustee, including reasonable counsel fees and expenses; provided that, moneys drawn under the Letter of Credit shall not be applied to any such payment, and (ii) any remaining amounts shall then be applied as follows: (a) Unless the principal of all Bonds shall have become or shall have been declared due and payable, all such moneys shall be applied: First: To the payment to the Persons entitled thereto of all installments of interest then due on the Bonds, in the order of the maturity of the installments of such interest including (to the extent permitted by law) interest on overdue installments of interest at the rate borne by the Bonds on which such interest shall then be due, and, if the amount available shall not be sufficient to pay in full any particular installment or installments, then to the payment ratably, according to the amounts due on such installment or installments, to the Persons entitled thereto, without any discrimination or preference; and Second: To the payment to the Persons entitled thereto of the unpaid principal of and premium, if any, on any of the Bonds which shall have become due (other than Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of the Indenture) in the order of their due dates, with interest on such Bonds from the respective dates upon which they become due and, if the amount available shall not be sufficient to pay in full Bonds due on any particular date, together with such interest, then to the payment ratably, according to the amount of 92 principal due on such date, to the Persons entitled thereto without any discrimination or preference. (b) If the principal of all the Bonds shall have become or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal, premium, if any, and interest then due and unpaid upon the Bonds, with interest on overdue principal, premium, if any, and interest as aforesaid, without preference or priority of principal and premium, if any, over interest or of interest over principal and premium, if any, or of any installment of interest over any other installment of interest or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal, premium, if any, and interest, to the Persons entitled thereto without any discrimination or preference. (c) If the principal of all the Bonds shall have been declared due and payable, and if such declaration shall thereafter have been rescinded and annulled under the provisions of this Article X, then, subject to the provisions of paragraph (b) of this Section which shall be applicable in the event that the principal of all the Bonds shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of paragraph (a) of this Section. Moneys drawn under the Letter of Credit may not be applied to effect any payment on any Bond not entitled to the benefits thereof as provided in Section 3.01. Whenever moneys are to be applied pursuant to the provisions of this Section, such moneys shall be applied at such times, and from time to time, as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall apply such funds, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made and upon such date interest on the amount of principal to be paid on such date shall cease to accrue. Notwithstanding the two preceding sentences any moneys drawn under the Letter of Credit under this Article X shall be applied by the Trustee pursuant to the provisions of this Section 10.09 within five days after such moneys have been drawn. For the purpose of determining the Bondowners who are entitled to such application, the Trustee may establish a record date not more than five days before such payment date. The Trustee shall give such notice to Bondowners by mailing in the manner it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such payment date, and shall not be required to make payment to the owner of any Bond until such Bond shall be presented to the Trustee for appropriate endorsement or for cancellation if fully paid. Section 10.10. Entirety of Agreement. The rights and remedies of the owners of the Bonds and of the Trustee set forth in this Article X are in lieu of the rights and remedies 93 of owners of bonds of the Authority set forth in Section 1865 of the Act and the provisions of such Section 1865 are hereby abrogated with respect to the Bonds. Section 10.11. Notice of Event of Default. The Trustee shall, within 30 days after the occurrence of an Event of Default becomes known to a Responsible Officer, give notice thereof to all Bondowners by mail in the manner provided in Section 16.05 unless such Event of Default shall have been cured before the giving of such notice. 94 ARTICLE XI CONCERNING THE TRUSTEE AND PAYING AGENT Section 11.01. Appointment of Trustee; Paying Agents. Chemical Bank is hereby appointed as Trustee and Paying Agent for the owners from time to time of the Bonds. The Trustee hereby accepts the duties and obligations of the Trustee and Paying Agent created by the Indenture for the owners from time to time of the Bonds. The provisions of this Article XI shall not affect the Trustee's obligation to accelerate the Bonds upon the occurrence of an Event of Default under Section 10.01(f) or (g), draw on the Letter of Credit or make any payment of principal, premium or interest on the Bonds. Subject to Article X and Section 11.04, and as and to the extent provided in Sections 4.08 and 4.09 of the Participation Agreement, the Trustee, the Paying Agent and the Tender Agent shall be entitled to indemnification by the Company for any losses, costs, charges, expenses (including reasonable attorneys' fees and disbursement), judgments and liabilities incurred by the Trustee, the Paying Agent and the Tender Agent in connection with any claims made, or any action, suit or proceeding instituted or threatened, in connection with the transactions contemplated by the Participation Agreement or the Indenture. The Trustee, Paying Agents and Tender Agent, except as otherwise provided in Section 9.06, shall look solely to the Company for such indemnification. Section 11.02. No Responsibility for Correctness of Statements in Indenture. The recitals, statements and representations in the Indenture or in the Bonds contained, save only the Trustee's certificate of authentication upon the Bonds, shall be taken and construed as made by and on the part of the Authority, and not by the Trustee, and the Trustee does not assume, and shall not have, any responsibility or obligation for the correctness of any recitals, statements and representations hereof or thereof or any other document delivered by the Authority or the Company in connection with the issuance of the Bonds. Section 11.03. No Responsibility for Default of Agents Selected with Due Care, nor for Own Acts Save Willful Misconduct or Negligence. The Trustee may execute such of the trusts or powers required of it hereunder and perform the duties required of it hereunder as may be reasonably necessary by or through attorneys, agents or receivers and the Trustee shall not be answerable for the default, negligence or misconduct of any such attorney, agent or receiver selected by it with reasonable care. The Trustee may in all cases pay such reasonable compensation to and receive reimbursement for all such attorneys, agents, receivers, and employees as may reasonably be employed in connection with the trusts hereof. The Trustee may act upon the opinion or advice of any attorney (who may be the attorney or attorneys for the Authority or the Company), approved by the Trustee in the exercise of reasonable care. The Trustee shall not be responsible for any loss or damage resulting from any action or non-action 95 in good faith in reliance upon such opinion or advice. The Trustee shall not be answerable for the exercise or non-exercise of any discretion or power under the Indenture or for anything whatever in connection with the trusts herein created, except only for its own willful misconduct or negligence. No provision of the Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that such funds will not be repaid or if satisfactory indemnity against such risk or liability is not provided to the Trustee. Section 11.04. No Duty to Take Enforcement Action Unless so Requested by Owners of 25% of the Bonds. Unless and until an Event of Default shall have occurred and (i) written notice thereof shall have been given to the Trustee or (ii) the occurrence thereof otherwise shall be known to a Responsible Officer of the Trustee, the Trustee shall be under no obligation to take any action in respect of any default or otherwise in respect of or toward the execution or enforcement of any of the trusts hereby created, or to institute, appear in or defend any suit or other proceeding in connection therewith, unless requested in writing so to do by owners of at least twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding, and if in its opinion such action may tend to involve it in expense or liability, unless furnished, from time to time as often as it may require, with security and indemnity satisfactory to it; but the foregoing provisions are intended only for the protection of the Trustee, and shall not affect any discretion or power given by any provisions of the Indenture to the Trustee to take action in respect of any default without such notice or request from the Bondowners, or without such security or indemnity. Notwithstanding any other provision of the Indenture or the Participation Agreement, no right of the Trustee to indemnification shall prevent the Trustee from (a) making payments on the Bonds when due from moneys available to it, (b) accelerating the Bonds as required pursuant to Article X, or (c) drawing on the Letter of Credit to make payments on the Bonds when due. Section 11.05. Right to Rely. The Trustee shall be protected and shall incur no liability in acting or proceeding in good faith upon any resolution, notice, telegram, request, consent, waiver, certificate, statement, affidavit, voucher, bond, requisition or other paper or document which it shall in good faith believe to be genuine and to have been authorized or signed by the proper board or person or to have been prepared and furnished pursuant to any of the provisions of the Indenture and the Trustee may require a written opinion from legal counsel who is reasonably acceptable to the Trustee, which counsel may be an employee of or counsel to the Company or the Trustee, confirming the accuracy of any such paper or document, and the Trustee shall be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements. 96 Section 11.06. Right to Own and Deal in Bonds and Engage in Other Transactions with Authority and Company. The Trustee may in good faith buy, sell, own, hold and deal in any of the Bonds issued hereunder and secured by the Indenture, and may join in any action which any Bondowner may be entitled to take with like effect as if the Trustee were not a party to the Indenture. The Trustee, either as principal or agent, may also engage in or be interested in any financial or other transaction with the Authority or the Company, and may act as depository, trustee, or agent for any committee or body of owners of the Bonds secured hereby or other obligations of the Authority as freely as if it were not Trustee hereunder. Section 11.07. Construction of Provisions of Indenture by Trustee. The Trustee may construe any of the provisions of the Indenture insofar as the same may appear to be ambiguous or inconsistent with any other provision thereof, and any construction of any such provisions hereof by the Trustee in good faith shall be binding upon the Bondowners. Section 11.08. Right to Resign Trust. The Trustee may at any time and for any reason resign and be discharged of the trusts created by the Indenture by (a) executing an instrument in writing resigning such trusts and specifying the date when such resignation shall take effect, (b) filing the same with the Secretary of the Authority (c) giving notice thereof in writing to the Company not less than 60 days before the date specified in such instrument when such resignation shall take effect, and (d) giving notice of such resignation to Bondowners by mail in the manner provided in Section 16.05, the mailing of said notice to occur not less than four weeks prior to the date specified in such notice when such resignation shall take effect. Such resignation shall take effect only upon the appointment of a successor Trustee in accordance with the provisions of Section 11.10. Section 11.09. Removal of Trustee. (a)The Trustee at any time and for any reason may be removed by an instrument in writing, appointing a successor, filed with the Trustee so removed and executed by the owners of a majority in aggregate principal amount of the Bonds then outstanding; provided, however, that no such removal shall become effective until the acceptance of appointment by a successor Trustee in accordance with Section 11.13. (b) The Trustee at any time other than during the continuance of an Event of Default or the continuance of an event which but for the passage of time would constitute an Event of Default and for any reason may be removed by an instrument in writing, executed by an Authorized Officer, appointing a successor, filed with the Trustee so removed; provided, however, that no such removal shall become effective until the acceptance of appointment by a successor Trustee in accordance with Section 11.13. Section 11.10. Appointment of Successor Trustee by Bondowners or Authority. In case at any time the Trustee shall resign, or shall be removed, or be dissolved, or if its property or affairs shall be taken under the control of any state or federal court or administrative body because of insolvency or bankruptcy, or for any other reason, a vacancy shall forthwith and ipso facto exist in the office of the Trustee, then a successor may be appointed by the 97 owners of a majority in aggregate principal amount of the Bonds then outstanding, by an instrument or instruments in writing filed with the Secretary of the Authority, signed by such Bondowners or by their attorneys-in-fact duly authorized. Copies of each such instrument shall be promptly delivered by the Authority to the predecessor Trustee, to the Trustee so appointed and to the Company. Until a successor Trustee shall be appointed by the Bondowners as herein authorized, the Authority, by an instrument authorized by resolution, shall appoint a Trustee to fill such vacancy. The Authority shall not appoint a Trustee without the approval of the Company as evidenced by a certificate in writing signed by an Authorized Company Representative, which approval shall not be unreasonably withheld. After any appointment by the Authority, it shall cause notice of such appointment to be mailed to the Bondowners in the manner provided in Section 16.05. Any new Trustee so appointed by the Authority shall immediately and without further act be superseded by a Trustee appointed by the Bondowners in the manner above provided. Section 11.11. Qualifications of Successor Trustee. Every successor in the trusts hereunder appointed pursuant to the foregoing provision shall be a bank or trust company organized and doing business under the laws of the United States or any state or territory thereof with trust powers, shall have a combined capital and surplus of at least $100,000,000 and shall (or the parent corporation of such successor shall) be rated at least Baa-3 and/or P-3 or an equivalent rating by Moody's or otherwise be acceptable to Moody's and the Authority if such a bank or trust company willing and able to accept the trusts on customary terms can, with reasonable effort, be located. Section 11.12. Court Appointment of Successor Trustee. In case at any time the Trustee shall resign and no appointment of a successor Trustee shall be made pursuant to the foregoing provisions of this Article XI prior to the date specified in the notice of resignation as the date when such resignation shall take effect, the Trustee, the Company or the owner of any Bond may apply to any court of competent jurisdiction to appoint a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Trustee. Section 11.13. Acceptance of Appointment by, and Transfer of Trust Estate to, Successor Trustee. Any successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Authority an instrument accepting such appointment hereunder as a fiduciary for the owners from time to time of the Bonds and shall request the Bank to transfer the Letter of Credit to it as successor Trustee, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become duly vested with all the estates, property, rights, powers, trusts, duties and obligations of its predecessor in the trust hereunder, with like effect as if originally named Trustee herein and shall give notice thereof to the Company. Upon request of such Trustee, the Trustee ceasing to act and the Authority shall execute and deliver an instrument transferring to such successor Trustee all the estates, property, rights, powers and 98 trusts hereunder of the Trustee so ceasing to act, and the Trustee so ceasing to act shall pay over to the successor Trustee all moneys and other assets, including the Company Note at the time held by it hereunder. Section 11.14. Successor Trustee by Merger or Consolidation. Any corporation into which any Trustee hereunder may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which any Trustee hereunder shall be a party, or any corporation to which any Trustee hereunder may transfer all or substantially all of its assets, shall be the successor Trustee under the Indenture, without the execution or filing of any paper or any further act on the part of the parties hereto, anything herein to the contrary notwithstanding. Section 11.15. Exercise of Rights and Powers During Event of Default. Notwithstanding any other provisions of this Article XI, the Trustee shall, during the existence of an Event of Default of which a Responsible Officer of the Trustee has actual knowledge, exercise such of the rights and powers vested in it by the Indenture and use the same degree of skill and care in their exercise as a prudent man would use and exercise under the circumstances in the conduct of his own affairs. Section 11.16. Trustee may Intervene in Judicial Proceedings Involving Authority or the Company. In any judicial proceeding to which the Authority or the Company is a party and which in the opinion of the Trustee and its counsel has a substantial bearing on the interests of the owners of the Bonds, the Trustee may in its own name or as trustee of an express trust intervene on behalf of the owners of the Bonds and shall, upon receipt of indemnity satisfactory to it, do so if requested in writing by the owners of at least twenty-five percent (25%) in aggregate principal amount of Bonds then outstanding if permitted by the court having jurisdiction in the premises. Section 11.17. Paying Agents. The Authority may, with the approval of the Company as evidenced by a certificate in writing signed by an Authorized Company Representative, at any time or from time to time appoint one or more additional Paying Agents for the owners from time to time of the Bonds in the manner and subject to the conditions set forth in this Section 11.17. Each Paying Agent shall signify its acceptance of the duties and obligations imposed upon it by the Indenture by written instrument of acceptance deposited with the Authority, the Trustee and the Company. Each Paying Agent appointed in addition to the Trustee and the Tender Agent shall be a bank or trust company duly organized under the laws of the United States or any state or territory thereof, shall have a capital stock and surplus aggregating at least $100,000,000 and shall (or the parent corporation of such successor shall) be rated at least Baa-3 and/or P-3 or an equivalent rating by Moody's or otherwise be acceptable to Moody's and the Authority and shall be willing and able to accept the office on reasonable and customary terms and shall be authorized by law to perform all the duties imposed upon it by the Indenture. 99 Any Paying Agent may at any time resign and be discharged of the duties and obligations created by the Indenture by giving at least 60 days' prior written notice to the Authority, the Trustee and the Company. Any Paying Agent may be removed at any time by an instrument filed with such Paying Agent, the Company and the Trustee and signed by the Authority. In the event of the resignation or removal of any Paying Agent, such Paying Agent shall pay over, assign and deliver any moneys held by it as Paying Agent to its successor, or if there be no successor, to the Trustee. In the event that for any reason there shall be a vacancy in the office of any Paying Agent, the Trustee shall act as such Paying Agent. Each Paying Agent shall set aside, segregate and hold in a trust account in trust solely for the benefit of the owners from time to time of the Bonds moneys transferred to such Paying Agent for the payment of the principal of, premium, if any, and interest on the Bonds. Section 11.18. Appointment of Co-Trustee. It is the purpose of the Indenture that there shall be no violation of any law of any jurisdiction (including particularly the law of the State of New York) denying or restricting the right of banking corporations or associations to transact business as a trustee in such jurisdiction. It is recognized that in case of litigation under the Indenture or the Participation Agreement and in particular in case of the enforcement thereof upon an Event of Default, or in the case the Trustee deems that by reason of any present or future law of any jurisdiction it may not exercise any of the powers, rights or remedies herein granted to the Trustee or hold title to the properties, in trust, as herein granted, or take any action which may be desirable or necessary in connection therewith, it may be necessary that the Trustee appoint an additional individual or institution as a separate or co-trustee. The following provisions of this Section are adapted to these ends. In the event that the Trustee appoints an additional individual or institution as a separate or co-trustee, each and every remedy, power, right, claim, demand, cause of action, immunity, estate, title, interest and lien expressed or intended by the Indenture to be exercised by or vested in or conveyed to the Trustee with respect thereto shall be exercisable by and vest in such separate or co-trustee but only to the extent necessary to enable such separate or co-trustee to exercise such powers, rights and remedies, and every covenant and obligation necessary to the exercise thereof by such separate or co-trustee shall run to and be enforceable by either of them. Should any instrument in writing from the Authority be required by the separate or co-trustee so appointed by the Trustee for more fully and certainly vesting in and confirming to it such properties, rights, powers, trusts, duties and obligations, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Authority. In case any separate or co-trustee or a successor to either shall die, become incapable of acting, resign or be removed, all the estates, properties, rights, powers, trusts, duties and obligations of such 100 separate or co-trustee, so far as permitted by law, shall vest in and be exercised by the Trustee until the appointment of a new trustee or successor to such separate or co-trustee. 101 ARTICLE XII EXECUTION OF INSTRUMENTS BY BONDOWNERS AND PROOF OF OWNERSHIP OF BONDS Section 12.01. Execution of Instruments; Proof of Ownership of Bonds. Any request, direction, consent, or other instrument in writing required or permitted by the Indenture to be signed or executed by Bondowners may be in any number of concurrent instruments of similar tenor and shall be signed or executed by such Bondowners in person or by agent appointed by an instrument in writing. Proof of the execution of any such instrument and of the ownership of Bonds shall be sufficient for any purpose of the Indenture and shall be conclusive in favor of the Trustee with regard to any action taken by it under such instrument if made in the following manner: (a) The fact and date of the execution by any Person of any such instrument may be proved by the certificate of any officer in any jurisdiction who, by the laws thereof, has power to take acknowledgements within such jurisdiction, to the effect that the Person signing such instrument acknowledged before him or her the execution thereof, or by an affidavit of a witness to such execution. (b) The ownership of Bonds shall be proved by the Bond Register. Nothing contained in this Article XII shall be construed as limiting the Trustee to such proof, it being intended that the Trustee may accept any other evidence of the matters herein stated which to it may seem sufficient. Any request or consent of the owner of any Bond shall bind every future owner of the same Bond, or any Bond issued in exchange or substitution therefor, in respect of anything done by the Trustee in pursuance of such request or consent. 102 ARTICLE XIII INDENTURES SUPPLEMENTAL HERETO Section 13.01. Supplemental Indentures not Requiring Consent of Bondowners. Subject to the conditions and restrictions herein contained, the Authority and the Trustee may, without the consent of or notice to the Bondowners, enter into an indenture or indentures supplemental hereto, for any one or more of the following purposes: (a) To cure any ambiguity or formal defect or omission in the Indenture; (b) To grant to or confer upon the Trustee for the benefit of the Bondowners any additional rights, remedies, power or authority that may lawfully be granted to or conferred upon the Bondowners or the Trustee or either of them; (c) To subject to the provisions of the Indenture additional revenues, properties or collateral; (d) To modify, amend or supplement the Indenture in such manner as to permit the qualification of the Indenture under any federal statute now or hereafter in effect or under any state Blue Sky Law, and, in connection therewith, if they so determine, to add to the Indenture, such other terms, conditions and provisions as may be permitted or required by said federal statute or Blue Sky Law; (e) To modify, amend or supplement the Indenture in such manner as to permit the qualification of the Bonds for deposit with a Securities Depository, and, in connection therewith, if they so determine, to add to the Indenture, such other terms, conditions and provisions as may be required to permit such qualification; or (f) To provide for any change in the Indenture which is not prejudicial to the interests of the Trustee or the Bondowners, including but not limited to any change necessary to obtain or maintain a rating on the Bonds from Moody's or S&P. Section 13.02. Supplemental Indentures Requiring Consent of Bondowners. Except as otherwise provided in Section 13.01, any modification or amendment of the Indenture may be made only with the consent of the owners of not less than two-thirds in aggregate principal amount of the Bonds then outstanding and shall be set forth in a Supplemental Indenture. No such modification or amendment shall be made which will reduce the percentages of aggregate principal amount of Bonds, the consent of the owners of which is required for any such modification or amendment, or permit the creation by the Authority of any lien prior to or 103 on a parity with the lien of the Indenture upon the Company Note Payments and other funds pledged hereunder, or which will affect the times, amounts and currency of payment of the principal of and premium, if any, and interest on the Bonds without the consent of the owners of all Bonds then outstanding and affected thereby. If at any time the Authority shall request the consent of Bondowners to the execution of any such Supplemental Indenture for any of the purposes of this Section, the Trustee shall, upon being satisfactorily indemnified with respect to expenses, cause notice of the proposed execution of such Supplemental Indenture to be given as shall be reasonably requested by the Authority and in any event mailed to Bondowners in the manner provided in Section 16.05. Such notice shall briefly set forth the nature of the proposed Supplemental Indenture and shall state that copies thereof are on file at the Corporate Trust Office of the Trustee for inspection by all Bondowners. If, within 60 days or such longer period as shall be prescribed by the Authority following the mailing of such notice, the required consent and approval of Bondowners is obtained, no owner of any Bond shall have any right to object to any of the terms and provisions contained therein, or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Authority or the Trustee from executing the same or restrain the Authority or the Trustee from taking any action pursuant to the provisions thereof. Upon the execution of any such Supplemental Indenture as in this Section is permitted and provided, the Indenture shall be and be deemed to be modified and amended in accordance therewith. The Trustee shall consent to any such Supplemental Indenture requiring the consent of Bondowners if the required consent of Bondowners is obtained; provided that the Trustee may, but shall not be obligated to consent to any Supplemental Indenture which affects its own rights, powers, duties or obligations hereunder. Section 13.03. Company and Bank Consent to Amendment of Indenture. The Authority and the Trustee shall not enter into any indenture supplemental to or amendatory of the Indenture without the prior consent of the Company as evidenced by a certificate in writing signed by an Authorized Company Representative and no such indenture supplemental to or amendatory of the Indenture shall be or become effective until such consent (as so evidenced) shall have been given by the Company. Prior to the expiration of the Letter of Credit, the Trustee shall not enter into any indenture supplemental to or amendatory of the Indenture without the prior written consent of the Bank, which consent shall not be unreasonably withheld. 104 ARTICLE XIV DEFEASANCE Section 14.01. Defeasance. 1. If at any time: (a) there shall have been delivered to the Trustee for cancellation all the Bonds (other than any Bonds which have been mutilated, lost, stolen or destroyed and which shall have been replaced or paid as provided in the Indenture, except for any such Bonds as are shown by proof satisfactory to the Trustee to be held by bona fide owners), or (b) with respect to all the Bonds not theretofore delivered to the Trustee for cancellation, the whole amount of the principal and the interest and the premium, if any, due and payable on such Bonds then outstanding shall be paid in accordance with the terms thereof and the terms of the Indenture (including but not limited to Section 6.03) or deemed to be paid as set forth below, and provision shall also be made for paying all other sums payable hereunder, including the Authority's, Trustee's, Tender Agent's, Remarketing Agent's, Indexing Agent's and Paying Agent's fees and expenses, then the Trustee, in such case, on written demand of the Authority or the Company, shall release the Indenture with respect to such Bonds and turn over to the Company the Company Note and turn over to the Bank the Letter of Credit, and shall execute such documents as may be reasonably required by the Authority and the Company to evidence such release. If the Bank certifies to the Trustee that any amount remains unpaid under the Reimbursement Agreement, the Trustee shall pay to the Bank any balances remaining in any fund created under the Indenture, other than (i) moneys and Investment Obligations retained for the redemption or payment of principal, interest or Purchase Price of Bonds which shall be held under the Indenture for the benefit of the Owners and (ii) moneys held in the Rebate Fund which shall be paid to the Company. Notwithstanding the foregoing, the Trustee shall not release the Project Fund or Rebate Fund or any funds therein to the Company until it shall have received an Opinion of Bond Counsel to the effect that such funds may be transferred to the Company without adversely affecting the exclusion of interest on any series of Bonds from gross income for federal income tax purposes; and all rights and immunities of the Trustee, including its rights to indemnification and to payment of fees and expenses under the Indenture or the Participation Agreement, shall survive the satisfaction of the Indenture under this Article XIV. 2. After the date that the interest rate on the Bonds is converted to a Fixed Rate, Bonds shall be deemed to be paid whenever there shall have been deposited with the Trustee (whether upon or prior to the maturity or the redemption date of such Bonds) either moneys in an amount which shall be sufficient, or noncallable obligations, not subject to prepayment, issued or guaranteed as to full and timely payment by the United States of America (including any certificates or any other evidence of an ownership interest in such obligations or in specified 105 portions thereof, which may consist of specified portions of the principal thereof or the interest thereon and which certificates or other evidence of an ownership interest must be rated by the Rating Agency then rating the Bonds at least as high as the obligations issued or guaranteed by, or backed by the full faith and credit of, the United States of America, which obligations are rated by a Rating Agency in its highest note or commercial paper rating category, and which obligations are held by a custodian in safekeeping on behalf of the owners thereof) (such noncallable obligations, certificates and other evidence are herein referred to as "Investment Obligations") of such maturities and interest payment dates and bearing such interest as will, without the necessity of further investment or reinvestment of either the principal amount thereof or interest therefrom, provide moneys which shall be sufficient, to pay when due the principal of and premium, if any, and interest due and to become due on all such Bonds on and prior to the redemption date or maturity date thereof, as the case may be, or a combination of such moneys and Investment Obligations which shall be sufficient for such purposes, and the Trustee shall have given notice to the Registered Owners of such Bonds in the manner provided in Section 16.05 that a deposit meeting the requirements of this paragraph has been made and stating such maturity or redemption date upon which moneys are to be available for the payment of the principal or redemption price, if applicable, on such Bonds; provided, however, that neither Investment Obligations nor moneys deposited with the Trustee pursuant to this paragraph nor principal or interest payments on any Investment Obligations shall be withdrawn, or used for any purpose other than, and shall be held in trust for, the payment of the principal of and premium, if any, and interest on such Bonds. 3. Prior to the date that the interest rate on the Bonds is converted to a Fixed Rate, Bonds shall be deemed to be paid whenever (i) there shall have been deposited with the Trustee in the Bond Fund, moneys in an amount which shall be sufficient, without the necessity of further investment or reinvestment of either the principal amount thereof or interest therefrom, to pay when due the principal of, premium, if any, and interest due and to become due on the Bonds (computed at the maximum interest rate that may become applicable to the Bonds) on and prior to the redemption date or maturity date thereof, as the case may be, provided, however, if the Bonds are subject to optional or mandatory tender for purchase prior to the redemption date or maturity date thereof, as the case may be, such deposit also must be in an amount which shall be sufficient, without the necessity of such further investment or reinvestment, to pay when due the Purchase Price which may become applicable to the Bonds prior to the redemption date or maturity date, as the case may be, and (ii) any Rating Agency then rating the Bonds shall have received both an opinion of a nationally recognized accounting firm as to the sufficiency of the deposit in clause (i), without the necessity of further investment or reinvestment, and an unqualified opinion of counsel experienced in bankruptcy matters and satisfactory to the Trustee and to Moody's, if the Bonds are then rated by Moody's, or to S&P, if the Bonds are then rated by S&P, to the effect that the application of such Available Moneys to the payment of principal of, premium, if any, and interest on the Bonds would not result in a preferential payment pursuant to the provisions of Section 547 of the United States Bankruptcy Code, 11 U.S.C. ss.ss.101, et seq.; and, if the Bonds are to be redeemed the Trustee shall have given, or shall have received, in form satisfactory to it, irrevocable instructions to give, on a 106 date in accordance with the provisions of Article VIII, notice of redemption of the Bonds to Bondowners; provided, however, that if the Trustee shall not have given notice of redemption to the Bondowners because such notice is not yet due, then the Trustee shall give notice to the Registered Owners of such Bonds in the manner provided in Section 16.05 that a deposit meeting the requirements of this paragraph has been made and stating such maturity or redemption date upon which moneys are to be available for the payment of principal or redemption price, if applicable, on such Bonds. Moneys so deposited with the Trustee shall not be withdrawn or used for any purpose other than, and shall be held in trust for, the payment of the principal of, premium, if any, and interest on, the Bonds or for the payment of the Purchase Price of Bonds or authorized denominations thereof, in accordance with Section 2.05; provided that such moneys, if not then needed for such purpose, shall, to the extent practicable, upon written direction of the Company be invested and reinvested in Investment Obligations maturing on or prior to the earlier of (i) the date moneys may be required for the purchase of Bonds pursuant to Section 2.05 or (ii) the date moneys may be required to pay principal, premium, if any, or interest on the Bonds as evidenced by an opinion of a nationally recognized accounting firm or such other evidence as may be acceptable to the Trustee. Subject to the provisions of the next succeeding sentence and the last sentence of Section 14.01.1, neither the Company nor the Authority shall have any interest in, or ability to withdraw amounts from, any moneys so deposited with the Trustee. Amounts determined by the Trustee to be in excess of the amount necessary to pay the principal of, premium, if any, and interest (computed at the maximum interest rate that may become applicable to the Bonds on or prior to the redemption date or maturity date, as applicable) on, the Bonds or the Purchase Price thereof (computed at the maximum interest rate that may become applicable to the Bonds on or prior to the redemption date or Maturity Date, as applicable) pursuant to Section 2.05 shall, upon a written direction of the Company, be paid over to the Company, as received by the Trustee, free and clear of any trust, lien or pledge. 107 ARTICLE XV REMARKETING AGENTS; REMARKETING OF BONDS; INDEXING AGENT; TENDER AGENT Section 15.01. Appointment and Duties of Remarketing Agents. The Authority has appointed, with the approval of the Company, Dillon, Read & Co. Inc. as the initial Remarketing Agent (the "Remarketing Agent") and Lehman Brothers Inc. as the initial CoRemarketing Agent (the "Co-Remarketing Agent") for the Bonds (the Remarketing Agent and the Co-Remarketing Agent shall hereafter be collectively referred to as the "Remarketing Agents"). Each Remarketing Agent shall designate to the Trustee its principal office and signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument of acceptance delivered to the Authority, the Company and the Trustee under which such Remarketing Agent will agree particularly to (i) perform its obligations under Section 2.03 with respect to the determination of the Weekly Rate, the Semi-Annual Rate, the Medium-Term Rate, the Money Market Municipal Rate, and the Fixed Rate (ii) perform its obligations under Section 2.06 with respect to any Bond delivered or deemed to have been delivered to the Tender Agent for purchase pursuant to Section 2.05, and (iii) keep books and records with respect to its activities hereunder as shall be consistent with prudent industry practice and to make such books and records available for inspection by the Authority, the Trustee, the Company and the Bank at all reasonable times. Such acceptance shall include a designation of one Remarketing Agent as the "Remarketing Representative" who shall act on behalf of the other Remarketing Agent(s) and the acceptance by each Remarketing Agent of the determinations of the Remarketing Representative. Each Remarketing Agent acts as an agent for the purchasers of remarketed Bonds and not as an agent of the Authority or the Company in connection with any moneys delivered to it for the purchase of Bonds. The Authority shall cooperate with the Trustee, the Tender Agent and the Company to cause the necessary arrangements to be made and to be thereafter continued whereby funds from the sources specified herein and in the Participation Agreement will be made available for the purchase of Bonds presented at the Corporate Trust Office of the Tender Agent and whereby Bonds executed by the Authority and authenticated by the Trustee shall be made available to the Tender Agent to the extent necessary for delivery pursuant to Section 2.07. Section 15.02. Qualifications of a Remarketing Agent. Each Remarketing Agent shall be a commercial bank or member of the National Association of Securities Dealers, Inc., having a capitalization of at least $25,000,000 and authorization by law to perform all the duties imposed upon it by the Indenture (provided that to qualify as a successor Remarketing Agent, such successor, or the parent corporation of such successor, shall be rated at least Baa-3 and/or P-3 or an equivalent rating by Moody's or otherwise be acceptable to Moody's and the Authority). Subject to the provisions of the next succeeding paragraph, a Remarketing Agent 108 may at any time resign and be discharged of the duties and obligations created by the Indenture by giving at least thirty (30) days' notice to the Authority, the Company and the Trustee. A Remarketing Agent may be removed upon 30 days' notice, upon written request of the Company, by an instrument, signed by the Authority, filed with the Company, each Remarketing Agent (if more than one), the Indexing Agent, the Tender Agent, the Trustee and the Bank. In the event that a Remarketing Agent shall resign or be removed, and the Authority shall not have appointed a successor as Remarketing Agent and there are no other Remarketing Agents continuing to serve hereunder, then the last such Remarketing Agent or Remarketing Agent to resign or be removed notwithstanding the provisions of the first paragraph of this Section 15.02, shall continue as the Remarketing Agent solely for the purpose of determining the interest rate to be borne by the Bonds until the appointment by the Authority of a successor Remarketing Agent. Section 15.03. Appointment and Duties of Indexing Agents. The Authority shall, with the approval of the Company, appoint the Indexing Agent for the Bonds, subject to the conditions set forth in this Section. There may be separate Indexing Agents for the purpose of calculating each of the interest indices set forth in Section 1.01. The Indexing Agent shall designate to the Trustee its principal office and signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument of acceptance delivered to the Authority, the Trustee, the Company and the Remarketing Agents under which the Indexing Agent will agree, particularly: (a) to compute the Weekly Rate Index, Semi-Annual Rate Index, the MediumTerm Rate Index, the Money Market Municipal Rate Index or the Fixed Rate Index, as the case may be, pursuant to and in accordance with Section 2.03, and when the Bonds bear interest at the related Rate, to give written notice to the Trustee, the Remarketing Agents and the Company of such index on the date of the computation thereof; and (b) to keep such books and records as shall be consistent with prudent industry practice and to make such books and records available for inspection by the Authority, the Trustee, the Remarketing Agents and the Company at all reasonable times. The Indexing Agent will perform the duties provided for in Section 2.03. Whenever the Indexing Agent makes a computation under that Section, it will promptly notify in writing the Trustee, the Authority, the Remarketing Agents and the Company of the results and date of computation. The Indexing Agent will keep adequate records pertaining to the performance of its duties and allow the Trustee, the Authority, the Remarketing Agents and the Company to inspect the records at reasonable times. 109 Section 15.04. Qualifications of Indexing Agents. The Indexing Agent shall be a commercial bank, a member of the National Association of Securities Dealers, Inc. or a nationally recognized municipal securities evaluation service authorized by law to perform all the duties imposed upon it by the Indenture. The Indexing Agent may at any time resign and be discharged of the duties and obligations created by the Indenture by giving at least sixty (60) days' written notice to the Authority, the Company, the Remarketing Agents and the Trustee. The Indexing Agent may be removed at any time, at the written direction of the Company, by an instrument, signed by the Authority, filed with the Company, the Indexing Agent, the Remarketing Agents, the Trustee and the Bank. In the event that the Authority shall fail to appoint an Indexing Agent hereunder or the Indexing Agent shall resign or be removed, or be dissolved, or if the property or affairs of the Indexing Agent shall be taken under the control of any state or federal court or administrative body because of bankruptcy or insolvency, or for any other reason, and the Authority shall not have appointed its successor as Indexing Agent, the Remarketing Representative, notwithstanding the provisions of the first paragraph of this Section 15.04, shall ipso facto be deemed to be the Indexing Agent solely for the purpose of determining the interest rate to be borne by the Bonds until the appointment by the Authority of the Indexing Agent or successor Indexing Agent, as the case may be. Section 15.05. Dealings With the Authority and the Company. The Remarketing Agents and the Indexing Agent may in good faith buy, sell, own, hold and deal in any of the Bonds issued hereunder, and may join in any action which any Bondowner may be entitled to take with like effect as if it did not act in any capacity hereunder. The Remarketing Agents and the Indexing Agent, either as principal or agent, may also engage in or be interested in any financial or other transaction with the Authority or the Company, and may act as depository, trustee or agent for any committee or body of Bondowners secured hereby or other obligations of the Authority as freely as if it did not act in any capacity hereunder. Section 15.06. Tender Agent. The Authority shall, with the approval of the Company and the Bank, appoint the Tender Agent for the Bonds, subject to the conditions set forth in Section 15.07. The Tender Agent shall designate its Corporate Trust Office and signify its acceptance of the duties and obligations imposed upon it hereunder by a written instrument of acceptance delivered to the Authority, the Trustee, the Remarketing Agents, the Indexing Agent, the Bank and the Company under which the Tender Agent will agree, particularly to perform its obligations under Article II and to request the Trustee to draw on the Letter of Credit as provided in Section 6.07.1. Notwithstanding anything to the contrary in the Indenture, the Tender Agent shall not invest any moneys it receives from such a draw on the Letter of Credit. The Tender Agent may designate from time to time a different Corporate Trust Office within The City of New York, New York, by a written instrument delivered to the 110 Authority, the Trustee, the Remarketing Agents, the Indexing Agent, the Bank and the Company. The Tender Agent undertakes to perform such duties, and only such duties, as are specifically set forth in the Indenture and in any written instrument of acceptance of duties hereunder and no implied covenants shall be read into the Indenture against the Tender Agent. Insofar as such provisions may be applicable, the Tender Agent shall enjoy the same protective provisions in the performance of its duties hereunder as are specified in Sections 11.03, 11.05, 11.06, 11.07 and 11.14 with respect to the Trustee. Section 15.07. Qualifications of Tender Agent; Resignation; Removal. Any successor Tender Agent shall be a bank or trust company or a corporation duly organized under the laws of the United States of America or any state or territory thereof, which has an office in The City of New York, New York, and having a combined capital stock, surplus and undivided profits of at least $100,000,000 and authorized by law to perform all the duties imposed upon it by the Indenture. The Tender Agent may at any time resign and be discharged of the duties and obligations created by the Indenture by giving at least sixty (60) days' notice to the Authority, the Trustee, the Remarketing Agents, the Indexing Agent and the Company. The Tender Agent may be removed at any time, at the request of the Company, by an instrument, signed by the Authority, delivered to the Tender Agent, and to the Trustee, the Remarketing Agents, the Bank and the Indexing Agent. Any such resignation or removal of the Tender Agent shall not take effect until the appointment of a successor Tender Agent. In the event of the resignation or removal of the Tender Agent, the Tender Agent shall pay over, assign and deliver any moneys and Bonds held by it in such capacity to its successor (provided that to qualify as a successor Tender Agent, such successor, or the parent corporation of such successor, shall be rated at least Baa-3 and/or P-3 or an equivalent rating by Moody's or otherwise be acceptable to Moody's and the Authority) or, if there be no successor, to the Trustee. In the event that the Tender Agent shall resign or be removed, or be dissolved, or if the property or affairs of the Tender Agent shall be taken under the control of the state or federal court or administrative body because of bankruptcy or insolvency, or for any other reason, a successor may be appointed by the Authority with the prior written approval of the Bank and the Trustee. Any such successor shall have an office in The City of New York, New York, and shall be acceptable to the Trustee. Written notice of such appointment shall immediately be given by the Company to the Trustee and the Remarketing Agents and the Trustee shall cause written notice of such appointment to be given to the owners of the Bonds. Any successor Tender Agent shall execute and deliver an instrument accepting such appointment and thereupon such successor, without any further act, deed or conveyance, shall become fully vested with all rights, powers, duties and obligations of its predecessor, with like effect as if originally named as Tender Agent, but such predecessor shall nevertheless, on the written 111 request of the Authority or the Trustee, or of the successor, execute and deliver such instruments and do such other things as may reasonably be required to more fully and certainly vest and confirm in such successor all rights, powers, duties and obligations of such predecessor. If no successor Tender Agent has accepted appointment in the manner provided above within 90 days after the Tender Agent has given notice of its resignation as provided above, the Tender Agent may petition any court of competent jurisdiction for the appointment of a temporary successor Tender Agent; provided that any Tender Agent so appointed shall immediately and without further act be superseded by a Tender Agent appointed by the Authority as provided above. The Tender Agent shall not be required to take or be deemed to have notice of any Event of Default or of any event which the lapse of time or giving of notice, or both, would constitute an Event of Default unless an officer in its Corporate Trust Office shall have received written notice thereof from the Authority, the Bank or the Trustee. 112 ARTICLE XVI MISCELLANEOUS Section 16.01. Parties in Interest. Except as herein otherwise specifically provided, nothing in the Indenture expressed or implied is intended or shall be construed to confer upon any Person other than the Company, the Authority, the Trustee, the Tender Agent, the Bank and the owners of the Bonds hereunder, any right, remedy or claim under or by reason of the Indenture, the Indenture being intended to be for the sole and exclusive benefit of the Company, the Authority, the Trustee, the Bank and the owners of the Bonds. Section 16.02. Severability. In case any one or more of the provisions of the Indenture or of the Bonds issued hereunder shall, for any reason, be held to be illegal or invalid, such illegality or invalidity shall not affect any other provisions of the Indenture or of the Bonds, and the Indenture and the Bonds shall be construed and enforced as if such illegal or invalid provisions had not been contained therein. Section 16.03. No Individual Liability. No covenant or agreement contained in the Bonds or in the Indenture shall be deemed to be the covenant or agreement of any member, agent or employee of the Authority in his or her individual capacity, and neither the members of the Authority nor any official executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof. Section 16.04. Payment Due on Saturdays, Sundays and Holidays. In any case where the date of maturity of interest on or principal of the Bonds or the date fixed for redemption of any Bonds or any Mandatory Purchase Date shall be on a day other than a Business Day, then payment of interest or principal and premium, if any, or Purchase Price, need not be made on such date but may be made (without additional interest) on the next succeeding Business Day, with the same force and effect as if made on the date of maturity or the date fixed for redemption or the Mandatory Purchase Date. Section 16.05. Notices. (a) All notices, certificates, requests or other communications hereunder shall be sufficiently given and shall be deemed given, unless otherwise required by the Indenture, when mailed by first class mail, postage prepaid, addressed as follows: If to the Authority, at 2 Empire State Plaza, Suite 1901, Albany, New York 12223, Attention: President; if to the Company, at 175 East Old Country Road, Hicksville, New York, Attention: Treasurer; if to the Trustee, at 450 West 33rd Street, 15th Floor, New York, New York 10001, Attention: Corporate Trustee Administration Department; if to the Tender Agent, at 55 Water Street, Room 234, North Building, New York, New York 10041, Attention: Corporate Tellers; if to the Bank, at its address specified in the Reimbursement Agreement; and, if to the Indexing Agent or Remarketing Agents, at the address specified in their respective acceptances delivered pursuant to Article XV. A duplicate copy of each notice, certificate, request or other communication given hereunder to the Authority, the Company, the Trustee, 113 the Bank, the Indexing Agent, the Tender Agent or the Remarketing Agents shall also be given to the Authority, the Company and the Trustee. The Company, the Authority, the Trustee, the Bank, the Remarketing Agents and the Indexing Agent may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent. Any notice or other communication to be mailed to Registered Owners of the Bonds hereunder shall be mailed by first class mail in a sealed envelope, postage prepaid, addressed to each such Bondowner as his or her address last appears on the Bond Register. In case, by reason of the suspension of or irregularities in regular mail service, it shall be impractical to mail notice to the Registered Owners of Bonds of any event when such notice is required to be given pursuant to any provision of the Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. (b) So long as the Bonds shall be rated by Moody's, the Trustee shall furnish to Moody's at 99 Church Street, New York, New York, 10007-2796 Attn: Structured Transactions Group or such other office as Moody's may designate to the Trustee, and if the Bonds shall be rated by S&P, the Trustee shall furnish to S&P at 25 Broadway, New York, New York 10004, Attn: Letter of Credit Surveillance Group, (i) a copy of each amendment to the Indenture, Participation Agreement, Letter of Credit, and Reimbursement Agreement of which it has knowledge, (ii) notice of the termination, extension or expiration of any Letter of Credit, (iii) notice of the payment of all the Bonds, (iv) notice of conversion to a Medium-Term Rate Period of greater than three years duration or a Fixed Rate, and (v) notice of any successor Trustee, Paying Agent, Tender Agent or Remarketing Agents; provided, however, that failure by the Trustee to notify Moody's or S&P shall not result in any liability on the part of the Trustee or affect the validity of such documents or actions. SECTION 16.06. GOVERNING LAW. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE CONSTRUCTION OF THE INDENTURE AND OF THE BONDS. Section 16.07. Effective Date; Counterparts. The Indenture shall become effective on delivery. The Indenture may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Section 16.08. References to the Bank. After the establishment of a Fixed Rate for the Bonds and upon receipt by the Trustee of notice from the Bank that all amounts payable to the Bank with respect to draws under the Letter of Credit have been received, all references in the Indenture to the Bank shall be ineffective. Section 16.09. Date for Identification Purposes Only. The date of the Indenture shall be for identification purposes only and shall not be construed to imply that the Indenture was delivered as of any date other than the actual date of the delivery hereof by the parties hereto. 114 IN WITNESS WHEREOF, the Authority has caused the Indenture to be executed by its President and its corporate seal to be hereunto affixed and attested by its Secretary, and the Trustee has caused the Indenture to be executed by one of its authorized officers and attested by one of its authorized officers or persons, all as of the date first above written. NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY By /s/ F. William Valentino ------------------------ (SEAL) President Attest: /s/ Howard A. Jack ------------------- Secretary CHEMICAL BANK AS TRUSTEE (SEAL) By /s/ Gregory McFarlane - ------ --------------------- Vice President Attest: /s/ Richard Lorenzen - -------------------- Senior Trust Officer 115 STATE OF NEW YORK ) : ss.: CITY OF NEW YORK ) On the 23rd day of August, 1995 before me personally came G. McFarlane and R. Lorenzen, to me known, who, being by me duly sworn, did depose and say that they are a(n) Vice President and a(n) Senior Trust Officer, respectively, of Chemical Bank, the Trustee, described in and which executed the above instrument; that they know the seal of said Trustee; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Corporate Trust Committee of the Board of Directors of said Trustee, and that they signed their names thereto by like authority. /s/ Emily Fayan --------------- Notary Public Emily Fayan Notary Public, State of New York No. 24-4737006 Qualified in Kings County Certificate Filed in New York County Commission Expires December 31, 1995 116 STATE OF NEW YORK ) : ss.: COUNTY OF ALBANY ) On the 11th day of August, 1995, before me personally came F. William Valentino, to me known, who being by me duly sworn, did depose and say that he is President of New York State Energy Research and Development Authority, the Authority described in and which executed the above instrument and that he signed his name thereto by authority of the members of said Authority. /s/ Jacquelyn L. Jerry ---------------------- Notary Public Jacquelyn L. Jerry Notary Public, State of New York Qualified in Albany County No. 4679424 Commission Expires July 31, 1997 STATE OF NEW YORK ) : ss.: COUNTY OF ALBANY ) On the 11th day of August, 1995, before me personally came Howard A. Jack, to me known, who being by me duly sworn, did depose and say that he is Secretary of New York State Energy Research and Development Authority, the Authority described in and which executed the above instrument; that he knows the seal of said Authority, the Authority described in and which executed the above instrument; that he knows the seal of said Authority; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the members of said Authority, and that he signed his name thereto by like authority. /s/ Jacquelyn L. Jerry ---------------------- Notary Public Jacquelyn L. Jerry Notary Public, State of New York Qualified in Albany County No. 4679424 Commission Expires July 31, 1997 117 EXHIBIT A NOTICE OF ELECTION TO RETAIN BOND2 FOLLOWING A MANDATORY PURCHASE DATE [Name and Address of Tender Agent] Attention: Bond Tender Unit Ladies and Gentlemen: This notice is being sent to you in your capacity as Tender Agent under the Indenture of Trust (the "Indenture"), dated as of August 1, 1995, between New York State Energy Research and Development Authority (the "Authority") and Chemical Bank as Trustee (the "Trustee"), relating to the Authority's $50,000,000 aggregate principal amount Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1995 Series A (the "Bonds"). You are hereby notified that: 1. The undersigned is the owner of Bond No.(s) __________ outstanding under the Indenture in the principal amount(s) of $__________. 2. The undersigned's address is __________________. 3. The undersigned has received a notice from the Trustee that the Bonds are required to be tendered on the Mandatory Purchase Date for purchase on the Mandatory Purchase Date as a result of the matters discussed in such notices. 4. The undersigned elects to retain Bond No.(s) __________ in the principal amount(s) of $__________ (or any portion thereof in an authorized denomination) and will not tender such Bond(s) (or portion thereof as aforesaid) on the Mandatory Purchase Date (or prior thereto) for purchase pursuant to Section 2.05(e)(4) of the Indenture. 5. The undersigned agrees to surrender such Bond(s) to be retained by the undersigned to Chemical Bank, as Trustee, on the Mandatory Purchase Date in exchange for a replacement Bond or Bonds bearing the appropriate legend and in the following denomination(s): ____________________. - -------- 2 Note: Owners of Bonds may not elect to retain (i) if the Bonds currently bear interest at a Money Market Municipal Rate and (ii) unless the Bonds continue to be secured by a Letter of Credit after the Mandatory Purchase Date or have been converted to a Fixed Rate, as more particularly set forth in Section 2.05(e) of the Indenture. A-1 6. The undersigned acknowledges that this notice of election is irrevocable and that the events specified in the notice from the Trustee referred to in Paragraph 3 above are to occur. 7. The undersigned acknowledges that the rating assigned by Moody's or S&P, if any, to the Bonds may be lowered or withdrawn as a result of the matters described in the notice from the Trustee referred to in Paragraph 3 above. 8. All capitalized terms not otherwise defined herein shall have the meaning given to such terms in the Indenture. Dated: ____________________ - ------------------------------- ------------------------------- Witness Name of owner as it is written on the face of the above-identified Bonds, in every particular without alteration, enlargement or any change whatsoever. A-2 EXHIBIT B REQUISITION CERTIFICATE Long Island Lighting Company (the "Company") hereby requests Chemical Bank, as Trustee, under the Indenture of Trust relating to New York State Energy Research and Development Authority's (the "Authority") Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1995 Series A dated as of August 1, 1995 (the "Indenture"), to withdraw $__________ from the Construction Account in the Project Fund established under the Indenture for purposes permitted by Section 5.03 thereof. In connection with this withdrawal, the Company states as follows: 1. This requisition relates to the Bond Proceeds Sub-Account of the separate account in the Project Fund relating to the Project (as defined in the Indenture). 2. The number of this requisition is No. _____. 3. Payments aggregating $__________ are due to the following persons in the following amounts for expenditures incurred in connection with the Project: Person Amount Item 4. Payment is due to the Company in the total amount of $__________ in reimbursement for amounts paid by the Company in connection with the Project as shown on the Schedule attached hereto. Deposit such payment by wire transfer to the ---------------. 5. Each amount referred to in paragraphs 3 and 4 hereof will be used to pay, or reimburse the Company for, a Cost of Construction of such Project and is a proper charge against the separate account for such Project in the Project Fund. 6. None of the items for which the disbursement is requested has formed the basis for any disbursement heretofore made from the Project Fund. 7. The disbursement will not be used in a manner that would result in a violation of any representation, warranty or covenant contained in Section 5.04 of the Participation Agreement or in the Tax Regulatory Agreement. B-1 8. No "event of default" as defined in the Participation Agreement has occurred and is continuing and no event which with the lapse of time alone would become such a default has occurred and is continuing. 9. No "event of default" as defined in the Indenture has occurred and is continuing and no event which with the lapse of time alone would become such a default has occurred and is continuing. Capitalized terms used in this requisition are used as defined in the Indenture. I am an Authorized Company Representative. LONG ISLAND LIGHTING COMPANY By:____________________________ Name: Title: B-2 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS; LIABILITY UNDER BONDS; INDENTURE TO CONSTITUTE CONTRACT Section 1.01. Definitions...................................... 24 Section 1.02. Rules of construction............................ 39 Section 1.03. Liability under Bonds............................ 39 ARTICLE II DESCRIPTION; AUTHORIZATION; MANNER OF EXECUTION; AUTHENTICATION; REGISTRATION AND TRANSFER OF BONDS Section 2.01. Issuance of Bonds; Designation of Bonds; Certain Particulars and Form of Bonds..........................40 Section 2.02. Additional Particulars of Bonds..........................40 Section 2.03. Interest Rates on Bonds..................................41 Section 2.04. Conversion of Interest Rate on Bonds.....................48 Section 2.05. Optional and Mandatory Tender of Bonds for Purchase...............................................52 Section 2.06. Remarketing of Bonds.....................................58 Section 2.07. Delivery of Purchased Bonds..............................59 Section 2.08. Mutilated, Lost, Stolen or Destroyed Bonds...............61 Section 2.09. Temporary Bonds..........................................62 Section 2.10. Execution of Bonds; Effect of Change of Officers.........62 Section 2.11. Registration of Bonds; Transfers; Securities Depository.............................................62 Section 2.12. Persons Treated as Owners................................65 Section 2.13. Exchange of Bonds........................................65 Section 2.14. Payment For and Limitations on Exchanges and Transfers..............................................65 Section 2.15. Endorsement of Certificate of Authentication on Bonds..................................................66 Section 2.16. Cancellation of Bonds....................................66 Section 2.17. Redemption of Bonds......................................66 (i) Page ARTICLE III SECURITY FOR BONDS; ISSUANCE OF BONDS Section 3.01. Pledge and Assignment Effected by Indenture; Bonds Equally and Ratably Secured...................... 67 Section 3.02. Issuance of Bonds........................................ 67 ARTICLE IV AMENDMENT OF PARTICIPATION AGREEMENT, COMPANY NOTE AND TAX REGULATORY AGREEMENT Section 4.01. Amendments to Participation Agreement not Requiring Consent of Bondowners........................ 69 Section 4.02. Amendments to Participation Agreement Requiring Consent of Bondowners........................ 69 Section 4.03. Amendments to Company Note............................... 70 Section 4.04. Amendments to Tax Regulatory Agreement................... 70 ARTICLE V PROJECT FUND; REBATE FUND Section 5.01. Creation and Custody of Project Fund..................... 71 Section 5.02. Application of Moneys in the Project Fund................ 71 Section 5.03. Construction Account Requisitions........................ 71 Section 5.04. Retention of Requisitions................................ 72 Section 5.05. Certification of Completion of the Project............... 72 Section 5.06. Disposition of Balance Remaining in Project Fund......... 73 Section 5.07. Creation and Custody of Rebate Fund...................... 73 Section 5.08. Application of Moneys in the Rebate Fund................. 73 ARTICLE VI BOND FUND; LETTER OF CREDIT Section 6.01. Creation and Custody of the Bond Fund.................... 75 Section 6.02. Payments into the Bond Fund.............................. 75 Section 6.03. Application of Moneys in the Bond Fund................... 75 Section 6.04. Non-presentment of Bonds................................. 77 Section 6.05. (Intentionally Deleted).................................. 77 (ii) Page Section 6.06. Trustee to Notify Authority and Company of Funds in Bond Fund..................................... 77 Section 6.07. Letter of Credit....................................... 77 ARTICLE VII SECURITY FOR AND INVESTMENT OF MONEYS Section 7.01. Moneys Held in Trust.................................... 80 Section 7.02. Uninvested Moneys Held by the Trustee....................80 Section 7.03. Investment of, and Payment of Interest on, Moneys.................................................80 Section 7.04. Disposition of Amounts After Payment of Bonds............82 ARTICLE VIII REDEMPTION OF BONDS Section 8.01. Bonds to be Redeemed Only in Manner Provided in Article VIII........................................83 Section 8.02. Redemption of Less Than all Bonds........................84 Section 8.03. Notice of Redemption.....................................84 Section 8.04. Rights of Owners of Bonds Called for Redemption Limited to Redemption Price and Accrued 84 Interest Section 8.05. Redemption at Demand of the State....................... 85 ARTICLE IX PARTICULAR COVENANTS Section 9.01. Payment of Principal of and Interest and Redemption Premium of Bonds...........................86 Section 9.02. Performance of Covenants................................86 Section 9.03. Further Instruments.....................................86 Section 9.04. Inspection of Project Books.............................86 Section 9.05. No Extension of Time of Payment of Interest.............86 Section 9.06. Trustee's, Paying Agent's, Indexing Agent's, Tender Agent's and Remarketing Agents's Fees, Charges and Expenses...............................................87 (iii) Page Section 9.07. Agreement of the State of New York..................... 87 ARTICLE X DEFAULTS AND REMEDIES Section 10.01. Events of Default...................................... 88 Section 10.02. Judicial Proceedings by Trustee........................ 90 Section 10.03. Effect of Discontinuance or Abandonment of Proceedings.......................................... 90 Section 10.04. Power of Bondowners to Direct Proceedings.............. 90 Section 10.05. Limitation on Actions by Bondowners.................... 91 Section 10.06. Trustee's Right to Enforce Rights in Respect of Bonds in Own Name and Without Possession of Bonds.... 91 Section 10.07. No Remedy herein Conferred upon or Reserved Exclusive............................................ 91 Section 10.08. No Delay or Omission to be Deemed Waiver of Default.............................................. 92 Section 10.09. Application of Moneys Received by Trustee Pursuant to Article X................................ 92 Section 10.10. Entirety of Agreement.................................. 93 Section 10.11. Notice of Event of Default............................. 94 ARTICLE XI CONCERNING THE TRUSTEE AND PAYING AGENT Section 11.01. Appointment of Trustee; Paying Agents................... 95 Section 11.02. No Responsibility for Correctness of Statements in Indenture...........................................95 Section 11.03. No Responsibility for Default of Agents Selected with Due Care, nor for Own Acts Save Willful Misconduct or Negligence.............................................95 Section 11.04. No Duty to Take Enforcement Action Unless so Requested by Owners of 25% of the Bonds................96 Section 11.05. Right to Rely............................................96 Section 11.06. Right to Own and Deal in Bonds and Engage in Other Transactions with Authority and Company..........97 Section 11.07. Construction of Provisions of Indenture by Trustee................................................97 (iv) Page Section 11.08. Right to Resign Trust...................................97 Section 11.09. Removal of Trustee......................................97 Section 11.10. Appointment of Successor Trustee by Bondowners or Authority..........................................97 Section 11.11. Qualifications of Successor Trustee.....................98 Section 11.12. Court Appointment of Successor Trustee..................98 Section 11.13. Acceptance of Appointment by, and Transfer of Trust Estate to, Successor Trustee....................98 Section 11.14. Successor Trustee by Merger or Consolidation............99 Section 11.15. Exercise of Rights and Powers During Event of Default...............................................99 Section 11.16. Trustee may Intervene in Judicial Proceedings Involving Authority or the Company....................99 Section 11.17. Paying Agents...........................................99 Section 11.18. Appointment of Co-Trustee...............................00 ARTICLE XII EXECUTION OF INSTRUMENTS BY BONDOWNERS AND PROOF OF OWNERSHIP OF BONDS Section 12.01. Execution of Instruments; Proof of Ownership of Bonds..................................... 102 ARTICLE XIII INDENTURES SUPPLEMENTAL HERETO Section 13.01. Supplemental Indentures not Requiring Consent of Bondowners..............................................103 Section 13.02. Supplemental Indentures Requiring Consent of Bondowners..............................................103 Section 13.03. Company and Bank Consent to Amendment of Indenture...............................................104 (v) Page ARTICLE XIV DEFEASANCE Section 14.01. Defeasance.............................................. 105 ARTICLE XV REMARKETING AGENTS; REMARKETING OF BONDS; INDEXING AGENT; TENDER AGENT Section 15.01. Appointment and Duties of Remarketing Agents.............108 Section 15.02. Qualifications of a Remarketing Agent....................108 Section 15.03. Appointment and Duties of Indexing Agents................109 Section 15.04. Qualifications of Indexing Agents........................110 Section 15.05. Dealings With the Authority and the Company..............110 Section 15.06. Tender Agent.............................................110 Section 15.07. Qualifications of Tender Agent; Resignation; Removal................................................111 ARTICLE XVI MISCELLANEOUS Section 16.01. Parties in Interest......................................113 Section 16.02. Severability.............................................113 Section 16.03. No Individual Liability..................................113 Section 16.04. Payment Due on Saturdays, Sundays and Holidays...........113 Section 16.05. Notices..................................................113 SECTION 16.06. GOVERNING LAW............................................114 Section 16.07. Effective Date; Counterparts.............................114 Section 16.08. References to the Bank...................................114 Section 16.09. Date for Identification Purposes Only....................114 EXHIBIT A NOTICE OF ELECTION TO RETAIN BOND FOLLOWING A MANDATORY PURCHASE DATE......................................... A-1 EXHIBIT B REQUISITION CERTIFICATE..................................B-1 (vi) Exhibit 10(x) NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY AND LONG ISLAND LIGHTING COMPANY PARTICIPATION AGREEMENT Dated as of August 1, 1995 - relating to - Electric Facilities Revenue Bonds (Long Island Lighting Company Project), 1995 Series A This PARTICIPATION AGREEMENT, dated as of August 1, 1995, between NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY, a body corporate and politic, constituting a public benefit corporation, established and existing under and by virtue of the laws of the State of New York (the "Authority"), and LONG ISLAND LIGHTING COMPANY, a corporation duly organized and existing and qualified to do business as a public utility under the laws of the State of New York (the "Company"), W I T N E S S E T H : WHEREAS, pursuant to a special act of the Legislature of the State of New York (Title 9 of Article 8 of the Public Authorities Law of New York, as from time to time amended and supplemented, herein called the "Act"), the Authority has been established, as a body corporate and politic, constituting a public benefit corporation; and WHEREAS, pursuant to the Act, the Authority is empowered to contract with any power company to participate in the construction of facilities for the furnishing of electricity to the extent required by the public interest in development, health, recreation, safety, conservation of natural resources and aesthetics; and WHEREAS, pursuant to the Act, the Authority has also been empowered to extend credit and make loans from bond and note proceeds to any person for the construction, acquisition and installation of, or for the reimbursement to any person for costs in connection with, any special energy project, including, but not limited to, any land, works, system, building or other improvement, and all real and personal properties of any nature or any interest in any of them which are suitable for or related to the furnishing, generation or production of energy; and WHEREAS, the Authority is also authorized under the Act to borrow money and issue its negotiable bonds and notes to provide sufficient moneys for achieving its corporate purposes; and WHEREAS, the Authority is also authorized under the Act to enter into any contracts and to execute all instruments necessary or convenient for the exercise of its corporate powers and the fulfillment of its corporate purposes; and WHEREAS, the Company is a public utility corporation doing business in the State of New York and operates power plants in the State of New York; and WHEREAS, the Company has requested that the Authority participate in financing the acquisition, construction and installation of certain facilities for the furnishing of electric energy within the Company's service area (such facilities for the furnishing of electric energy being hereinafter referred to as the "Project") and, as part of such participation, that the Authority issue bonds pursuant to the Act to provide funds to finance the cost to the Company of the Project and the expenses incurred in connection with the authorization, issuance and sale of such bonds; and WHEREAS, the Authority, pursuant to Resolution No. 850, adopted January 30, 1995, has determined to issue its Electric Facilities Revenue Bonds (Long Island Lighting Company Project), bearing the series designation set forth on the first page of this Participation Agreement in an aggregate principal amount of $50,000,000 (the "Bonds"), for the purpose of financing a portion of such costs and expenses, all such Bonds to be issued under and secured by an Indenture of Trust relating to the Bonds dated as of August 1, 1995, between the Authority and Chemical Bank, as Trustee (the "Indenture"); NOW, THEREFORE, for and in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, it is hereby agreed by and between the parties as follows: 2 ARTICLE I DEFINITIONS; RULES OF CONSTRUCTION; EFFECTIVE DATE AND DURATION OF PARTICIPATION AGREEMENT Section 1.01. Definitions. The terms used in this Participation Agreement which are defined in Section 1.01 of the Indenture shall have the meanings, respectively, herein, which such terms are given in said Section 1.01 of the Indenture. Section 1.02. Rules of Construction. Unless the context clearly indicates to the contrary, the following rules shall apply to the construction of the Participation Agreement: (a) Words importing the singular number shall include the plural number and vice versa; (b) All references herein to particular articles or sections are references to articles or sections of the Participation Agreement; (c) The captions and headings herein are solely for convenience of reference and shall not constitute a part of the Participation Agreement nor shall they affect its meaning, construction or effect; (d) The terms "hereby," "hereof," "hereto," "herein," "hereunder" and any similar terms, as used in the Participation Agreement, refer to the Participation Agreement in its entirety and not to the particular article or section of the Participation Agreement in which they appear, and the term "hereafter" means after, and the term "heretofore" means before, the date of the Participation Agreement; and (e) In the event that there is any conflict between the provisions of the Participation Agreement and those of the Indenture, the provisions of the Indenture shall govern the disposition of such conflict. Section 1.03. Effective Date of Participation Agreement; Duration of Participation Agreement. This Participation Agreement shall become effective upon its execution and delivery, and shall continue in full force and effect until the principal of, and premium, if any, and interest on, the Company Note and Bonds have been fully paid (or provision for their payment has been made in accordance with the provisions of the Indenture) and all sums to which the Authority or the Trustee are entitled hereunder have been fully paid. 3 ARTICLE II REPRESENTATIONS Section 2.01. Representations and Warranties by the Authority. The Authority represents and warrants as follows: (a) The Authority is a body corporate and politic, constituting a public benefit corporation, established and existing under the laws of the State of New York; (b) The Authority has full power and authority to execute and deliver this Participation Agreement, the Indenture and the Tax Regulatory Agreement and to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder; (c) The Authority is not in default under any of the provisions of the laws of the State of New York which would affect its existence or its powers referred to in the preceding paragraph (b); (d) The Authority has determined that its participation in the financing of the Project, as contemplated by this Participation Agreement, is in the public interest; (e) The Authority has duly authorized the execution and delivery of this Participation Agreement, the Indenture and the Tax Regulatory Agreement and the execution and delivery of the other documents incidental to this transaction, and all necessary authorizations therefor or in connection with the performance by the Authority of its obligations hereunder or thereunder have been obtained and are in full force and effect; and (f) The execution and delivery by the Authority of this Participation Agreement, the Indenture and the Tax Regulatory Agreement and the consummation of the transactions herein or therein contemplated will not violate any indenture, mortgage, loan agreement or other contract or instrument to which the Authority is a party or by which it is bound, or to the best of the Authority's knowledge, any judgment, decree, order, statute, rule or regulation applicable to the Authority. Section 2.02. Representations and Warranties by the Company. The Company represents and warrants as follows: (a) The Company is a corporation duly incorporated and in good standing under the laws of the State of New York, is duly qualified and authorized to engage in business as a public utility in the State of New York, has power to enter into, execute and deliver this Participation Agreement, the Tax Regulatory Agreement and the Company Note by 4 proper corporate action and has duly authorized the execution and delivery by it of this Participation Agreement, the Tax Regulatory Agreement and the Company Note; (b) The execution and delivery by the Company of this Participation Agreement, the Tax Regulatory Agreement and the Company Note and the consummation of the transactions herein contemplated do not conflict with or constitute a breach of or a default under the Company's Certificate of Incorporation, By-Laws or any indenture, mortgage, loan agreement or other contract or instrument to which the Company is a party or by which it is bound, or to the best of the Company's knowledge, any judgment, decree, order, statute, rule or regulation applicable to the Company; (c) This Participation Agreement, the Tax Regulatory Agreement and the Company Note constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforcement may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or other laws, judicial decisions or principles of equity relating to or affecting the enforcement of creditors' rights or contractual obligations generally; (d) The execution and delivery by the Company of this Participation Agreement and the Company Note in the manner and for the purposes herein set forth have been duly authorized by an order of the Public Service Commission of the State of New York; (e) No additional authorizations for or approvals of the execution and delivery by the Company of this Participation Agreement, the Tax Regulatory Agreement and the Company Note need be obtained by the Company or if any such authorization or approval is necessary it has been obtained; and (f) The representations of the Company set forth in the Tax Regulatory Agreement are hereby incorporated by reference as though fully set forth herein. 5 ARTICLE III CONSTRUCTION OF THE PROJECT; ISSUANCE OF BONDS Section 3.01. Construction of the Project. 1. The Company will construct and complete or cause construction and completion of the Project with reasonable dispatch and in accordance with the Company's construction plans therefor. The Project shall belong to and be the property of the Company. In order to effectuate the purposes of this Participation Agreement, the Company will do or cause to be done all things requisite or proper for the construction of the Project and the fulfillment of the obligations of the Company under this Participation Agreement. 2. Notwithstanding any other provision of this Participation Agreement to the contrary, the Company shall not be required to complete the construction of any component of the Project with respect to which funds have not been disbursed from the Project Fund if in the Company's business judgment it is not necessary or advisable to do so, provided that failure to complete the construction of such component will not affect the character or intended purpose of any other component of such Project and provided further that the estimated Cost of Construction of the components of the Project yet to be completed (as estimated by the Company at the time it determines not to complete any component) is at least equal to the amount of moneys remaining in the Project Fund. Notwithstanding any other provision of this Participation Agreement to the contrary, the Company shall not be required to complete the construction of any component of the Project if in the Company's business judgment it is not necessary or advisable to do so and the Company shall have delivered to the Authority an opinion of Bond Counsel to the effect that failure to complete such component of such Project will not adversely affect the qualification of any other component of such Project for financing under the Act or the exclusion from gross income for Federal income tax purposes of interest on the Bonds. Section 3.02. Sale of Bonds and Deposit of Proceeds; Liability Under Bonds. 1. In order to provide funds for payment of a portion of the Cost of Construction of the Project, the Authority, as soon as practicable after the execution of this Participation Agreement will issue, sell and deliver the Bonds to the initial purchasers thereof, all pursuant to and as provided in the Purchase Contract for the Bonds among the Authority, the Company, Lehman Brothers Inc. and Dillon, Read & Co. Inc. and will deposit the proceeds of such sale of the Bonds with the Trustee, as follows: (i) in the Bond Fund, a sum equal to the accrued interest, if any, paid by the initial purchasers of the Bonds and (ii) in the Construction Account of the Project Fund, the balance of the proceeds received from such sale. 2. The Bonds shall not be general obligations of the Authority, and shall not constitute an indebtedness of, or a charge against the general credit of, the Authority or give rise 6 to any pecuniary liability of the Authority. The liability of the Authority under the Bonds shall be enforceable only to the extent provided in the Indenture, and the Bonds shall be payable solely from the Company Note Payments, funds drawn under the Letter of Credit and any other funds held by the Trustee under the Indenture and available for such payment. The Bonds shall not be a debt of the State of New York, and the State of New York shall not be liable thereon. Section 3.03. Disbursements from Project Fund and Rebate Fund. 1. The Authority has, in the Indenture, authorized and directed the Trustee to make payments from the Project Fund, in accordance with and subject to the provisions of Section 5.03 of the Indenture, to pay the Cost of Construction of the Project upon receipt from time to time of requisitions signed by an Authorized Company Representative, stating with respect to each payment to be made for the Project the information required by Section 5.03 of the Indenture. The Company will cause such requisitions to be submitted to the Trustee as may be necessary to effect payments out of the Project Fund in accordance with the provisions of the Indenture. Concurrently with the delivery by the Company of each requisition to the Trustee, the Company will deliver to the Authority a copy of such requisition and any attachments thereto. The Authority and the Trustee may rely on the Company as to the completeness and accuracy of all statements in such requisition, and the Company will indemnify and save harmless the Authority and the Trustee from any liability incurred in connection with any requisition so delivered and the payment of funds in reliance thereon. 2. All moneys remaining in the Project Fund after the certificate referred to in Section 5.05 of the Indenture is furnished shall, at the written direction of an Authorized Company Representative, be applied in accordance with Section 5.06 of the Indenture. Section 3.04. Revision of Construction Plans. The Company may revise the construction plans for the Project at any time and from time to time; provided, however, that no such revision shall be made prior to the Completion Date with respect to such Project which would render the description of such Project inaccurate in any material respect, except in accordance with the following procedure: (a) Prior to any such revision the Company shall deliver to the Trustee and the Authority (1) a certificate of an Authorized Company Representative, setting forth the text of the change in the description of such Project which would be necessary to reflect accurately the proposed revision in plans and specifications, and certifying that, notwithstanding such revision, such Project will still be designed to serve the purposes which would have been served by such Project in the absence of such revision, and (2) an opinion of Bond Counsel that such revision of such Project description and the expenditure of moneys from the Project Fund under the provisions of the Indenture to pay the Cost of Construction of such Project in accordance with the revised description of such Project will not impair the exclusion of interest on any of the Bonds then outstanding from gross income for Federal income tax purposes. 7 (b) Ten (10) days after the receipt by the Authority and the Trustee of the certificate and opinion referred to in paragraph (a) above, such Project description shall be deemed amended to include such revision for all purposes of this Participation Agreement and the Indenture. Upon the request of either party or the Trustee, the Authority and the Company shall enter into an appropriate instrument reflecting such amendment. Section 3.05. Certification of Completion of Project. When the Project has been completed (except for components that the Company has determined not to complete in accordance with Section 3.01), the Company shall promptly deliver to the Trustee and the Authority a certificate of an Authorized Company Representative to the effect that, as of a specified date, the Project has been completed (except as aforesaid). Such certificate shall specify the components of the Project, if any, the completion of which has been excused pursuant to Section 3.01. The certificate delivered pursuant to this Section 3.05 shall also contain an appropriate direction to the Trustee with respect to any amount in the Project Fund which is to be retained or thereupon disposed of as provided in Section 5.06 of the Indenture. The Trustee may rely as to the accuracy and completeness of all statements in such certificate. Notwithstanding the foregoing, such certificate shall be given and may state that it is given without prejudice to any rights against third parties which exist at the date thereof or which may subsequently come into being. Section 3.06. Payment of Cost of Construction of the Project in Event Project Fund Inadequate. If the moneys in the Project Fund available therefor shall not be sufficient to pay the Cost of Construction of the Project in full (whether due to investment losses or otherwise), the Company shall, subject to the provisions of Section 3.01, complete the Project and pay (whether through financing or otherwise) all that portion of the Cost of Construction thereof in excess of the moneys available therefor in the Project Fund. The Authority does not make any warranty, either express or implied, that the moneys which will be paid into the Project Fund will be sufficient to pay the Cost of Construction of the Project. If the Company shall pay any portion of the Cost of Construction of the Project pursuant to the provisions of this Section, except to the extent it may submit requisitions pursuant to Section 5.03 of the Indenture, it shall not be entitled to any reimbursement therefor from the Authority, the Trustee or the owners of any of the Bonds, nor shall it be entitled to any diminution in or postponement of the payments required to be paid by the Company pursuant to this Participation Agreement or the Company Note. Section 3.07. No Interest in Project Conferred. Neither the Authority nor the Trustee shall be entitled to any interest in the Project by reason of the advance of Bond proceeds pursuant to this Participation Agreement. Section 3.08. Operation, Maintenance and Repair. The Authority and the Company recognize that the Project will constitute integrated portions of the electric energy 8 production, transmission, and distribution facilities of the Company and that it is not feasible to administer the Project separately from such facilities. The Company shall operate the Project (with such changes, improvements or additions as the Company may deem desirable) as part of such facilities for the joint useful life of the Project and such facilities and shall maintain and repair the Project in conformity with the Company's normal maintenance and repair programs for such facilities provided that the Company shall have no obligation to operate, maintain or repair any element or item of the Project the operation, maintenance, or repair of which becomes uneconomic to the Company because of damage or destruction or obsolescence (including physical, functional and economic obsolescence), or change in government standards and regulations, or the termination of the operation of the facilities to which the element or item of the Project is an adjunct; and provided further that, in any event, the Company is proceeding in good faith to maintain the availability of the Project for use as an authorized project under the Act. Section 3.09. Investment of Moneys in Funds Under the Indenture. Any moneys held as a part of any fund created under the Indenture shall be invested or reinvested by the Trustee as provided in Article VII of the Indenture. Any such investment shall be consistent with the provisions of the Tax Regulatory Agreement. Section 3.10. Agreement not to Exercise Option to Convert to Fixed Rate Absent Specified Rating. The Company agrees not to direct that a Fixed Rate become effective pursuant to Section 2.04(b) of the Indenture unless the Company shall have delivered to the Authority evidence satisfactory to the Authority that upon conversion to a Fixed Rate the Bonds are expected to be rated in at least the third highest rating category of Moody's or S&P (currently "A" in the case of Moody's and "A" in the case of S&P). Section 3.11. Securities Depository. The Company acknowledges that the Authority and the Trustee, at the request of the Company, have arranged for the initial deposit of the Bonds with The Depository Trust Company ("DTC") which will act as Securities Depository in order to effectuate a book-entry-only system and that this system may be discontinued or, if discontinued, reinstituted (with DTC or another Securities Depository) in accordance with the Indenture. The Company agrees to take all actions necessary, and to refrain from taking actions contrary to the effectuation of a book-entry-only system established pursuant to the Indenture and any arrangements among the Authority, the Trustee and any Securities Depository. The Authority shall not enter into any written agreements with a Securities Depository without receipt and acceptance of such agreements by the Company. 9 ARTICLE IV COMPANY NOTE AND PAYMENTS; LETTER OF CREDIT Section 4.01. Execution and Delivery of Company Note to Trustee. 1. Concurrently with the authentication by the Trustee and delivery by the Authority of the Bonds and in order to evidence the obligation of the Company to the Authority to repay the advance of the proceeds of the Bonds, the Authority hereby directs the Company, and the Company hereby agrees, to execute and deliver to the Trustee its Company Note and to duly and punctually pay the principal of, premium, if any, and interest on, the Company Note at the place, the times and in the manner provided therein. The Company Note shall be substantially in the form attached hereto as EXHIBIT C. 2. The obligation of the Company to make any payment of principal of, and premium, if any, and interest on, the Company Note shall be deemed satisfied and discharged to the extent of the corresponding payment made by the Bank under the Letter of Credit. Section 4.02. Redemption of Bonds. Whenever Bonds are redeemable in whole or in part, the Authority will redeem the same at the written direction of an Authorized Company Representative given in accordance with Section 8.01 of the Indenture. Section 4.03. Obligation for Payment Absolute; Deficiencies. The Company agrees that its obligation to make the Company Note Payments and payments under Section 4.11 at the times and in the amounts provided in the Company Note and this Participation Agreement shall be absolute, irrevocable and unconditional and shall not be subject to any defense (other than payment) or any right of set-off, counterclaim or recoupment for any reason, including, without limitation, the unenforceability (because of judicial decision or otherwise) or the impossibility of performance of the Company Note obligations, or any breach by the Authority of any obligation to the Company, whether under this Participation Agreement or otherwise, or inaccuracy of any representation by the Authority to the Company under this Participation Agreement or in any other instrument, or any indebtedness or liability at any time owing to the Company by the Authority, or any failure to complete the Project, or the destruction by fire or other casualty of the Project or any portion thereof, or the taking of title thereto or the use thereof by the exercise of the power of eminent domain. If for any reason Company Note Payments, together with other moneys held by the Trustee and then available for such purpose (including moneys paid by the Bank under the Letter of Credit), would not be sufficient to make the corresponding payments of principal of, and premium, if any, and interest on, the Bonds when such payments are due, the Company will pay the amounts required from time to time to make up any such deficiency. If for any reason payments under Section 4.11, together with other moneys held by the Trustee and the Tender Agent and then available for such purpose (including moneys paid by the Bank under the Letter of Credit), would not be sufficient to make the corresponding payments of the purchase price of the Bonds when such payments are due, the Company will pay the amounts required from time to time to make up any such deficiency. 10 Section 4.04. Administration Fees; Expenses, Etc. In order to defray a portion of the expenses incurred by the Authority in conducting and administering its programs for the acquisition and construction of facilities for the furnishing of electricity, special energy projects and the development of advanced technologies, the Company shall pay to the Authority an initial Administration Fee in the amount of $125,000 on the date of the delivery of the Bonds to the initial purchasers thereof and an annual Administration Fee in the amount of $6,500 on August 1 of each year commencing August 1, 1996, until the Bonds are no longer outstanding. In addition, the Company shall pay to the State of New York with respect to the Bonds a bond issuance charge in the amount of $175,000 on the date of authentication and delivery of the Bonds to the initial purchasers. In addition to such Administration Fees, the Company will pay or reimburse the Authority upon its request for all reasonable expenses, disbursements and advances incurred or made by the Authority (including printing costs and the reasonable fees, expenses and disbursements of its counsel, bond counsel and co-bond counsel) in connection with the Participation Agreement, the Indenture or any transaction or event contemplated by the Participation Agreement, the Tax Regulatory Agreement or the Indenture. Section 4.05. Compensation of Trustee, Paying Agent, Remarketing Agents, Indexing Agent and Tender Agent. The Company agrees: (1) to pay to the Trustee from time to time upon its request reasonable compensation for all services rendered by it in any capacity under the Indenture (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as so otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred by it in any capacity under the Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; (3) to pay to the Paying Agent from time to time upon its request, reasonable compensation for all services rendered by it as Paying Agent under the Indenture and reimburse it for its reasonable expenses incurred under the Indenture (including reasonable compensation and expenses and disbursements of its agents and counsel), except any such expense as may be attributable to its negligence or bad faith; and (4) to pay to the Remarketing Agents, the Tender Agent and the Indexing Agent their reasonable fees and expenses as and when the same become due, except any such expense as may be attributable to such person's negligence or bad faith. 11 Section 4.06. Project Not Security for Bonds. It is expressly recognized by the parties hereto that neither the Project nor any other property of the Company will constitute any part of the security for the Bonds. Section 4.07. Payment of Taxes and Assessments; No Liens or Charges. The Company will (a) pay, when the same shall become due, all taxes and assessments, including income, profits, property or excise taxes, if any, or other municipal or governmental charges, imposed, levied or assessed by the Federal, state or any municipal government upon the Authority, the Tender Agent or the Trustee in respect of any payments (other than payments made pursuant to Sections 4.04 and 4.05) made or to be made pursuant to this Participation Agreement or the Company Note and (b) pay or cause to be discharged, within sixty (60) days after the same shall accrue, any lien or charge upon any such payment made or to be made under this Participation Agreement, provided that the Company shall not be required to pay any such tax or assessment so long as (i) the Company at its expense contests, by appropriate legal proceedings conducted in good faith and with due diligence, the amount, validity or application of any such tax, assessment or charge, (ii) such proceedings shall have the effect of suspending the collection thereof from the Authority, the Trustee and the Tender Agent, and (iii) the Company shall indemnify and hold the Authority, the Trustee and the Tender Agent harmless from any losses, costs, charges, expenses (including reasonable attorneys' fees and disbursements), judgments and liabilities arising in respect of such tax, assessment or charge and the nonpayment thereof. Section 4.08. Indemnification of Authority, Trustee, Tender Agent, Paying Agent, Remarketing Agents and Indexing Agent. Any obligation of the Authority created by or arising out of this Participation Agreement shall be a limited obligation of the Authority, payable solely from the Company Note Payments, any payments by the Company under Section 4.11, funds drawn under the Letter of Credit and any other funds held by the Trustee under the Indenture and available for such payment, and shall not constitute an indebtedness of or a charge against the general credit of the Authority and shall not constitute or give rise to any pecuniary liability of the Authority; nevertheless, if the Authority shall incur any such pecuniary liability, then in such event the Company shall indemnify and hold the Authority harmless by reason thereof. The Company releases the Authority, the Trustee, the Paying Agent, the Remarketing Agents, the Tender Agent and the Indexing Agent from, agrees that the Authority, the Trustee, the Remarketing Agents, the Tender Agent, the Paying Agent and the Indexing Agent shall not be liable for, and agrees to indemnify and hold the Authority, the Trustee, the Paying Agent, the Remarketing Agents, the Tender Agent and the Indexing Agent harmless from, any liability for any loss or damage to property or any injury to or death of any person that may be occasioned by any cause whatsoever arising out of the construction or operation of the Project or the financing thereof. The Company agrees to indemnify and hold the Authority, its members, officers and employees, the Trustee, the Tender Agent, the Remarketing Agents, the Paying Agent and the Indexing Agent harmless from any losses, costs, charges, expenses (including reasonable attorneys' fees and disbursements), judgments and liabilities incurred by it or them, as the case may be, in connection with any claims made, any action, suit or proceeding instituted 12 or threatened, in connection with the transactions contemplated by this Participation Agreement or the Indenture so long as, in the case of the Authority, its members, officers and employees, it or they, as the case may be, have acted in good faith to carry out the transactions contemplated by this Participation Agreement, the Remarketing Agreement or the Indenture and, except, in the case of the Trustee, the Tender Agent, the Paying Agent and the Indexing Agent, the Trustee's, the Tender Agent's, the Paying Agent's and the Indexing Agent's willful misconduct or negligence. Section 4.09. Company to Pay Attorneys' Fees and Disbursements. If the Company shall default under any of the provisions of this Participation Agreement and the Authority or the Trustee or both of them shall employ attorneys or incur other expenses for the collection of payments due under this Participation Agreement or for the enforcement of performance or observance of any obligation or agreement on the part of the Company contained in this Participation Agreement, the Company will on demand therefor reimburse the reasonable fees of such attorneys and such other reasonable disbursements so incurred. Section 4.10. No Abatement of Administration Fees and Other Charges. It is understood and agreed that so long as any Bonds are outstanding under the Indenture, Administration Fees and other charges payable to the Authority pursuant to this Participation Agreement shall continue to be payable at the times and in the amounts herein specified, whether or not the Project, or any portion thereof, shall have been destroyed by fire or other casualty, or title thereto or the use thereof shall have been taken by the exercise of the power of eminent domain, and that there shall be no abatement of any such Administration Fees and other charges by reason thereof. Section 4.11. Payment to Tender Agent. The Company shall pay, or cause to be paid, to the Tender Agent amounts equal to the amounts to be paid pursuant to Section 2.05 of the Indenture in respect of Bonds tendered for purchase or deemed to be so tendered pursuant to the terms of Section 2.05 of the Indenture, such amounts to be paid by the Company to the Tender Agent on the dates such payments pursuant to Section 2.05 of the Indenture are to be made; provided, however, that the obligation of the Company to make any such payment shall be reduced by the amount of any moneys available for such payment under clauses (i) through (iii) of Section 2.05(h) of the Indenture and provided, further, that the obligation of the Company to make any such payment shall be deemed satisfied and discharged to the extent of the corresponding payment made by the Bank under the Letter of Credit. Section 4.12. The Letter of Credit. At all times on or prior to the Fixed Rate Conversion Date except during any period when all the Bonds then outstanding are held by or for the account of the Company, a Letter of Credit meeting the requirements of this Section 4.12 shall be in effect and, in the event that an Alternate Credit Facility is to replace an expiring Letter of Credit, the requirements of Section 6.07 of the Indenture will be fulfilled. A Letter of Credit shall be an obligation of a bank or banks, insurance company or companies, other financial institution or institutions, or any combination of the foregoing, entitling the Trustee to 13 draw up to (a) an amount equal to the principal amount of the Bonds then outstanding to pay (i) the principal of the Bonds when due, or (ii) the portion of the Purchase Price of Bonds corresponding to principal, plus (b) an amount equal to 210 days' accrued interest on the Bonds then outstanding computed at the maximum rate specified in such Letter of Credit, which shall in no event exceed fifteen percent (15%), on the basis of a 360-day year. A Letter of Credit shall expire on the earliest occurrence of (1) at its stated expiration date, which shall be no earlier than one (1) day after the next succeeding Optional Tender Date or Purchase Date not less than six months from its effective date, (2) when all available amounts have been drawn, (3) the first business day following the effective date of the Fixed Rate Conversion Date, (4) on the effective date of any Alternate Credit Facility that replaces the then effective Letter of Credit, (5) the earliest date on which no Bonds are outstanding and (6) twelve (12) days after the Trustee receives notice from the Bank that it is terminating the Letter of Credit and directing the Trustee to cause a mandatory tender and purchase of or to accelerate the Bonds. A Letter of Credit shall provide that when there is a drawing to pay interest on scheduled payment dates, if the Trustee does not receive from the Bank by the close of business on a day specified therein, which shall not be later than the fourth (4th) day following such a drawing in respect of interest, notice by telephone confirmed in writing (or by other means acceptable to the Trustee and the Authority) that the amount available to be drawn has not been reinstated by the amount of the drawing for interest (except on principal of a Bond being paid or purchased and cancelled), the amount available to be drawn will automatically be reinstated by the amount of the drawing on such specified day. 14 ARTICLE V SPECIAL COVENANTS Section 5.01. No Warranty as to Suitability of Project. The Authority makes no warranty, either express or implied, with respect to actual or designed capacity of the Project, as to the suitability of the Project for the purposes specified in this Participation Agreement, as to the condition of the Project, or as to the suitability of the Project for the Company's purposes or needs. Section 5.02. Authority's Rights to Inspect Project and Plans and Specifications. The Authority shall have the right at all reasonable times to examine and inspect the Project and, to the extent reasonably available, the plans and specifications therefor and such other information and records relating to the Project as may be reasonably necessary to establish the qualification of the Project for financing under the Act and compliance with this Participation Agreement. Section 5.03. Company Consent to Amendment of Indenture. The Authority shall not enter into any indenture supplemental to or amendatory of the Indenture without the prior consent of the Company as evidenced by a certificate in writing signed by an Authorized Company Representative. Section 5.04. Tax Covenant. Notwithstanding any other provision hereof, the Company covenants and agrees that it will not take or authorize or permit any action to be taken with respect to the Project, or the proceeds of Bonds, including any amounts treated as proceeds of the Bonds for any purpose of Section 103 of the Code, which will result in the loss of the exclusion of interest on the Bonds from gross income for Federal income tax purposes under Section 103 of the Code (except for any Bond during any period while any such Bond is held by a person referred to in Section 147(a) of the Code). This provision shall control in case of conflict or ambiguity with any other provision of this Participation Agreement. In furtherance of such covenant and agreement, the Authority and the Company have entered into the Tax Regulatory Agreement and the Company hereby agrees to comply with the provisions thereof insofar as the Tax Regulatory Agreement relates to the Bonds. Section 5.05. Company Agrees to Perform Obligations Imposed by Indenture. The Company agrees to perform such obligations as may be required of it by the provisions of the Indenture. Section 5.06. Maintenance of Office or Agency of Company. The Company will at all times keep in Hicksville, New York, or another location in the State of New York an office or agency where notices and demands with respect to the Company Note and this Participation Agreement may be served, and will, from time to time, give written notice to the Trustee and the Authority of the location of such office or agency; and, in case the Company 15 shall fail so to do, notices may be served and demands may be made at the principal office of the Trustee. Section 5.07. Further Assurances. The Company will make, execute, acknowledge and deliver, or cause to be made, executed, acknowledged and delivered, to the Trustee any and all such further acts, instruments or assurances as may be reasonably required for effectuating the intention of this Participation Agreement and the Company Note. Section 5.08. Payment of Taxes and Other Charges. The Company will promptly pay and discharge, or cause to be paid and discharged, as the same become due and payable, any and all taxes, rates, levies, assessments, and governmental liens, claims and other charges at any time lawfully imposed or accruing upon or against the Company or upon or against its properties or any part thereof, or upon the income derived therefrom or from the operations of the Company, provided that the Company shall not be required to pay or discharge, or cause to be paid or discharged, any such obligation, tax, rate, levy, assessment, lien, claim or other charge so long as in good faith and by appropriate legal proceedings the validity thereof shall be contested. Section 5.09. Maintenance of Properties. The Company will at all times make or cause to be made such expenditures for repairs, maintenance and renewals, or otherwise, as shall be necessary to maintain its properties in good repair, working order and condition as an operating system or systems to the extent necessary to meet the Company's obligations under the Public Service Law of the State of New York and the Participation Agreement; provided, however, that nothing herein contained shall be construed to prevent the Company from ceasing to operate any of its plants or any other property, if, in the judgment of the Company, it is advisable not to operate the same and the operation thereof shall not be essential to the maintenance and continued operation of the rest of the operating system or systems, and the security under the Indenture afforded by the Company Note will not be substantially impaired by the termination of such operation. It is understood that the Company has agreed pursuant to a settlement with the State of New York, approved by the Company's shareholders on June 28, 1989, not to operate the Shoreham Nuclear Power Station. Section 5.10. Insurance. The Company will keep or cause to be kept such parts of its properties as, in the opinion of an Authorized Company Representative (as defined in the Indenture and who shall be a licensed professional engineer), are of an insurable nature, insured against loss or damage by fire or other casualties, the risk of which is customarily insured against by companies similarly situated and operating like properties, to the extent that property of similar character is customarily insured against by such companies, either (a) by reputable insurers or (b) in whole or in part in the form of reserves or of one or more insurance funds created by the Company, whether alone or with other corporations, provided that the plan of each such insurance fund shall have been or shall be approved by the Board of Directors of the Company. 16 Section 5.11. Proper Books of Record and Account. The Company will at all times keep or cause to be kept proper books of record and account, in which full, true and correct entry will be made of all dealings, business and affairs of the Company, including proper and complete entries to capital or property accounts covering property worn out, obsolete, abandoned or sold, all in accordance with the requirements of any system of accounting or keeping accounts or the rules, regulations or orders prescribed by a regulatory commission with jurisdiction over the rates of the Company giving rise to at least fifty-one percent (51%) of the Company's gross revenues, or if there are no such requirements or rules, regulations or orders, then in compliance with generally accepted accounting principles. Section 5.12. Certificates as to Defaults. The Company shall file with the Trustee, on or before April 30 of each year, a certificate signed by an Authorized Company Representative (as defined in the Indenture) stating that, to the best of his knowledge, information and belief, the Company has kept, observed, performed and fulfilled each and every one of its covenants and obligations contained in this Participation Agreement and in the Company Note and, to the best of his knowledge, information and belief, there does not exist at the date of such certificate any default by the Company under this Participation Agreement or any event of default hereunder or other event which, with notice or the lapse of time specified in Section 6.01, or both, would become an event of default or, if any such default or event of default or other event shall so exist, specifying the same and the nature and status thereof. Section 5.13. Company Not to Permit Hindrance or Delay of Payment of Company Note. The Company will not voluntarily do, suffer or permit any act or thing intended to hinder or delay the payment of the indebtedness evidenced by the Company Note. Section 5.14. Corporate Existence, Consolidation, Merger or Sale of Assets. The Company will maintain its corporate existence, will not consolidate with or permit itself to be merged into any other corporation or corporations, or sell, transfer or otherwise dispose of all or substantially all of its properties and assets, except in the manner and upon the terms and conditions set forth in this Section 5.14. Nothing contained in this Participation Agreement shall prevent (and this Participation Agreement shall be construed as permitting and authorizing) any lawful consolidation or merger of the Company with or into any other corporation or corporations lawfully authorized to acquire and operate the properties of the Company, or a series of consolidations or mergers, in which the Company or its successor or successors shall be a party, or any sale of all or substantially all the properties of the Company as an entirety to a corporation lawfully authorized to acquire and operate the same; provided that, upon any consolidation, merger or sale, the corporation formed by such consolidation, or into which such merger may be made, or making such purchase shall execute and deliver to the Trustee an instrument, in form satisfactory to the Trustee, whereby such corporation shall effectually assume the due and punctual payment of the principal of, and premium, if any, and interest on, the Company Note according to its tenor and the due and punctual performance and observance 17 of all covenants and agreements to be performed by the Company pursuant to this Participation Agreement, the Tax Regulatory Agreement and the Company Note. Every such successor corporation shall possess, and may exercise, from time to time, each and every right and power hereunder of the Company, in its name or otherwise; and any act, proceeding, resolution or certificate by any of the terms of this Participation Agreement, the Tax Regulatory Agreement and the Company Note required or provided to be done, taken and performed or made, executed or verified by any board or officer of the Company shall and may be done, taken and performed or made, executed or verified with like force and effect by the corresponding board or officer of any such successor corporation. If consolidation, merger or sale or other transfer is made as permitted by this Section, the provisions of this Section 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. Section 5.15. Financial Statements of Company. The Company agrees to furnish the Trustee with a copy of its annual report to stockholders for each year, beginning with the year 1995, on or before March 31 of the subsequent year or as soon thereafter as it is reasonably available. The Company further agrees to furnish to the Trustee, and to any owner of the Bonds if requested in writing by such owner, all financial statements which it sends to its shareholders generally. Section 5.16. Compliance with Laws. The Company agrees to comply in all material respects with all applicable laws, rules and regulations and orders of any governmental authority, non-compliance with which would adversely affect the Company's ability to perform its obligations hereunder or under the Tax Regulatory Agreement or the Company Note, except laws, rules, regulations or orders being contested in good faith or laws, rules, regulations or orders for which the Company has applied for variances or exceptions. 18 ARTICLE VI DEFAULTS BY COMPANY; REMEDIES Section 6.01. Events of Default; Acceleration. In case one or more of the following events of default shall have occurred and be continuing: (a) failure by the Company to pay when due any amount required to be paid under this Participation Agreement or the Company Note, which failure causes a default in the payment when due of the interest on any of the Bonds and continuance of such default for five (5) days; or (b) failure by the Company to pay when due any amount required to be paid under this Participation Agreement or the Company Note, which failure causes a default in the payment when due of the principal of, or premium, if any, on any of the Bonds; or (c) failure by the Company to pay when due any amount required to be paid under Section 4.11, which failure causes a default in the payment when due of any amount payable pursuant to Section 2.05 of the Indenture and continuance of such default for five (5) days; or (d) failure on the part of the Company to duly observe or perform any other of the covenants or agreements on the part of the Company contained in this Participation Agreement (other than failure to pay amounts required to be paid under Sections 4.04, 4.05, 4.08, 4.09 or 4.10) or in the Company Note for a period of ninety (90) days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Authority or the Trustee; or (e) an Act of Bankruptcy relating to the Company; or (f) the occurrence and continuance of an "event of default" as defined in the Company Indenture; then, and in any such event, the Trustee, may, and upon the written request of the owners of at least twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding shall, by notice in writing to the Company and provided that the default has not theretofore been cured, declare the Company Note to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything contained in this Participation Agreement or in the Company Note to the contrary notwithstanding. Any amounts collected by the Trustee pursuant to action taken under this Section 6.01 shall be applied in accordance with the Indenture. In addition, if at any time the principal of the Bonds shall have been declared to be due and payable by acceleration pursuant to the terms of the Indenture, the Company Note shall thereupon become and be immediately due and payable, 19 subject to such declaration with respect to the Bonds being annulled pursuant to Section 10.01 of the Indenture. The right or obligation of the Trustee to make any such declaration as aforesaid, however, is subject to the condition that if, at any time after declaration, but before all the Bonds shall have matured by their terms, the principal of, premium, if any, and interest on, the Company Note which shall have become due and payable otherwise than by such declaration, and all other sums payable hereunder, except the principal of, and interest on, the Company Note which shall have become due and payable by such declaration, shall have been paid or provision satisfactory to the Trustee shall have been made for such payment, and the reasonable expenses of the Trustee and of the owners of the Bonds shall have been paid, including reasonable attorneys' fees paid or incurred, and all defaults hereunder and under the Bonds or under the Indenture, except as to the payment of principal and interest due and payable solely by reason of such declaration, shall be made good or be secured to the satisfaction of the Trustee or provision deemed by the Trustee to be adequate shall be made therefor, then and in every such case the owners of a majority in aggregate principal amount of the Bonds then outstanding, by written notice to the Authority and to the Trustee, may rescind such declaration and annul such default in its entirety, or, if the Trustee shall have acted in the absence of a written request of the owners of at least twenty-five percent (25%) in aggregate principal amount of the outstanding Bonds, and if there shall not have been theretofore delivered to the Trustee written direction to the contrary by the owners of at least twenty-five percent (25%) in aggregate principal amount of the outstanding Bonds, then any such declaration shall ipso facto be deemed to be rescinded and any such default and its consequences shall ipso facto be deemed to be annulled, but no such rescission and annulment shall extend to or affect any subsequent default or impair or exhaust any right or power consequent thereon. In case the Trustee shall have proceeded to enforce any right under this Participation Agreement or the Company Note and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Authority and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Company, the Authority and the Trustee shall continue as though no such proceedings had been taken. Section 6.02. Certain Events of Default; Authority or Trustee May Take Certain Actions. In case the Company shall have failed to comply with its obligations under Article III or under Sections 4.04, 4.08, 4.09, 4.10 or 5.16, which event shall have continued for a period of ninety (90) days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Authority or the Trustee, the Authority or the Trustee may take whatever action at law or in equity as may appear necessary or desirable to enforce performance or observance of any obligations or agreements of the Company under said Article or Sections. In case the Company shall have failed to comply with its obligations under Section 4.05, which event shall have continued for a period of ninety (90) 20 days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee, the Trustee may take whatever action at law or in equity as may appear necessary or desirable to the Trustee to enforce performance or observance of any obligations or agreements of the Company under said section. Section 6.03. Judicial Proceedings by Trustee. Upon the occurrence and continuance of an event of default (as defined in Section 6.01) the Trustee may, and upon the written request of the owners of at least twenty-five percent (25%) in aggregate principal amount of the Bonds then outstanding and receipt by the Trustee of indemnity satisfactory to it shall, institute any actions or proceedings at law or in equity for the collection of any amounts then due and unpaid on the Company Note, and may prosecute any such action or proceeding to judgment or final decree, and may collect in the manner provided by law the moneys adjudged or decreed to be payable. 21 ARTICLE VII MISCELLANEOUS Section 7.01. Disposition of Amounts After Payment of Bonds. Any amounts determined by the Trustee to be remaining in the funds created under the Indenture after payment in full, or provision for payment in full, of principal of, and premium, if any, and interest on, all of the Bonds, in accordance with the provisions of the Indenture, and payment of all the fees, charges and expenses of the Authority, the Trustee, the Tender Agent, the Indexing Agent, the Remarketing Agents and the Paying Agent in accordance with the Indenture and this Participation Agreement and any amounts required to be paid to the United States of America pursuant to the Tax Regulatory Agreement, shall be paid to the Bank; provided, however, that on or after the Fixed Rate Conversion Date and solely with respect to moneys not resulting from a draw on the Letter of Credit and not constituting remarketing proceeds, such amounts that would be payable to the Bank pursuant to this Section 7.01 shall be paid to the Company if the Bank has been paid in full under the Reimbursement Agreement. Section 7.02. Notices. All notices, certificates, requests or other communications between the Authority, the Company and the Trustee required to be given under this Participation Agreement or under the Indenture (except as otherwise provided therein) shall be sufficiently given and shall be deemed given when delivered or mailed by first class mail, postage prepaid, addressed as follows if to the Authority, at 2 Empire State Plaza, Suite 1901, Albany, New York 12223, Attention: President; if to the Company, at 175 East Old Country Road, Hicksville, New York 11801, Attention: Treasurer; and if to the Trustee, at 450 West 33rd Street, 15th Floor, New York, New York 10001 Attention: Corporate Trustee Administration Department and if to the Tender Agent, Remarketing Agents or the Indexing Agent to the addresses set forth for such persons in Section 16.05 of the Indenture. A duplicate copy of each notice, certificate, request or other communication given hereunder to the Authority, the Company or the Trustee shall also be given to the others. The Company, the Authority and the Trustee may, by notice given hereunder, designate any further or different addresses to which subsequent notices, certificates, requests or other communications shall be sent. Section 7.03. Successors and Assigns. This Participation Agreement shall inure to the benefit of and shall be binding upon the Authority, the Company, the Trustee, the Bank and their respective successors and assigns. Section 7.04. References to the Bank. After establishment of a Fixed Rate for the Bonds and upon receipt by the Trustee of notice from the Bank that all amounts payable to the Bank with respect to draws under the Letter of Credit have been received, all references in this Participation Agreement to the Bank shall be ineffective. 22 Section 7.05. Amendment of Participation Agreement. This Participation Agreement may not be amended except by an instrument in writing signed by the parties and, if such amendment occurs after the issuance of the Bonds, upon compliance with the provisions of Sections 4.01 and 4.02 of the Indenture. Section 7.06. Assignment by Authority. The Authority shall assign its rights under and interest in this Participation Agreement (except the rights and interest of the Authority under Article III and Sections 4.04, 4.08, 4.09, 4.10 and 5.16 and insofar as the obligations of the Company under Section 4.07 relate to taxes and assessments imposed upon the Authority and not the Trustee, Section 4.07), subject to the provisions of this Participation Agreement relating to the amendment thereof, to the Trustee pursuant to the Indenture, as security for payment of the principal of, and premium, if any, and interest on, the Bonds. In addition, the Trustee shall have the same power as the Authority to enforce from time to time the rights of the Authority set forth in Article III and Section 5.16, subject to the provisions of this Participation Agreement relating to the amendment hereof. Except as provided in this Section 7.06, the Authority will not sell, assign, transfer, convey or otherwise dispose of its interest in this Participation Agreement during the term of this Participation Agreement. Section 7.07. Participation Agreement Supersedes Any Prior Agreements. This Participation Agreement supersedes any other prior agreements or understandings, written or oral, between the parties with respect to the transactions contemplated hereby. Section 7.08. Counterparts. This Participation Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but such counterparts shall together constitute but one and the same Participation Agreement. Section 7.09. Severability. If any clause, provision or section of this Participation Agreement is held illegal, invalid or unenforceable by any court or administrative body, such Participation Agreement shall be construed and enforced as if such illegal or invalid or unenforceable clause, provision or section had not been contained in this Participation Agreement. In case any agreement or obligation contained in this Participation Agreement shall be held to be in violation of law, then such agreement or obligation shall be deemed to be the agreement or obligation of the Authority or the Company, as the case may be, to the full extent permitted by law. 24 SECTION 7.10. NEW YORK LAW TO GOVERN. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE CONSTRUCTION OF THIS PARTICIPATION AGREEMENT. IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be duly executed as of the day and year first written above. NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY By /s/ F. William Valentino ------------------------ (SEAL) President ATTEST: /s/ Howard A. Jack ------------------ Secretary LONG ISLAND LIGHTING COMPANY By /s/ Theodore A. Babcock ----------------------- (SEAL) Treasurer ATTEST: /s/ Herbert M. Leiman - --------------------- Assistant Secretary EXHIBIT A (To Participation Agreement dated as of August 1, 1995, between New York State Energy Research and Development Authority and Long Island Lighting Company) DESCRIPTION OF ELECTRIC FACILITIES The Project will consist of the following facilities which are to be acquired, constructed and installed by Long Island Lighting Company (the "Utility") as part of the Utility's electric system: 1. Production Facilities; 2. Transmission Facilities including interconnections and subtransmission; 3. Distribution Facilities, including stations, lines, transformers and meters; 4. Certain Common Facilities. All such facilities are as further described in the Tax Regulatory Agreement between the Authority and the Company dated the date of the initial delivery of the Bonds. The Project shall also include (i) such instrumentation, controls, structures and all other facilities, equipment, devices and the like necessary to support the facilities herein described, (ii) such necessary land improvements, and (iii) subject to Section 3.04 of the Participation Agreement, such additional or substituted facilities for the furnishing of electric energy which, because of changes in technology, environmental standard, cost or the like, the Utility determines shall be added or substituted for said facilities. A-1 EXHIBIT B (To Participation Agreement dated as of August 1, 1995, between New York State Energy Research and Development Authority and Long Island Lighting Company) DESCRIPTION OF OTHER FACILITIES Any portion of the Electric Facilities described in Exhibit A as shall have been placed in service more than one year prior to the date of the original issuance and delivery of the Bonds. B-1 EXHIBIT C (To Participation Agreement dated as of August 1, 1995, between New York State Energy Research and Development Authority and Long Island Lighting Company) LONG ISLAND LIGHTING COMPANY $50,000,000 PROMISSORY NOTE FOR ELECTRIC FACILITIES REVENUE BONDS (LONG ISLAND LIGHTING COMPANY PROJECT), 1995 SERIES A Long Island Lighting Company (the "Company"), a New York corporation, for value received, hereby promises to pay, on or before the dates set forth below, the amounts set forth below, to Chemical Bank, New York, New York, as trustee or its successor or successors as trustee (the "Trustee") under the Indenture of Trust relating to the above-referenced Bonds dated as of August 1, 1995, between the New York State Energy Research and Development Authority (the "Authority"), a body corporate and politic, constituting a public benefit corporation, established and existing under and by virtue of the laws of the State of New York, and the Trustee. Such Indenture of Trust, as it may be amended or supplemented from time to time, is herein called the "Indenture." Unless otherwise defined herein, the terms used in this promissory note (the "Company Note") which are defined in Section 1.01 of the Indenture shall have the meanings, respectively, herein which such terms are given in said Section 1.01 of the Indenture. This Company Note is issued pursuant to the Participation Agreement in order to evidence the obligation of the Company to the Authority to repay the advance of the proceeds of the Bonds. In accordance with the Participation Agreement, the Authority has authorized and directed the Company to issue this Company Note payable to the order of the Trustee as security for the payment of principal of, premium, if any, and interest on, the Bonds. The rights and interest of the Authority under the Participation Agreement (except the rights and interest of the Authority under Article III and Sections 4.04, 4.08, 4.09 and 4.10 and 5.16 thereof and insofar as the obligations of the Company under Section 4.07 relate to taxes and assessments imposed upon the Authority and not the Trustee, Section 4.07 thereof), subject to the provisions of the Participation Agreement relating to the amendment thereof, have been assigned to the Trustee pursuant to the Indenture. In addition, the Authority has granted the Trustee the same power as the Authority to enforce from time to time the rights of the Authority set forth in said Article III and Section 5.16, subject to the provisions of the Participation Agreement relating to C-1 the amendment thereof. All of the terms, conditions and provisions of the Participation Agreement are, by this reference thereto, incorporated herein as part of this Company Note. This Company Note shall be payable as to principal, premium, if any, and interest as follows: (a) On or before each Interest Payment Date, commencing September 1, 1995, a sum which together with other moneys then available for such purpose in the Bond Fund will enable the Trustee to pay the interest on the Bonds coming due on such date; (b) On or before any redemption date for the Bonds (other than a redemption date pursuant to Section 8.05 of the Indenture), a sum which together with other moneys then available for such purpose in the Bond Fund will enable the Trustee to pay the principal of, premium, if any, and interest on the Bonds which are to be redeemed on such date; and (c) On or before August 1, 2025, a sum which together with other moneys then available for such purpose in the Bond Fund will enable the Trustee to pay the outstanding principal amount of the Bonds; provided that, if the Bonds are redeemed pursuant to Section 8.05 of the Indenture, the amounts that would otherwise have been payable on this Company Note if not for such redemption, shall continue to be payable at the times and in the amounts set forth above as if such redemption had not occurred; and provided further that if the Bonds are redeemed pursuant to Section 8.05 of the Indenture the Company shall have the right at any time thereafter to prepay this Company Note by paying the amount due on this Company Note at the time of such prepayment together with unpaid interest accrued thereon to the date of such prepayment. The obligation of the Company to make any payment of principal of, and premium, if any, and interest on, this Company Note shall be deemed satisfied and discharged to the extent of the corresponding payment made by the Bank under the Letter of Credit. All payments of principal of, and premium, if any, and interest on, this Company Note shall be made in immediately available funds to the Trustee at its corporate trust office, 450 West 33rd Street, 15th Floor, New York, New York 10001, Attention: Corporate Trustee Administration Department, Wire Transfer Number: 967-0-22461, or to such different address or wire transfer number as the Trustee may from time to time designate, on or before each date on which such principal, premium, if any, or interest is due in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. The Company has agreed in the Participation Agreement that if for any reason Company Note Payments, together with other moneys held by the Trustee and then available for such purpose (including moneys paid by the Bank under the Letter of Credit), would not be sufficient to make the corresponding payments of principal of, and premium, if any, and interest on, the Bonds when such payments are due, the Company will pay the amounts required from time to time to make up any such deficiency. C-2 In the event that payment has been made in respect of the principal of and premium, if any, and interest on, all of the Bonds, or provision therefor has been made in accordance with Article XIV of the Indenture, then this Company Note shall be deemed paid in full and shall be cancelled and returned to the Company; provided that this Company Note shall not be deemed paid in full if the Bonds are redeemed pursuant to Section 8.05 of the Indenture. No reference herein to the Participation Agreement shall impair the obligation of the Company to pay the principal of and premium, if any, and interest on this Company Note at the time and place and in the amounts herein prescribed, which obligation is absolute, irrevocable and unconditional and is not subject to any defense (other than payment) or any right of set-off, counterclaim or recoupment for any reason, including, without limitation, any breach by the Authority of any obligation to the Company, whether under the Participation Agreement or otherwise, or inaccuracy of any representation by the Authority to the Company under the Participation Agreement, or any indebtedness or liability at any time owing to the Company by the Authority or any failure to complete the Project or the destruction by fire or other casualty of the Project or any portion thereof, or the taking of title thereto or the use thereof by the exercise of the power of eminent domain. In case of an event of default (as defined in Section 6.01 of the Participation Agreement), the principal of and interest to the date of payment of this Company Note may be declared immediately due and payable as provided in the Participation Agreement. In addition, if at any time the principal of the Bonds shall have been declared to be due and payable by acceleration pursuant to the terms of the Indenture, this Company Note shall thereupon become and be immediately due and payable, subject to such declaration with respect to the Bonds being annulled pursuant to Section 10.01 of the Indenture. This Company Note may not be amended except by an instrument in writing signed by the Company, by the Authority and by the Trustee, on behalf of the owners of the Bonds, in the manner and subject to the conditions provided in Section 4.03 of the Indenture. This Company Note may not be transferred by the Trustee except to effect an assignment to a successor Trustee under the Indenture or pursuant to Section 8.05 of the Indenture. THIS COMPANY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK. Presentment, demand, protest and notice of dishonor are hereby expressly waived. C-3 IN WITNESS WHEREOF, the Company has caused this Company Note to be duly executed and delivered as of August 24, 1995. LONG ISLAND LIGHTING COMPANY (SEAL) By: /s/ - ------ ---------------------------- Treasurer ATTEST: /s/------------------------------- Assistant Secretary C-4 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS; RULES OF CONSTRUCTION; EFFECTIVE DATE AND DURATION OF PARTICIPATION AGREEMENT Section 1.01. Definitions................................................ 3 Section 1.02. Rules of Construction...................................... 3 Section 1.03. Effective Date of Participation Agreement; Duration of Participation Agreement.................................... 3 ARTICLE II REPRESENTATIONS Section 2.01. Representations and Warranties by the Authority............ 4 Section 2.02. Representations and Warranties by the Company.............. 4 ARTICLE III CONSTRUCTION OF THE PROJECT; ISSUANCE OF BONDS Section 3.01. Construction of the Project.................................6 Section 3.02. Sale of Bonds and Deposit of Proceeds; Liability Under Bonds6 Section 3.03. Disbursements from Project Fund and Rebate Fund.............7 Section 3.04. Revision of Construction Plans..............................7 Section 3.05. Certification of Completion of Project......................8 Section 3.06. Payment of Cost of Construction of the Project in Event Project Fund Inadequate...............................8 Section 3.07. No Interest in Project Conferred............................8 Section 3.08. Operation, Maintenance and Repair...........................8 Section 3.09. Investment of Moneys in Funds Under the Indenture...........9 Section 3.10. Agreement not to Exercise Option to Convert to Fixed Rate Absent Specified Rating.....................................9 Section 3.11. Securities Depository.......................................9 (i) Page ARTICLE IV COMPANY NOTE AND PAYMENTS; LETTER OF CREDIT Section 4.01. Execution and Delivery of Company Note to Trustee.........10 Section 4.02. Redemption of Bonds.......................................10 Section 4.03. Obligation for Payment Absolute; Deficiencies.............10 Section 4.04. Administration Fees; Expenses, Etc........................11 Section 4.05. Compensation of Trustee, Paying Agent, Remarketing Agents, Indexing Agent and Tender Agent...........................11 Section 4.06. Project Not Security for Bonds............................12 Section 4.07. Payment of Taxes and Assessments; No Liens or Charges.....12 Section 4.08. Indemnification of Authority, Trustee, Tender Agent, Paying Agent, Remarketing Agents and Indexing Agent..............12 Section 4.09. Company to Pay Attorneys' Fees and Disbursements..........13 Section 4.10. No Abatement of Administration Fees and Other Charges.....13 Section 4.11. Payment to Tender Agent...................................13 Section 4.12. The Letter of Credit......................................13 ARTICLE V SPECIAL COVENANTS Section 5.01. No Warranty as to Suitability of Project................. 15 Section 5.02. Authority's Rights to Inspect Project and Plans and Specifications 15 Section 5.03. Company Consent to Amendment of Indenture................ 15 Section 5.04. Tax Covenant..............................................15 Section 5.05. Company Agrees to Perform Obligations Imposed by Indenture15 Section 5.06. Maintenance of Office or Agency of Company................15 Section 5.07. Further Assurances....................................... 16 Section 5.08. Payment of Taxes and Other Charges........................16 Section 5.09. Maintenance of Properties.................................16 Section 5.10. Insurance.................................................16 Section 5.11. Proper Books of Record and Account........................17 Section 5.12. Certificates as to Defaults...............................17 Section 5.13. Company Not to Permit Hindrance or Delay of Payment of Company Note...................................17 Section 5.14. Corporate Existence, Consolidation, Merger or Sale of Assets 17 Section 5.15. Financial Statements of Company......................... .18 Section 5.16. Compliance with Laws..................................... 18 (ii) Page ARTICLE VI DEFAULTS BY COMPANY; REMEDIES Section 6.01. Events of Default; Acceleration........................... 19 Section 6.02. Certain Events of Default; Authority or Trustee May Take Certain Actions............................................20 Section 6.03. Judicial Proceedings by Trustee........................... 21 ARTICLE VII MISCELLANEOUS Section 7.01. Disposition of Amounts After Payment of Bonds......... .. 22 Section 7.02. Notices.................................................. 22 Section 7.03. Successors and Assigns....................................22 Section 7.04. References to the Bank....................................22 Section 7.05. Amendment of Participation Agreement..................... 23 Section 7.06. Assignment by Authority.................................. 23 Section 7.07. Participation Agreement Supersedes Any Prior Agreements.. 23 Section 7.08. Counterparts............................................. 23 Section 7.09. Severability............................................. 23 Section 7.10. New York Law to Govern................................... 24 EXHIBIT A DESCRIPTION OF ELECTRIC FACILITIES..................... A-1 EXHIBIT B DESCRIPTION OF OTHER FACILITIES........................ B-1 EXHIBIT C PROMISSORY NOTE........................................ C-1 (iii) EX-10.Z.9 3 CONSULTING AGREEMENT DATED MAY 24, 1995 EXHIBIT 10(Z)(9) CONSULTING AGREEMENT AGREEMENT made as of May 24, 1995 between LONG ISLAND LIGHTING COMPANY, a New York corporation, having its principal offices at 175 East Old Country Road, Hicksville, New York 11801 (hereinafter the "Company") and WINFIELD E. FROMM, residing in Ft. Myers, Florida (hereinafter the "Consultant"); WHEREAS, the company has requested that the Consultant perform services for it; and WHEREAS, the Consultant is willing to perform consulting services for the Company; NOW THEREFORE, it is agreed that: 1. Effective May 24, 1995, the Consultant will be engaged as a Consulting Director for a period ending on the day of the 1996 Annual Meeting of Shareowners. The Consultant will advise and counsel the Board of Directors and any of its committees on various business and financial matters and any other areas requested by or on behalf of the Board of Directors of the Company. 2. For such services, the Consultant will receive an annual retainer equal to the annual retainer paid to a duly elected Director, an additional $500.00 for each Board or Committee meeting attended and the same pension and health benefits provided to a duly elected director. 3. The Consultant shall have the right to participate as a Consulting Director in the Company's Deferred Compensation Plan for Directors and the Company's Retirement Income Plan for Directors. 4. This agreement shall be governed by the laws of the State of New York. IN WITNESS WHEREOF, this agreement has been executed this 23rd day of August, 1995. CONSULTANT LONG ISLAND LIGHTING COMPANY /s/ WINFIELD E. FROMM /s/ KATHLEEN A. MARION - -------------------------- ----------------------- WINFIELD E. FROMM CORPORATE SECRETARY EX-23 4 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in the Post-Effective Amendment No. 3 to Registration Statement (No. 33-16238) on Form S-8 relating to Long Island Lighting Company's Employee Stock Purchase Plan, Post-Effective Amendment No. 1 to Registration Statement (No. 2-87427) on Form S-3 relating to Long Island Lighting Company's Automatic Dividend Reinvestment Plan and in the related Prospectus, Registration Statement (No. 2-88578) on Form S-3 relating to the issuance of Common Stock and in the related Prospectus and Registration Statement (No. 33-52963) on Form S-3 relating to the issuance of General and Refunding Bonds, Debentures, Preferred Stock or Common Stock and in the related Prospectus, of our report dated February 7, 1996, with respect to the financial statements and schedule of Long Island Lighting Company included in this Annual Report on Form 10-K for the year ended December 31, 1995. ERNST & YOUNG LLP Melville, New York February 20, 1996 EX-24 5 POWER OF ATTORNEY Exhibit 24(a) Annual Report on Form 10-K for the period ending December 31, 1995 LONG ISLAND LIGHTING COMPANY POWER OF ATTORNEY WHEREAS, LONG ISLAND LIGHTING COMPANY, a New York corporation (the "Company"), intends to file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K as prescribed by said Commission pursuant to said Act and the rules and regulations promulgated thereunder. NOW, THEREFORE, in my capacity either as a director or officer, or both as the case may be, of the Company, I do hereby appoint KATHLEEN A. MARION and ANTHONY NOZZOLILLO, and each of them severally, as my attorneys-in-fact with power to execute in my name and place, and in my capacity as a director, officer, or both, as the case may be, of LONG ISLAND LIGHTING COMPANY, said Report, any amendment to said Report and any other documents required in connection therewith, and to file the same with the Securities and Exchange Commission. IN WITNESS WHEREOF, I have executed this power of attorney this 9th day of February 1996. /S/ WILLIAM J. CATACOSINOS ---------------------------------- WILLIAM J. CATACOSINOS PRINCIPAL EXECUTIVE OFFICER, PRESIDENT and CHAIRMAN OF THE BOARD OF DIRECTORS EXHIBIT 24(b) 1995 Form 10-K LONG ISLAND LIGHTING COMPANY CERTIFICATE AS TO POWER OF ATTORNEY WHEREAS, LONG ISLAND LIGHTING COMPANY, a New York corporation, intends to file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, an Annual Report for the year ended December 31, 1995, on Form 10-K as prescribed by said Commission pursuant to said Act and the rules and regulations promulgated thereunder. NOW, THEREFORE, in my capacity as Corporate Secretary of Long Island Lighting Company, I do hereby certify that Anthony Nozzolillo has been appointed by the Board of Directors of Long Island Lighting Company with power to execute, among other documents, said Report, any amendment to said Report and any other documents required in connection therewith, and to file the same with the Securities and Exchange Commission. WITNESS my hand and the seal of the Company this 23rd day of February, 1996. /s/ KATHLEEN A. MARION ------------------------ KATHLEEN A. MARION Corporate Secretary (Corporate Seal) Exhibit 24(c) 1995 FORM 10-K LONG ISLAND LIGHTING COMPANY I, KATHLEEN A. MARION, Corporate Secretary of LONG ISLAND LIGHTING COMPANY (the "Company"), a New York corporation, DO HEREBY CERTIFY that annexed hereto is a true, correct and complete copy of the resolution adopted at a meeting of the Board of Directors of the Company duly called and held on February 23, 1996, at which meeting a quorum was present and acting throughout. AND I DO FURTHER CERTIFY that the foregoing resolution has not been in any way amended, annulled, rescinded or revoked and that the same is still in full force and effect. WITNESS my hand and the seal of the Company this 23rd day of February, 1996. /s/ KATHLEEN A. MARION ------------------------ KATHLEEN A. MARION Corporate Secretary (Corporate Seal) LONG ISLAND LIGHTING COMPANY (Resolution adopted on February 23, 1996) "RESOLVED, that 1. the proper officers of this Company are authorized to execute and file with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for the Year Ended December 31, 1995 as prescribed by said Commission pursuant to said Act and the rules and regulations promulgated thereunder, substantially in the form submitted to each of the directors with such additional changes therein as counsel for the Company shall approve (the "Form 10-K"); 2. Anthony Nozzolillo, Senior Vice President and Chief Financial Officer, and Kathleen A. Marion, Vice President and Corporate Secretary, their successors and each of them, are designated as agents for service in connection with said Form 10- K and each of them is authorized to receive all notices and communications from the Securities and Exchange Commission respecting said Form 10-K and any amendment thereto; and all powers which are provided by any rules and regulations of said Commission to be conferred upon persons so designated are hereby conferred upon each of said officers; and 3. without limiting the authority of any officer of this Company to act in the premises, Anthony Nozzolillo and Kathleen A. Marion, their successors and each of them, are hereby appointed attorneys-in-fact of this Company with the power to execute and file any instruments and documents, including but not limited to the Form 10-K, and to make any payments and do any other acts and things, including the execution and filing of any amendment to said Form 10-K as they may deem necessary or desirable to effect such filing; and the Corporate Secretary or any Assistant Corporate Secretary, or any other officer of this Company, is hereby authorized to certify and deliver to the Securities and Exchange Commission copies of this resolution as evidence of such powers." EX-27 6 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Staement of Income, Balance Sheet and Statement of Cash Flows, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1995 DEC-31-1995 PER-BOOK 3,594,998 16,030 1,407,215 21,023 7,445,103 12,484,369 598,277 1,063,757 790,919 2,452,953 693,550 63,934 4,722,675 0 0 0 415,000 4,800 0 0 4,185,457 12,484,369 3,075,128 208,338 2,135,172 2,343,510 731,618 43,703 775,321 472,035 303,286 52,620 250,666 211,630 412,512 772,000 2.10 2.10
-----END PRIVACY-ENHANCED MESSAGE-----